CHAPTER 2: Part II
Lifetime Value in Acquistion
Now that you know when you can accurately forecast based on a reliable LTV, we can look at the role of LTV in acquisition. LTV is used to guide the volume goal posts we assign our program and the costs we manage in acquiring net new subscribers and customers.
In Chapter 2.1 we covered that the subscription business model is different from one-time sale business models in that subscription businesses rely on discounting the initial offer with the anticipation of gaining a long-term and high-value customer due to recurring charges.
With that in mind we know that Return On Ad Spend (ROAS) will not be a reliable forecasting metric to build our projection models from, as it relies on the initial offer purchased and no further revenue down the lifetime of the customer.
Analyzing LTV in Cohorts
Note: the last day of the time frame is set to at least 30 days prior to the current date to allow for new subscribers to reach renewal maturity on a monthly subscription.
In Chapter 2.1 of our Deep Dive Into Customer Lifetime Value, we started with the foundation of how to calculate LTV and when you can rely on a snapshot metric to start initial media waterfall modeling and forecasting.
Now we will walk you through the pivot to actually analyzing LTV by cohorts in your acquisition program. The above chart shows the average LTV for each media source broken out across three months. Having an overall program average LTV is helpful for a snapshot of performance, or for initial projections but to prioritize performance optimizations Sublytics recommends analyzing LTV by acquisition month cohorts (or more granular depending on your media mix). At a monthly level, you can then layer on the next parameter or variable you would like to analyze. In this case we are starting with source to see which channel needs attention. We can see the lowest LTV source is Google Ads in March so we will prioritize analyzing which factors impacted the average LTV of this source.
Let’s dive into the optimizations to consider now that we have selected the primary source that needs attention.
LTV Guiding Cost Adjustments
A knee-jerk response may be to immediately allocate funds from Google Ads campaigns to other sources, based on the dip in LTV, but first we need to consider Customer Acquisition Cost (CAC) before making such adjustments. The metrics that really needs to be assessed in making campaign adjustments is LTV:CAC Ratio.
LTV / CAC = LTV:CAC Ratio
The ideal CLV:CAC ratio is 3:1 (or 3 as it will translate in the Sublytics Ad Spend Report), meaning your customers’ value is three times more than the cost of acquiring them. If your CLV:CAC ratio is 1:1, you are paying an equal amount to acquire the customer to the customer value. If your CLV:CAC ratio is 4:1 or higher this can indicate opportunity to invest more in marketing.
The performance break out below comes from the Sublytics Ad Spend Report, which we will use to make informed campaign optimization decisions. If you want to reduce ad spend waste and optimize with granular visibility please reach out or connect your store data today to take our analytics platform on a test drive.
You have a source level LTV average for Google Ads of $107.53 for the month of March and the overall program average LTV for the month is $183.16. If you only looked at LTV for Ad Group 1 and Ad Group 2 of Campaign A, you would be tempted to allocate dollars to Ad Group 2.
If you look at the CAC column you see that the average CAC for Ad Group 1 is actually much lower than that of Ad Group 2, and the LTV:CAC Ratio reflects this.
A wise campaign adjustment with the right visibility now looks like allocating dollars to Ad Group 1 Ad A and making optimizations to Ad B. Optimizations will also need to be made to Ad Group 2 to lower the CAC and raise the LTV:CAC Ratio.
LTV:CAC Ratio Guiding Volume
Now that you have an in-depth understanding of how far your media dollars go in acquisition you are properly setup to set sustainable volume goals. Your volume may look different when you start optimizing campaigns by LTV:CAC Ratio, meaning you may have once celebrated a net new subscriber month of 400 – but if your company is breaking even obtaining those 400 you may want to put down the party streamers and balloons.
If you’ve gotten this far in our Essential Subscription Data Guide series, you may have put together that volume goals, heck even LTV goals, aren’t relevant if you’re not anchoring them in cost of acquisition.
Avoid Common Mistakes When Analyzing LTV in Acquisition:
Optimizing Programs for Average LTVs without LTV:CAC Ratio
While it is a big step to move from measuring campaigns using ROAS, measuring campaigns based on LTV alone will not be beneficial till you associate CAC to the LTV.
Making campaign optimizations with limited high-level visibility.
Without ad-level visibility of LTV:CAC Ratio your ad spend costs will sky-rocket and your acquisition program will not be sustainable.
Setting Blanket Net-New Subscriber Goals
Setting a blanket net new subscriber volume goal and obtaining it will leave you with blindspots and will hurt your bottom-line without anchoring them in LTV, CAC, and LTV:CAC ratios.
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Understanding how customer behavior impacts LTV.
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Up Next: The Essential Subscription Data Guide Chapter 2.3- A Deep Dive on Customer Lifetime Value