“X Month” Value

The basic concept of LifeTime Value (LTV) was ably outlined by Seth Godin in a great post here.  If you know the average net value of a customer is $2500 over their “Life”, why would you not spend  $50 (or $200, really) to acquire each one?  As long as you stuck to the model, your company would be insanely profitable over time.

Their are 2 primary challenges to implementing this idea.

1.  “Over time” is a concept many management folks have a hard time embracing; what matters are the profits this year, or this quarter, or this month.  Unless the whole company embraces an “over time” measurement approach it is difficult for Marketers and Analysts to drive towards programs and practices supporting the LTV outcome.

2.  The $2500 is an average figure.  Most customers are worth less; 10% or 20% are worth much more.

Most people I talk to embrace the general idea of LTV models intuitively.  It’s really a cash flow concept, isn’t it?

So Financial people get it right away, and if Marketers could align with it, there would be no conflicts and the Marketing budget becomes virtually unlimited.

In fact, many folks in the PPC world follow just this model – they have unlimited budget as long as each conversion costs no more than “X”.  Because the company knows if it spends no more than X on a conversion, it always makes money.   Marketers and Analysts involved with these “Cost < X” PPC programs love them, because Management loves them. 

And Management loves them, why?  Because the CFO loves these programs  Why?  Because they are based on Cash Flow analysis, which CFO’s understand very, very well.

So then, what will it take to get more acquisition budgets like these Cost < X  PPC programs?  We have to address the two challenges above:

1.   In the near term, forget about “LifeTime” Value, because most companies lack an incentive structure to support the LifeTime of anything.  Create a benchmark called “6 month value” or for a fast cycle business, “3 month value”, or “1 year value” if appropriate. 

At HSN, we mostly talked in terms of “90 day value” because the CFO wanted to link to the quarterly reports.  Challenging benchmark to achieve for a Marketer?  Sure, but the payback to Marketing was unlimited budgets for any program generating threshold ROI (90-day T-bill interest rate) in 90 days.  

Update:  Question – why did CFO choose this 90-day benchmark?

CFO’s have to invest Cash that comes in net of expenses going out.  They frequently put this Cash in T-Bills because it’s a reliable short-term investment, but they are under pressure to optimize these returns.  If they can get a better return investing in Marketing, they will do it – as long as they can prove these returns are “real”.   This is where Analysts play – proving the ROI of a Marketing effort beats the current 90-day T-bill rate.  How?  Use control groups.

Then score and rank the performance of programs – and the people and management responsible for them – using a simple customer value model that aligns the performance of marketing with the Cash Flow model – like this one.

2.  To optimize profitability, recognize the $2500 number is an average, and the benchmark value (6 or 3 month) of a customer is largely determined by the media / offer and product being offered in the acquisition campaign.

Segment by campaign and product to find your X month value, and use the Cost < X from PPC to determine what can be paid to acquire customers in each segment.

If the “Cost < X” number in PPC is 15% of sales, then a $100 6 month customer can be acquired for $15, a $1000 6 month customer can be acquired for $150, and so forth.

This approach should make total sense to a CFO who loves the Cost < X PPC model.  And the interesting thing is, if you can get this X Month Value play right, LTV frequently (but not always) takes care of itself.  In other words, the Marketing risk is really in the front end; the back end value post “X Month” is profit gravy.

And this approach should make sense to you as well. 

Because longer term, once you start looking at your business in this way, you will have the confidence of management and the tools to measure the impact of just about any  product or program – including Service, Usability, Centricity – in the same financially-oriented, Cash Flow modeled way.

This methodology becomes a pattern, a part of the culture; a universal tool to measure the success of any Marketing or Service effort using a single, common-across-all-domains metric: “X month” customer value.

Once that happens, you’re not just optimizing Campaigns, you’re optimizing the whole business.

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6 thoughts on ““X Month” Value

  1. Hi, great article but I think there’s one factor that’s not mentioned. For some large companies, I’m thinking particularly telecoms and retail or gaming websites, organic user acquisition is high. This means that in effect that a paid acquisition is not merely a binary we-got-them-or-we-didn’t value and likewise our $2,500 can’t be taken as the full incremental amount. Given how hard it is to accurately calculate how incremental these events are, does this not make the “Why would you not spend $50?” a great deal more complex?

  2. Domaz, agreed.

    Which is why I suggested using control groups (or control geo-markets if you can’t identify the population) and a scoring system to execute this plan; the effort has to be measured correctly.

    Here is another link to control groups info:

    http://blog.jimnovo.com/control-group-series/

    and the scoring system:

    http://blog.jimnovo.com/2007/04/25/engagement-customers/

    I’ve never understood why people seem to think using control groups is “hard”; the execution is simply not that difficult. So, any problems one might have are probably more political / cultural.

    The CFO can drive a move to universal success measurement like this simply by insisting budget releases be tied to universal measurement.

    Analysts too can drive this change though the process will be slower. Find the people who have enough guts to be measured as the CFO would measure them and run some tests to hone the process, working the use of controls up gradually into major campaigns. Then start laying the results of controlled tests on the table. This is the approach a Linchpin would take.

    Trust me, given a choice between releasing additional budget to areas with controlled test results versus any other proofs, the CFO will pick the people using the control groups every time.

    Which then begs the question from the CFO: why isn’t everyone else using control groups? And that’s how you get to universal success measurement.

  3. Totally agree on the control groups. Totally myopic not to use them if it’s an option. However, if you’re acquiring new users through search engines or other partner websites test and control set-ups aren’t always available. Then you’re obliged to model how incremental these are and that can get tough.

  4. I don’t know about partner sites but it seems like a “real” partner would be willing to prove their incrementality.

    Paid search you can (hopefully) invoke geo-controls and get close.

    Display you can use geo-control and / or swap out non-profit ads as control – wish Google would allow this on PPC ’cause it would clear up some questions on paid search incrementality.

    Leaving organic search…which I would consider more operational and not really a marketing issue. It just makes sense to design for findability, and is more appropriately judged on volume for payback, I think. In my view, organic demand is the “base” and everything else should be incremental to this organic demand.

    So yea, it can get complex, but you don’t need a marketing mix or other sophisticated model to get an idea of where the incremental lies. However, it does take some coporate “stamina” to not walk all over other people’s controls and so forth.

    Which leads back to the whole culture issue, and needing a desire to level the playing field, so everyone competes for resources based on universal success measurement.

  5. Pingback: Josh Kerbel

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