Why Lifetime Value Matters in a Real-Time, Conversion- Based World Kevin Hillstrom President, MineThatData

Lifetime Value: Zzzzzzzzz Which project would you rather work on? Project #1 = Real-time optimization of paid search based on landing page merchandise optimization, keyword copy testing, and various bidding strategies? Project #2 = A Lifetime Value project?

Common Complaints “I don’t care what a customer will do in All I care about is getting a customer to buy something today. If I don’t get customers to purchase something today, what difference does LTV make? Have you ever been in a meeting with our CEO? She only cares about getting a customer to buy something today.”

Common Complaints “Are you kidding me? LTV might be fun in theory, but in the real world, we’re not even allowed to know how profitable our company is. That information is ‘confidential’. Therefore, I can’t even compute LTV, so why worry about it?”

Common Complaints “LTV is complicated. Somebody told me you have to know what the ‘discount rate’ is, you have to account for the future value of cash. Who could possibly know that? What do I use, 3%? 7%? 22%? This is stupid!”

Common Complaints “Google Analytics won’t allow me to answer LTV easily, so why bother?”

Common Complaints “I read all of the important Web Analytics blogs and have been to eMetrics Toronto … nobody ever talks about LTV. Isn’t that something that 62 year old dudes who write Fortran code on mainframe computers do?”

Common Complaints “Our Leadership Team is trying to flip our business and earn a big payday. Why would we even care about LTV?”

Common Complaints “Who cares about LTV? I mean, I’m sure Montgomery Wards had customers with LTV, and they’re out of business, right?”

Common Complaints “Engagement is the new LTV. Focus on relevant, modern metrics, right?”

Pick Up A Broom Things that are hard to do are not built into software applications. Hint: Many Marketers / IT Folks / Finance Folks believe that Web Analytics software is “easy” to use, and as a result, these folks devalue your work, believing they can do your job as easily as you can. They can’t, however, easily do LTV work.

Get Started: Introduce Yourself Measuring LTV is hard. You don’t have the information you need to do a good job. Maybe the most important part of a LTV project is “getting connected” … getting to know the folks that will give you the information you need to be successful, the folks who will evangelize your work to the rest of the organization.

Your Chief Financial Officer Your CFO may be, surprisingly, the biggest supporter of your work! GET TO KNOW THIS PERSON, OR GET TO KNOW HER STAFF! NOW!

Don’t Get Too Complicated!

The Profit Factor Most CFOs will tell you the percentage of revenue that converts to profit, on average. My History: Lands’ End, : 35% of Demand flowed-through to profit. Eddie Bauer, : 30% of Demand flowed-through to profit. Nordstrom, : 27% of Retail Sales flowed-through to profit.

Profit: Turns Out You Need It Keep the profit calculation simple! By only knowing marketing expense and your profit factor, you quickly learn how profitable a marketing activity was!

You Lost Money. You’re Fired! Under what circumstance would it be acceptable to lose $3.05 profit per order?

Run A Query: Profit Next Year Select all customers you acquired in Calculate the average demand spent by a newly acquired customer in Multiply average demand by your profit factor. Guesstimate marketing spend per customer, on an annual basis.

Run A Query: Profit Next Year Example: 30% of new buyers purchase next year. They spend an average of $150 each. Average value = 30% * $150 = $ Profit Factor = 35%. Profit Contribution = $45*0.35 = $15.75 Marketing Expense / Customer = $ Month Profit = $ $5.75 = $10. Next year, a customer will pay you back $10.00 profit … that sounds good!!

Run A Query: Profit Next Year Remember, we lost $3.05 profit per order on our paid search campaign. Assuming the vast majority of these buyers are first-time buyers (a big assumption), we’ll generate $10.00 profit in the next year. ($3.05) + $10.00 = $6.95 of twelve-month profit. This is a good outcome, one worth pursuing!

This Isn’t LTV: It Is Better! Old-school LTV is a geeky, labor-intensive process, one that probably won’t be cherished by your Leadership team. Most CFOs are very happy with marketing activities that pay back within twelve months. If your CFO isn’t happy, then find out the payback window she is happy with, and optimize to that!

You Can Get Complicated, Too! Here’s what a scenario looks like when you acquire 20,000 newbies at $50 cost.

Spending More Can Work Here’s 40,000 newbies at a $65 cost … long-term, the payback is worth it.

And Then You Can Go Too Far! 60,000 newbies at an $85 cost is too prohibitive … profit isn’t recovered.

Social Media: ROI of Engagement I measure the value of my Social Media activities. Simple assumptions make this possible. I have 2,500 blog subscribers. I estimate that 500 are CEOs/CFOs/CMOs who hire me. The remaining 2,000 are Analysts/Managers/Directors who seek to learn about my methodologies.

Social Media: ROI of Engagement In an average year, I sell 10 projects to blog followers in the CEO/CFO/CMO audience. Let’s pretend that the average project costs $5,000. In an average year, I sell 1 project to the Analyst/Manager/Director audience, but I sell about 300 books at $2.00 profit per book.

Social Media: ROI of Engagement Executive Audience: (10 * $5,000) / 500 = $ per blog subscriber per year. Analyst/Manager/Director Audience: (300 * $2.00) / 2,000 = $0.30 per blog subscriber per year. Total Audience = ($ * 500) + ($0.30 * 2,000) / (2,500) = $20.24 per blog subscriber per year.

Social Media: ROI of Engagement Which audience should I write for? Which audience tweets/re-tweets my content, leaves comments, and is highly engaged? Even if my assumptions are seriously flawed, I know what my marketing strategy needs to be, if I want to earn a living, right?!

Social Media: Long-Term Value Common Argument: The Analyst / Manager / Director will become a CEO / CFO / CMO and will pay you. Good thinking! Pretend that 5% of this audience becomes Executives, and they have a 5% chance of buying a project at $5,000 in the next five years: 2,000 * 0.05 * 0.05 * $5,000 = $25,000 of long-term value!

What If I Am Wrong? Kevin, how do you know if 500 of your 2,500 subscribers are Executives? What if the number is 200? So what? Remember the difference in value ($ per Exec, $3.00 per Non-Exec). Value is different enough that our assumptions can be wrong, the conclusion doesn’t change!

Why Do We Care About LTV? LTV is our connection to the Finance Department. The Finance Department is our connection to the Leadership Team, to influencing the company. We learn how much money we can lose in the short-term in order to grow the business in the long-term (think Amazon in 1999).

Why Do We Care About LTV? On Twitter, analysts demand a “data-driven culture”, blaming HiPPOs if results aren’t accepted. Data doesn’t drive a culture. Knowing how much profit a customer is worth, and partnering with members of the Leadership Team who will act upon your findings, now that drives the culture.

Why Do We Care About LTV? Ignore LTV. Instead, focus on how much profit a customer generates in the next year. Partner with your Finance Team. Use your knowledge of profit to set the company advertising budget. Now you’re driving the culture with data!

Kevin Hillstrom President, MineThatData Questions?