If our new world is run by data, why are your traditional business metrics relics of a bygone era?
Michael Lewis’ 2003 book Moneyball revolutionized the way baseball teams were built. Instead of building teams around metrics of past success like batting average, RBI, and hits, Lewis determined that the two most important data points were slugging percentage and on-base percentage.
Using this data, Lewis helped the Oakland A’s build a team that went to the playoffs in 2002 and 2003, even though they were up against teams like the New York Yankees, who had three times more money to lure the “best” players.
Wouldn’t you like to Moneyball your business?
Customer lifetime value, aka LTV, has all the makings of being the on-base percentage for businesses. Consider revenue, a traditional way to measure all kinds of success. But lifetime value shows us that revenue is a vanity metric. Why?
A customer’s value is measured by more than what they bought in the past. Buying once doesn’t mean they’ll buy again. Revenue also isn’t profit — spending $100 on a customer who will generate $80 of revenue over their lifetime isn’t sustainable. Getting one dollar from your best customer is not the same as getting a dollar from your worst customer. Calculations based on past customer behaviors simply are not a helpful predictor of future behavior.
LTV is the predicted gross profit a customer will bring over his lifetime, and it’s a powerful tool because, when harnessed correctly, you can predict how much profit a customer will yield before they ever make a purchase.
LTV has the power to act as a common denominator across all units of a business:
- Acquisition can be calibrated against the LTV each acquired customer can bring
- Retention costs can be evaluated against the LTV of retained customers who would have churned otherwise
- Product build can prioritize the needs and desires of high LTV customers
- Finance and the CFO can accurately project prospective earnings
The conversation around LTV in years past has focused on how to calculate it, not what to do with it. These calculations can be problematic as they are done in retrospect or in aggregate, which do not enable accurate predictions of the value a customer will bring to an organization.
The current status quo is a costly one; business units inevitably measure themselves according to different metrics, resulting in a jungle of disparate vanity metrics. Here’s how that looks:
- Customer acquisition is measured in cost per click or cost per action
- Retention is measured in overall spend and NPS
- Product leverages user surveys to plan and execute future builds
- Finance/CFO develops financial forecasting models on past earnings and customer performance
Not only are these metrics all wildly different from each other, but they also don’t speak to each other at all.
If you want to Moneyball your business, your new data point is predicted lifetime value.
Until now, most state-of-the-art LTV models were only able to predict LTV with 60-70% accuracy. Savvy business leaders simply do not have the risk tolerance to take action on predictions at an individual level that are wrong 30-40% of the time.
But what if LTV calculations were more than 90% accurate? At that point, the margin of error is small and B2C brands face a much smaller risk. This kind of accuracy would allow companies to integrate LTV confidently into their workflow and create a common denominator against which business units can compare and evaluate performance.
When a brand agrees that predicted LTV is a foundational metric, customer acquisition and retention teams can organize and validate around attracting the highest LTV customers. Product can build for what high-value customers want, and the CFO can make highly accurate projections and decisions for the company.
When there is a clear hierarchy of metrics and LTV is at the top, teams can work in unison to build a profitable, sustainable business.
“More sophistication with LTV can help companies focus their marketing programs and budgets. Our study found that a majority of CEOs, chief revenue officers, sales leaders and line-of-business executives want to see quarterly LTV to help them make better strategic decisions. LTV is an indicator of how well a company identifies and nurtures profitable, long-term customer relationships.” - CMO Council, March 2020
Ocurate has built the database and the model to discern customer lifetime value with more than 90% accuracy — every time. This high level of accuracy allows our customers to use LTV as their organizing principle, yielding a 15%+ increase in gross profit. And this does not even include efficiency gains around the organization.
Join us as we help build better businesses that organize around LTV.