Build enhanced Lifetime Value models to increase your profitability

13 Aug, 2022

1 min

Contact us

Meeting of the minds.

Why does the Lifetime Value (LTV) metrics really matter for your advertising strategy? Today, Ronan, Head of Data at Better&Stronger, and Lorena, our Head of Performance, tackle the topic of LTV; a metric whose benefits are often misunderstood. 

No, we won’t praise LTV like other agencies would do (in order to make you spend more). Today, we are willing to help you determine when it is relevant for your business to use LTV (and when it is not). 

We invited Ronan Carrein and Lorena Sassman to share their expertise and experience regarding this topic, and to give you a big picture of Lifetime Value. Ronan’s 13-years working at Google experience constitute a tremendous resource for our Data Hub. He works hand in hand with Lorena (Head of Performance), our handywoman, and fount of science, on the topic of LTV, to help companies make the most of their data.  

We will find out with them how first-party data (purchase data, customer data…) can help you build predictive LTV models, and why it can help you increase the profitability of your campaigns. They’ll help us seize the importance of having a good data infrastructure to measure and improve your customer lifetime value. 

LorenaRonan

Better&Stronger - First, let’s go back to the basics, Lorena. How would you define Customer Lifetime Value? 

Lorena - According to HubSpot, “Customer lifetime value (or LTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship. The metric considers a customer's revenue value and compares that number to the company's predicted customer lifespan.”

B&S - Why is LTV so important for an ad campaign? What are the benefits an organisation would experience from monitoring LTV?

Lorena - LTV can be very useful when you want to know how much a customer can bring into your business in the long run. There are 3 main benefits of calculating the LTV: 

  1. Better manage and dispatch your ad spends 

By evaluating the customer value over time, you can easily re-adjust the amount spent on customer acquisition. 

Imagine that the Cost Of Acquisition (CAC) for Customer X is €20. Customer X makes a first purchase for an amount of €25. By focusing on the LTV, you realise that customer X has returned to your website several times to make 4 additional purchases. This means that Customer X didn’t only spend €25 but €100 overtime. It means that you can increase the CAC of Customer X, as it is a high potential customer.

  • Segment and create look-a-like model to be more profitable

Thanks to LTV, you can segment your audience, and thus find which customers are more likely to bring you more value over time. By doing so, you can address your customers differently. If a customer's LTV is very low, you have 2 options: 

  • Try to engage your customers to increase their LTV (rely on a nurturing strategy: send promotional emails…)

  • Decrease the amount you spend for these customers (or exclude them from your campaigns)

But that’s not all: you can also create look-a-like and retargeting model. You have to spot the most loyal and profitable customers and try to find prospects with the same characteristics. 

  •  Provide new marketing insights when LTV is integrated with other reporting topics

If the data team can connect LTV to different channels, then the marketing team will be able to see the impact of these channels on LTV and therefore, optimize business spends on a larger scale. 

B&S - Ronan, as our Head of Data, could you give us more details on how to calculate Customer Lifetime Value? What metrics do we need to measure it? 

Therefore, influencers are now perceived as genuine entertainers. Brands don’t consider influencers anymore as “brand ambassadors”, but as real “business drivers

B&S - Fanie, as our Head of Storytelling you are exposed on a daily basis to your client’s business issues. What are the social media challenges they face?

Ronan - There are different models to calculate LTV according to your business:

  1. LTV = average revenue a customer generates over a given period of time (ARPU) / users churn rate

  2. When the churn rate is not easily measurable, we advise you to calculate the LTV this way: LTV = average spending over X months back

  3. Or this way: LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime

It is, therefore, necessary to look for the most relevant formula (to find the right CPA for your ad campaigns).

B&S - What are the different types of LTV data? And what are they used for?

Ronan - The historic LTV is the most frequently used metric.

It is to the sum of all profits from a customer’s past purchases. This amount is based on existing customer data from a specific period. It is very relevant when you have a lot of behavioural data to analyzeOn the other hand, the predictive LTV is more appropriate when you don’t have access to such accurate data. It is a projection of how much revenue a customer will generate for a business throughout the customer relationship.

B&S - Could you explain the link between CAC and LTV? What is the purpose of comparing LTV to CAC?

Lorena - Well, the ratio LTV/ CAC is interesting because it gives you a clear idea of the contribution of your marketing effort to the financial health of your company. If the CAC takes into account all the spends related to customer acquisition: marketing, advertising..,) the LTV considers everything you earn thanks to clients over time

It also helps you to identify your revenue for every single customer. By comparing the Cost of Acquisition (CAC) and how much money your customers bring to your business. 
Eventually, the ratio LTV/ CAC is often used by investors because it helps determine a company’s health situation. 

B&S - Some companies still don’t use LTV. What do you think prevents an organisation from increasing its LTV?

Lorena - There are several reasons why companies choose to skip LTV. Let’s try to shed light on them to make the most of LTV.

  • “We don’t know how to calculate it”

This can occur when companies have never thought of the benefits of LTV before. They only look at what used to work in the past to prepare for future campaigns.  

  • “We don’t have the data to calculate it”

Calculating the LTV requires a good data infrastructure and a relevant data collection strategy. When you don’t have the in-house data and the required skills, measuring the churn rate or data related to customers' past purchases can be complicated.

This is why we consider it essential to set up a good data infrastructure very early, which will prevent you from these issues. 

B&S - Ok, but sometimes, it is not relevant to manage a campaign based on LTV. According to you Ronan, in which situations LTV doesn’t work?

Ronan - That’s right, sometimes, the business strategy simply doesn’t match with an LTV objective. It can happen in these situations: 

  • “We don’t have the necessary cash flow”

Sometimes, even if companies would like to run campaigns on LTV, they’re hampered by a lack of treasury. Let’s make it simple: if your first sale doesn’t generate enough money to cover the CAC of your ad, it won’t be possible to allocate the optimal amount to acquire the customer. 

  • “Our strategy is based on acquisition only”

Companies that go through an aggressive growth strategy or a product launch phase are eager to acquire only new customers, regardless of their LTV; because their goal is to gain notoriety and generate an exponential number of leads.

B&S - So why do we observe a lot of resilience regarding LTV?

Ronan -  On the one hand, most companies are afraid of changing all reporting systems. They are restrained by the cost that this may entail. Thus, we recommend running tests. At first,  it can be a small investment to see if it brings added value. 
On the other hand, we are seeing rivalries between acquisition and retention marketing teams that pursue their own goals and want to take credit for the short/ long term sale. Measuring LTV doesn't change that at all. So it's worth having the metric to show the impact of the company’s (as a whole) efforts.

B&S - Is it relevant for a company that has just been created to calculate its LTV?

Lorena - If a company just launched its activity, the data team (if there is one) won’t have the historical customer data to calculate the LTV… But it’s not a reason to abandon this metric! 

It’s the best moment to start thinking about LTV because: 

  • It is less expensive to set up a good data infrastructure from scratch than to completely revamp one 
  • Even if the LTV isn’t definitive, it allows you to have a good vision of what you should do to make revenues over time. 

B&S - Do you have any tips to improve your relationship with customers, providing them with a better experience?

Lorena - Once you’ve acquired a client, you must ensure that he won’t stop consuming your brand. There are 2 different logics:

  • For subscription: 

Find ways to prevent the customer from unsubscribing. Whenever the customer is likely to unsubscribe, use email automation (to share exclusive and appealing content), target them before and when they unsubscribe to try to change their mind. 

We can measure the frequency of use, monitor the customer’s behaviour, and consequently adapt our strategy.

  • For a product or a service without a subscription: 

Make sure to send the right marketing messages/ads at the right time. If the first purchase lasts for 14 weeks, we can try to send messages at this time to encourage them to buy a second time.

The added value for your Ads campaigns is significant, but it requires a good data infrastructure, so we genuinely encourage you to set up one (if not done yet).

B&S - Do you have any resources to share with our audience to dig into this subject?

Ronan - Sure, there are plenty of inspiring companies that have already adopted LTV! For instance, you can take a look at these articles and case studies :

B&S - Thank you for your insights. It was a very complete interview. Customer Lifetime Value has no secrets for us anymore. Please, come back to give us more details on how you operate concretely with your clients. 

By Emma Jeanpierre

31 Mar, 2022