LTV: A Business' Best Metric

The 2022 market has faced a lot of uncertainty, and many are worried about the potential of a recession.  As a result, many businesses are experiencing slowed growth, diminished profits, and layoffs. As leaders scramble to reduce spending without impacting revenue, they’re facing hard decisions for which they simply don’t have the data.

In eCommerce, 20% of a brand’s best customers often generate 80% of the brand’s revenue. That means that high-value customers generate 16x the revenue of low-value customers.

Our customers have validated this 80/20 rule within their own customer base. Here are some of  the most enlightening takeaways:

  • Treating every customer the same does not net profitable results as it wastes marketing budget and saps a marketer’s most valuable resource: time
  • Without a predictive solution, it’s nearly impossible to use an email address to determine if acquisition costs will be offset by a customer’s lifetime spend
  • It takes significant resources to segment campaigns, so it’s imperative you don’t just guess on how to split campaign groups
  • Acquiring the wrong customers can actually have a negative impact on net profit

Let’s get a couple of questions out of the way – most importantly: How should you measure customer performance?

Annualized Customer Lifetime Value (the proportional LTV for the next 12 calendar months) is a good starting point, but leads to a second question: How do you measure LTV?

We argue against measuring LTV in terms of revenue – too many companies in the eCommerce space are seeing that it’s more expensive to make and sell their product than it is to do nothing at all.

Many companies measure LTV in gross profit. They may even be revenue- or CoGS-positive, but their net profitability is negative. Once operating expenses are folded in per capita, numbers slip into the red.

Let’s look at the anonymized breakdown of customer data below, where we predict LTV as measured in gross profit for the next 12 months. In this example, we assume that each customer is being treated the same with all marketing communications.

You’ll notice the top 10% of most valuable customers generate 85% of gross profit. This means that high LTV customers are an astounding >50x more valuable than average customers.

The above graphic shows that treating low LTV customers the same as high LTV customers will cost the business almost $50K in gross profit. If they freed up these resources and focused on high LTV leads, assuming an average customer acquisition cost of $300, we could acquire 158 high LTV customers. That turns $50K in losses into $22.5K in gains, netting an overall gain of $72.5K with no additional resources.

It gets more interesting: Let’s add the potential gross profit for the next 12 months generated by each of these customers – something Ocurate predicts uniquely. We can only squeeze another $63K out of our low LTV customers, and won’t reach much more than breakeven with that segment while also having to engage with a large customer base – not advisable.

In contrast, our high LTV customers have the potential to increase their LTV for the next 12 months by over $50 per capita gross profit, which would increase the gross profit by an impressive 30%.

If your business isn’t investigating granular customer LTV, it’s hard to identify if your customers, on whom your team spends time and resources, are a detriment to your profits, or if they’ll be product evangelists who support your brand for years to come. With minimal purchase data or even just an email address prior to purchase, your own database simply isn’t enough to predict buying behavior over time.

As your company looks to weather the oncoming storm of privacy regulations, changes to the economy, ineffective targeting, and rising costs, how are you both identifying the customers who are draining your profits, and reallocating those resources to focus on attracting and retaining the customers who matter most to your business?

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