What is the easiest way to calculate Customer Lifetime Value and is that right for you? Listen as Chad shares 3 methods and the pros and cons of each to determine which one is right for you.
Chad Buckendahl is the Director of Analytics for LimeLight. Prior to serving in his current role, Chad has ran several successful multi-million dollar ecommerce businesses, including for OxiClean, Whole Foods Market, Video Professor and also ran successful weight loss, muscle and skin offers. Chad also co-owned 2Chads Fulfillment and sold it in 2016.
Chad has built a reputation as an expert and thought leader in the direct response industry. For the last 25 years, Chad has served in a wide variety of roles that touches every aspect of online businesses and is currently earning an MBA degree with an emphasis in Business Intelligence and Database Modeling from Colorado State University.
[Music] Welcome to FDC's Ecomm education block my name is Chad Bacchanal and I'm the Director of an alert set why might CRM today I want to share with you som thoughts on a topic that is often controversial in our industry. It's one of those topics that I know some of you will agree with me on and some of you will discourage rarely do I find a consensus agreement on this topic but the hope is that when the video is over you'll have a stronger understanding of the subject. What is this controversial subject? How to calculate customer lock on value. I'll cover three methods including the one that we found to be the most accurate and recommend for our clients. Why is this controversial? Well first there are many ways to calculate CLTV and the results you get can vary dramatically with each method. Second no business is the same, this obviously complicates things when we're trying to use a single measurement to evaluate businesses with widely variant attributes. With that let's jump into the topic: there are three different popular methods for calculating CLTV. Method one is the method we use to calculate CLTV outline and is widely used by businesses that have high customer turnover or churn. This method leverages gross revenue and cogs to determine gross profit and divides that by the unique customers. A unique customer is most often identified by a unique email address. For example if I have 1 million dollars in gross revenue and [ __ ] of $40,000 returning a gross profit of nine hundred and sixty thousand dollars. I have eight thousand unique customers and therefore the CLTV is a hundred and twenty dollars. It's a pretty straightforward calculation but can be criticized for simplicity. Method two has been around a long time and it's used quite a bit with several industries but it's not widely accepted by the subscription industry because of its reliance on churn ratio. Churn ratio is a useful measurement but the common argument is that churn ratio has no place in the CLTV calculation because it adds in variability to a measurement and ultimately muddies up the CLTV calculation. This method uses the returning average order or our AO / the turn ratio. For example let's say your RAO is $80 and your truth is 40%, this method is going to calculate your CLTV to be $200. So this method is also very straightforward but like method 1 it also is often criticized for being too simplistic. Method 3 is very popular it is widely used across many different industries but it's really meant for companies that are cross them throughout the customer lifecycle. Let's run through this calculation once again we start with our AO multiply gross margin with an $80 our AO and a gross margin to 40% we get a net REO of $48 then we consider a 40% churn in a discount rate of 0% this method leverages growth rate to arrive at the same $120 of method wah so then we are comparing apples to apples as much as possible across all three methods. Growth rate refers to the customers growth rate during the lifetime as a customer. If you're growing a customer's value over time this is an important number inside of the CLTV calculation the criticism of this method is that it is too complex and it leverages growth rate which is speculative it can water down the CL TV calculation. Now that we've reviewed all three methods let's talk about why we use method 1 at Lime Light and why we think this is the right approach for advertisers and subscription businesses. Method 1 is straightforward and while it can be criticized for its simplicity it gets praised for hosts customer lifetime analysis, accuracy mean that when we analyze customers after that they have cancelled the calculation often proves to be more accurate we have analysed our entire global transaction database millions of as actions over more than 10 years and we still have found method one to be the most accurate method for calculating CLTV. My goal and my life's goal is to stay on top of the industry and provide advertisers and e-commerce merchants the best analytics and revenue maximization tools for their businesses. My priority is to stay up-to-date on the best metrics and calculations specifically for CLTV. I'm always looking for various CL TV calculations and analyzing and considering their merit for Limelight's clients so don't be surprised if in the future we offer multiple methods to calculate CL TV keeping a handle on all the data and metrics of your business is complex. Leveraging is sophisticated and intelligent but relevant analytics is how you can not only compete but scale. If you watch this video to this point you've been bitten by the bug and are most likely a data junkie like me. This curiosity is are you all what do you think will happen if you can't get a quick handle on where your business is at at a moment's notice. I've been there and it's scary it's a very scary thought that's where a solid analytics package comes in. Whether you are using the solution that we developed at limelight or you have your own homegrown bi solution stay curious and continue to fight the good fight my goal and Limelight's goal is to equip our clients with the best features integrations and revenue maximization tools and of course analytics to not only stay on top of the industry but to help you succeed that's why we continue to work hard to build a flexible and reliable CRM solution so you have all of the information you need to make the right decisions for your business. I'm Chad Bucknam, Director of Analytics at one I wish you the best of luck growing your business and achieving your dreams [Music]