Why focusing on LTV is as important as CAC

eCommerce has become so preoccupied with CAC that it has largely forgotten about an equally crucial business metric - LTV.

Over the past decade, CAC (customer acquisition cost) has been about as subtle as an unpredictable, ever growing 600 pound gorilla in the corner of a room. Every year in eCommerce it seems to hit its peak cost, only to be overtaken the next year. Entire industries have focused on how we can reduce the cost of acquiring a customer - many building sophisticated models that blur offline and online approaches with granular tracking and attribution. However, all of this single-sided vision has blinkered us from focusing on what is perhaps a more important metric - Customer Lifetime Value.

LTV measures the value of a customer to your business before they churn, and it is calculated in terms of revenue. If, for example, you acquire a customer for £20, and the product you’re selling is £10 - you need at least 2 orders of that product to cover your acquisition spend and stand a chance of making any profit. (This excludes any additional costs, margin, etc). If CAC is the ignition of the engine, LTV is the fuel in the car. One without the other can create a business that is propped up on stilts without the underlying foundation to build upon. 

LTV is the lifeblood of your business. If your LTV is extremely strong, you can afford a far higher CAC to acquire more valuable customers. However, during the last decade, focus on LTV and prolonged profitability has been replaced by short term gains and instant returns. This has been fuelled by the “cheap” venture capital that has flowed into many industries that allows you to glaze over the lack of positive unit economics and pretend everything is “fine”. We have been plagued with short term thinking and reduction of LTV, at the cost of healthy businesses.

Adam Keesling offers a great Twitter breakdown on Blue Apron, covering how a single-sided viewpoint can destroy your business very quickly:

In many ways, LTV is far more of a fluid metric which you can have an actual effect on. Once you have acquired a customer they are yours - you own their data, their attention, and supply them with a product that suits their needs. Obviously there are a multitude of factors that lead to a customer coming back to you, and above all “product fit” - which only you can really build. Other elements are really focused on friction of action - how many pain points does your customer have to go through to purchase your product? As a rule of thumb, reducing the cognitive load and increasing the speed of experience can have incredible effects on your LTV.

Really understanding why your product is part of your customers lives and what needs they have (and you are solving) are fundamentals to building loyal, valuable customers and seeing LTV skyrocket. Pair this deep understanding with ease of experience and product fit, and you will see a powerful change.

CAC has increased as a result of the influx of capital in eCom (more players in the space + the same audience as before = cost inflation), which cannot just keep going. Companies are slowly coming round to the idea that a single viewpoint can’t work long term, and that a focus on LTV extension has to be part of a broader strategy. Removing yourself from the current narrative of short-term thinking and taking off the rose-tinted glasses of growth-at-all-costs will put you in a position to build a sustainable business.

SMS marketing is an innovative, cost effective way of reducing churn and boosting your LTV - take a look at what it can do for your brand.

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