If there were a business equivalent of WebMD, many brands would be searching for symptoms like:
And unfortunately, many brands come to the conclusion that the cure is to introduce a new product or service that will lure in more new customers.
Stitch Fix experienced this phenomenon in late 2021. In the face of acquiring few new subscribers, they opened their Freestyle service, once reserved only for existing customers, to the general public. Analysts attributed this so-called growth wall to Stitch Fix’s core offering “having matured out,” and commented that Freestyle had not spurred the growth they’d hoped to see.
Peloton experienced the same issue in the same timeframe; in late 2021, they had a hard time bringing on new users. CNBC recommended Peloton “create new workout devices in order to lure in people who don’t have an interest in its bikes or treadmills. Or, it must entice existing subscribers to build out their home gyms.”
Many brands have been in this position, and the prevailing wisdom has often been to grow your addressable market. More new customers will mean more money, right?
Surprisingly, this logic does not hold. Creating new products or services for a larger general market does not focus on the metric most important to building a profitable business with longevity: Customer lifetime value (LTV).
Customers must be considered for more than their one-time buying potential. One purchase or subscription does not turn a customer into a lifetime customer — or even a profitable one. Plus, revenue is not profit — spending $100 to gain a customer that will only generate $80 in lifetime revenue is not a sustainable mode.
Instead of just searching for new customers, retaining and optimizing the most profitable customers is the surest, most data-based way to increase profit. Brands should ask questions like:
Only after considering these questions should brands start to consider how to attract more high-value subscribers, because brands must first do the work to identify high LTV customers, understand their behaviors and attitudes, and adjust their promotions and offerings accordingly. To do that, brands need reliable, accurate data that can not only pinpoint existing high LTV customers, but can also predict a person’s LTV before they ever make a purchase.
Using Ocurate’s database of every adult American’s behaviors and attitudes can predict with more than 90% accuracy who will be the most profitable. This enables brands to not only reactivate lapsed customers through targeted campaigns, but also to think strategically about how to develop and market new products and services.
With Ocurate, Stitch Fix would have been able to identify which of their 4.18 million active clients were the highest value. Then, having learnt their attitudes and behaviors, they could have determined whether people who fit the high LTV customer profile were likely to make purchases from Freestyle, instead of opening it to any consumer.
Peloton could explore whether equipment beyond treadmills and bikes is actually enticing to those who fit their high LTV customer profile. They could learn whether the huge amounts of customers they had gained during the Covid pandemic were actually high profit customers, or whether they were short term customers. CNBC noted that Peloton has been “forced” to spend more to acquire new customers, when in reality, focusing on and optimizing for their highest LTV customers could bring about the sustainable profitability they and their investors desire.
Stitch Fix and Peloton could also identify how their high LTV customers react to email promotions. Do they respond well to discounts, or do discounts turn them off? Would the promotions entice them to stay around for the long-haul, or make a one-time purchase that ultimately lost the brand money?
Analysts are questioning whether Stitch Fix’s business model even works, but it’s not the business models that should be in question just yet. Instead, it should be the perspective of customer acquisition. Why is customer acquisition the first move when profitability wanes; why not customer retention? Why acquire customers who will not be profitable? Instead, subscriber brands must focus on customer lifetime value, and lean on that to create growth, profit, and sustainability.
