Accelent just placed one of our favorite Product Executives, Brent Halliburton, as the Vice President, Product, Media Solutions at TravelClick. We are excited to share with you that Brent recently published a book titled, The Lean Guide to Digital Advertising. For more information or to purchase his book, please GO HERE.
Here is an excerpt…
“Every business has a Lifetime Customer Value and in the world of direct response, it is the alpha and the omega. For a Software as a Service (SaaS) business, or any business with recurring fees, the LCV (sometimes called the LVC or Lifetime Value of a Customer) is the product of average revenue per user (sometimes called ARPU) per month, the gross margin, and the average lifespan of customers (expressed in months) Many businesses have a different view of how LCV is calculated for their industry, but it all ends up the same: A single number that describes the value of customers. You need to know this number for your business.
The customer acquisition payback period and LCV is a gauge for how aggressive a company can be marketing and selling its services. The longer the payback period, the greater the risk that a customer churns and the marketing dollars paid to acquire the customer are lost, and vice versa. The most efficient businesses recover the cost of acquiring a customer in 6 months. Generally speaking, if the customer acquisition cost (“CAC”) is over 12 months, the business is challenged.
For businesses with recurring revenue, the LCV is the net present value (NPV) of future revenue streams incorporating churn rates. So such a business may say they charge $5.00 per month (with $2 cost of good sold (COGS)) and the average customer remains for 15 months. Not taking into account a discount rate, they may say they have a $45 LCV (($5-$2)*15).
Similarly, an advertising business (like a content-based publishing site) might realize that the average consumer views 6 pages per visit, visits 5 times per month and stays a consistent visitor for 3 months. If they generate $3.00 RPMs (revenue per thousand page views, as opposed to the CPM, which we discussed earlier – the CPM being what the advertiser pays to access that inventory, resulting in revenue for the publisher), they might say that the value of a new visitor to their site would be approximately $0.27. (6 x 5 x 3 x (3/1000))
The payback period is important because as you make changes that you believe change retention long term, it can take a substantial amount of time to see the effect. If you make a change that causes the average new customer to stay three months longer, you may not be able to measure the change for a year or more. The shorter the period to payback, the more aggressive you can be about investing to make changes.
In a frictionless world, if LCV is greater than $0, you have a business. In the real world, the LCV needs to be a fair bit bigger. More specifically, the LCV needs to be bigger than the cost to acquire a user. If you think about this model or the recurring revenue model, you can see the many different ways in which LCV can be manipulated. All of these can be improved with aggressive testing:
- You could charge more or get customers to buy more stuff.
- You could drive down COGS.
- You could get customers to stay for a longer period of time (buying more products or paying monthly or annual fees decreasing churn).
All of this speaks to the value of creating an impactful business. Effective marketing starts with maximizing the opportunity for marketing to be effective. This means giving yourself the most marginal profit per marketing dollar spent and the largest direct budget to acquire customers.
You can look at more mature markets to understand the power of being good at this. Consider the online mortgage lead market. Companies such as LowerMyBills essentially made a business of finding leads for mortgage brokers. The essence of their business model was having more brokers to sell each lead to because each broker was willing to pay between $5 and $10 for a lead. If they had a mortgage lead and sold it to five brokers for $5 per broker, they made $25. If they sold it to 10 brokers, they made $50. If they had 100 brokers, they could make $500. LowerMyBills successfully managed to draw ahead in signing up mortgage brokers and suddenly a customer was worth $20 to $50 more to them than to any other mortgage broker because LowerMyBills was so good at monetizing them. Once this happened, LowerMyBills experienced a network effect: They were willing to pay more for leads in every marketing channel than anyone else was. The result was they got all the leads. As they amassed more leads, more mortgage brokers signed up with them to buy leads. This pushed them even farther ahead in the monetization race. Being better at turning customers into money made them better at direct response marketing than their competitors. TNS Media indicated in 2006 that LowerMyBills was one of the largest advertisers in the entire Internet. When they were acquired by Experian for more than $330 million dollars, they had $26 million in profits on $120 million in sales.
The University of Phoenix, a for-profit school, is no different. Their business is selling enrollment in classes they offer. There are many, many online universities, but the one that is top of mind to everyone is the University of Phoenix. This is because they did an outstanding job of optimizing their conversion process. They refined their process to such a degree that they were able to turn an email address on a landing page into someone signed up for classes so efficiently that just getting the email address of an interested consumer was worth several dollars to them. Think about what they did there: By only needing an email to start a customer down the path, they simplified the conversion. If you were a traffic-driving partner of online universities and had to choose between collecting email addresses and signing up people for classes online, you chose email addresses every time. For the traffic driving partner, it felt like a sure thing. For the University of Phoenix, with their optimized conversion process, turning email addresses into class registrations was a sure thing. With this simple conversion process, conversion rates skyrocketed compared to other online university experiences. If their conversion rate doubled, they could pay twice as much for traffic and get the same cost per lead. On the other end, when they got your email address, they had excellent sales people that closed consumers. In the same fashion as LowerMyBills, once Phoenix got a little bit ahead here, they were positioned for success. Ad Networks forced to choose which universities’ ad they would show inevitably chose Phoenix because it paid better. Suddenly Phoenix had all the education leads. Then they had all the money.
At its peak, the University of Phoenix had more than 600,000 students enrolled and spent more than $300 million annually on digital marketing.”
Purchase The Lean Guide to Digital Advertising HERE