Category: Work

What is your Customer Life Time Value?

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Life Time Value, or LTV, is one of the most important metrics when it comes to any business, but especially for an online business. It is, therefore, a big surprise for me that few companies that I have been associated with use this metric actively when it comes to managing their business.

LTV simply measures the value of a customer to your business. To calculate it, you need to have an understanding of how long can you get some revenue from your customer (the Life Time) and the total revenue you can receive from the customer during that period of time (the Value).

Let’s take an example. Let’s assume that the average customer purchases from your site for a period of 2 years, and makes purchases worth Rs. 2,500 in the first year and Rs. 1,000 in the second. Let’s also assume that you make a flat 20% margin on the sales.

So, in this case, the two-year LTV of your customers would be Rs. 500 (Rs. 2,500 * 20%) + Rs. 200 (Rs. 1,000 * 20%) = Rs. 700.

This means that, on an average, you make Rs. 700 from every customer you acquire.

An immediate application of this is that you now have a target for your Customer Acquisition Cost (CAC). If you wish to make a profit from every customer you acquire, then you cannot spend more than Rs. 700 to acquire a customer. Or, if you wish to make a profit of Rs. 200 per customer, then your CAC has to be less than Rs. 500.

Given the challenges with multi-channel and multi-device attribution, in my opinion, Customer Acquisition Cost, or CAC, should be the primary metric driving customer acquisition. However, I find very businesses adopting this, but that is a topic for another article!

Understanding LTV at an individual customer level also helps businesses create a highly targeted Customer Relationship Management strategy. One can create segments of users based on their relationship to the standard or expected Lifetime purchase behaviour and craft tailored messages, including offers, to those users who might be below the average LTV. Similarly, users with high LTV can be identified and developed as potential promoters / influencers.

So why do very few businesses adopt this key metric?

In my opinion, these are some of the challenges:

  • Lack of awareness and understanding of the metric – In general, most people are comfortable with pure transactional metrics. How many customers, sales, revenue did we make? And how much did we spend to make this sales? LTV, by definition, is a long-term metric. A business might only make profits from acquired customers after 6 months, 1 year or longer.
  • LTV is not a leading metric – As I mentioned previously, LTV is a long-term metric. For a new business, it might take up to a couple of years before they can realistically calculate their LTV. In the interim, they rely on more immediate (or leading) metrics to measure and run their business. And once they get comfortable with this, there is a natural and understandable reluctance to shift to another metric.
  • Lack of appropriate measurement for channel of customer acquisition – Measuring visits and conversions from a marketing channel is pretty straight-forward. However, tracking of new customer acquisition is a slightly trickier exercise. It typically requires some additional technical requirements to map a new customer back to the channel (either first or last) that led to that customer visiting your site and making their first purchase.
  • It takes time and effort to move the LTV needle – By it’s very nature, it takes a lot of time and sustained effort to move the needle when it comes to LTV. So, any business that wants to work with this metric would typically have to look at some element of the metric where short term movements are visible. For example, it could be one cohort of users, or a specific period in the Life Time, as opposed to the full LTV. As you can imagine, this brings in a degree of complexity from an analytics perspective that many businesses might not be resourced effectively for.
  • Team structures and goals – LTV is a difficult metric to break down for the various teams that are directly responsible for it. Many marketing teams are still structured on a channel basis. And it can be difficult to translate the LTV goal into an effective metric that operations and delivery teams can manage to.

Despite these challenges, I believe that every organisation, especially digital native ones, should have Life Time Value (LTV) as one of the key metrics that they measure and grow. It can provide both strategic as well as tactical insights that can prove very useful to scale their business in a sustainable manner.




Monday Reads – 27/01

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Clayton Christensen, Yuval Noah Harari, CES, Davos, tennis and more in this week’s set.

How Will You Measure Your Life – I must admit that I was not familiar with Clayton Christensen’s work until last week. The number of posts that popped up on my professional social network feed on his passing away last week led me to learn more about him. And I am glad I did. This article is nearly 10 years old now but still as, if not more, relevant today.

Yuval Noah Harari’s warning to Davos – Israeli historian, Yuval Harari, explained the threat from ‘technological disruption’ at the recent World Economic Forum at Davos. A must-read thought-provoking article. Among the key takeaways – ‘humans are likely to lose control over our own lives and also lose the ability to understand public policy.’ Also, ‘The global order is now like a house that everybody inhabits and nobody repairs.’

An unlikely vision of the future from the Consumer Electronics Show – What are some of the technological innovations that marketers might want to know more about this year? Read more about them in this article. “It is truly time for marketers to accept that the old models and traditional ways of operating are very much things of the past.”

The Inner Game: Why Trying Too Hard Can Be Counterproductive – This article claims that ‘The standard way of learning is far from being the fastest or most enjoyable. It’s slow, makes us second guess ourselves, and interferes with our natural learning process. Here we explore a better way to learn and enjoy the process.’ It takes the example of learning to be a better tennis player to explain the rationale for this statement.‘If we can overcome the instinct to get in our own way and be more comfortable trusting in our innate abilities, the results may well be surprising.’

Digital Duopolies

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The big news in the Indian tech space this week was the acquisition of Uber Eats by Zomato. Other than the fact that Uber Eats was the only food delivery app on my phone (which has now been replaced by Zomato), the acquisition was interesting because it effectively means that we now have a duopoly when it comes to food delivery apps in India with Zomato and Swiggy battling it out head to head.

The same story seems to be playing out at many tech industries. Uber and Ola / Lyft when it comes to on-demand transformation, Apple and Android on mobile phones, Chrome and Internet Explorer on browsers, Amazon and Flipkart / Walmart for online shopping, Expedia and Booking for online travel, Google and Facebook when it comes to digital ad spending.

I am sure this phenomenon is not unique to digital businesses, but it does seem to happen more regularly and faster for tech businesses than more traditional ‘offline’ businesses. For example, we still have multiple auto manufacturers, airlines, hotel companies, mobile phone manufacturers, etc.

This led to me think about why this phenomenon of the rise of duopolies plays out so frequently with digital businesses. These are my thoughts:

The inherent low levels of differentiation between competing companies – Product development being relatively very quick, it is fairly common to see digital businesses in the same domain quickly iterate and evolve their products such that they offer pretty much the same features and benefits as the others. When this happens, the choice of provider boils down to either personal preference (brand) or price.

Low costs of entry – The relatively low cost of entry means that, as soon as a new market opportunity opens up, many brands start up to compete for a chunk of the pie.

Consolidation – Initially, as the market grows rapidly, most of these new entrants are able to show decent growth and capture a decent share of the market. However, as the growth starts slowing with increasing industry maturity, some of these brands start to see a struggle in keeping up with the industry leaders. What causes some of these brands to surge ahead while other struggle at this stage is a topic for another article, but the result is that soon, the market throws up a few (typically 2 – 3) clear winners. At this stage, the rest have a few options:

  1. Continue with a smaller share of the market with low growth potential
  2. Shut down
  3. Merge with one of the market leaders.

One of the factors influencing the decision would be the key investors in the brand. If it’s a Venture Capital backed entity, chances are they would take the third option above to make some returns on their investment. Self-funded companies might take the first option. If it’s a branch of another business with larger interests in other markets, they might take the second option to focus their resources in their core business.

The net result of all of these stages (which could occur in the space of just a few years) is the emergence of duopolies. My guess is that, if there we no constraints, we would end up with monopolies. Till, that is, the market becomes so large and the incumbent so entrenched, that the time is ripe for disruption!


A New Teaching Gig

MITADT University campus
MITADT University campus

I have recently started a new teaching assignment, with the Institute of Product Leadership. I am teaching Digital Marketing to students in the first year of their Full Time MBA Course in Applied Data Science and Technology Management.

The classes are conducted in the campus of MITADT at Loni, Pune. MIT is a well know engineering college. I am familiar with and have visited their campus at Kothrud in South West Pune during my time studying at the Government College of Engineering (COEP), Pune. But this was a new campus for me. In fact, it was the first time I was visiting Loni, about 15 kms to the East of Pune, on the road to Solapur.

I was staying at a hotel in Mundhwa, or Koregaon Park Annexe. This is right in the heart of the city. And it had its advantage in that there were good street food options a couple of minutes walk from the hotel. I did not want to travel to Pune and not try the local street food and was delighted that I could indulge in this conveniently.

Sunset - Pune Koregaon Park
Sunset – Pune Koregaon Park

The commute to Loni took around 40 minutes one way. The campus is a pleasant one. Not very large, but with imposing buildings, dominated by the towering World Peace Dome. As with most educational campuses, it had well maintained lawns and numerous trees. The classrooms on the other hand, though, were relatively small and very school-like in its feel.  Having said that, it did have its benefits of being more intimate, leading to a greater degree of interactivity than in larger rooms.

One of the enjoyable moments for me occurred while I was taking a post-lunch stroll in the campus. The Mula-Mutha river forms the northern boundary of the campus, while immediately outside the main entrance to the South runs the main Mumbai – Solapur railway line. One frequently hears the passage of trains anywhere in the campus. This reminded me of my own engineering college, which, though located nearly twenty kilometres to the West in the heart of Pune city, had the exact same geographical layout, bordered by the river to the North and the railway line to the South.

I enjoyed teaching the course and look forward to subsequent visits.

When are you least productive at Work?

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Finally, studies have shown that what I experience during the course of a normal work-day is not unique. I have always found my concentration levels dip after lunch, making it harder to refocus and get work done as effectively and efficiently as before lunch (or later in the afternoon).

Now, this study in the UK has found that 14:17 is the time when a large number of people experience the dreaded slump at work. Now, this study was conduced in the UK, but I am sure the results would resonate with many office-goers.

I have definitely found this to be true for the most part of my working life. I am a morning person, and work at maximum efficiency till lunch time (usually around 12:30 / 1 pm). I try to take a short walk after lunch, but find that it’s still hard to get back to the same effectiveness as before. Rather than fight it, I usually just accept it and use this time for my casual browsing, emails, etc. Usually 20 minutes is what it takes for me to start getting out of the slump, and I then get back to work as usual.

Another thing I have observed recently is that this phenomenon is not restricted to working professionals alone. I have found that participants of my teaching sessions that start around 2 pm take longer to ‘warm up’ than at other times.

As experts quoted in the study mention, this slump is a natural part of our circadian rhythms. The ideal solution would be to take a brief nap at this time, but that might not be feasible in most work (or study) places.

What are some of the ways we can work around this natural slump?

  • Take some time during our immediately after lunch for mental relaxation. This can help manage stress levels and enhance energy levels.
  • Use this time for work that is not very mentally demanding (boring stuff).
  • Travel. If you have to travel for a meeting, can you time it such that you are traveling around this time (maybe even take a short nap on the way!).
  • Get a good night’s sleep. This is simply the best solution to minimise the effects of the afternoon slump.

Do you also experience a slump in the early afternoon? What do you do to overcome it?