Today’s newsletter is going to be more technical in nature, but it’s highly necessary if you’re a brand owner (or a media buyer/email marketer looking to improve):

LTV analysis

In fact, before I take on any email marketing or Meta ads management opportunity from a potential client, I always make sure to ask for all data related to customer lifetime value (LTV).

Without understanding a brand’s margins and LTV, it is nearly impossible to scale Meta ads and improve retention because you can’t answer the following questions:

1. What is the average customer LTV?

2. How much can you afford to spend on Meta ads to acquire a new customer and in what period of time?

3. How long will it take to break even on your customer acquisition costs?

4. Which products drive the highest profits and repurchase rate and should be appropriately marketed through email marketing flows and campaigns? And at what point in the customers’ journey?

Side note: If your media buyer or email marketer doesn’t ask for this data, I would highly recommend finding an alternative.

To answer these questions, you must be able to read a standard cohort analysis.

If you’re building a supplement business or any kind of brand that relies on repeat orders, not just first order profitability, marketing tends to blend with financial management.

Understanding the timing of your costs and cash flow is the only way to avoid burning cash irresponsibly.

Your cohort analysis is the first step in linking your marketing with financial analysis. The second step, which we’ll cover in a future newsletter, is taking your marketing metrics and plugging them into your financial model to ensure sustainable positive cash flow over the long-term.

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How to Evaluate LTV Properly

Cohort analysis breaks down the value of customers based on segments and tracks how each cohort engages with your business over time.

Here’s how it works:

1. Customers are grouped together based on when they placed their first orders. Typically, this is done on a month to month basis.

2. The value of the first order is shown in the first column for each cohort.

3. As you scan along the x-axis from left to right, each column shows the increase in value for each cohort generated by repurchases. This includes the value of the first order and any additional orders on a month to month basis.

4. Each column to the right tracks the increase in value from repurchases month by month. In theory, the longer you extend the y-axis, the value will approach the average lifetime value of your customers overall.

5. As an example, customers who placed their first order in June 2022 had an average order value of $74 for their first order. By the end of January 2023, or six months after the date of the first order, the average total value of the first order and subsequent repurchases was $87. In other words, new customers who placed their first order in June 2022 had an average lifetime value of $87 by January 2023.

Here are some further takeaways:

1. Cohort analysis takes into account the seasonality and changes in buying behavior on a month to month basis. Customers you acquire at the beginning of the year or earlier in your business’s history may behave different compared to more recent customers. Instead of showing you one average LTV, the cohort analysis measures how much a customer is worth to your business over time based on the date of acquisition.

2. A cohort analysis allows you to find your break even points more efficiently. As mentioned above, this must be done by incorporating your gross margins, not just by looking at revenue.

3. Generally, you want to break even on new customers within the first 30 to 90 days. So look for lifetime values that exceed your CAC (Customer Acquisition Cost) for each cohort one to three months after the date of the first order (make sure to account for your expenses so you’re looking at overall profit, not just revenue figures). Importantly, you want to see a significant increase in lifetime value in the first three months. While you can survive if your LTV is high enough over a six to 12 month period, capturing the majority of your average LTV in the first three months will make your life a lot easier and reduce your reliance on debt.

4. Your cohort analysis can be further finetuned by filtering your data based on marketing channels, like Google or Meta, and by product. This allows you to answer questions like:

   1. How much should you be spending on each marketing channel?

   2. Is your customer lifetime value growing from one month to the next for each marketing channel?

Mistakes with LTV Analysis

For your LTV and cohort analysis, I see many brands analyze their LTV incorrectly. In most cases, even with an app like Lifetimely, they calculate based on revenue.

This approach is flawed for several reasons:

Here are three reasons why:

1. Incomplete CAC payback assessment

Calculating the CAC payback solely by revenue fails to consider varying product costs. By ignoring actual profit based on your gross margins, this oversight can create a substantial gap between media buying costs and when you break even on new customer acquisition.

2. Misaligned resource allocation

Relying on revenue metrics may obscure underlying issues, such as weak gross margins. In many cases where brands are offering discounts as part of their email marketing strategy, growth in LTV may actually hide declining profit margins.

3. Wrong long-term decisions

In many cases, a brand may have a high LTV over a long period of time, but this masks critical financial vulnerabilities. Focusing on a 60 day or 90 day LTV (i.e. the estimated value that a customer will generate for a business within a 60 or 90-day period) is preferred because you need to recover the majority, if not all, of your acquisition costs as quickly as possible.

Operating in the red for a long period of time will force you into cash flow issues and taking on debt that your business may or may not be able to support if you run into any rough patches in the future.

Make sure you’re analyzing your data based on the following:

1. Check the accumulated sales by customer to identify cohorts with the highest LTV.

2. Evaluate the accumulated gross margin per customer to visualize your gross profit.

3. Compare repurchases and filter by products to see which products drive the most repurchases.

The third point is especially critical for retention marketing since understanding which products and when to promote them will form the core of your email and SMS marketing strategy. This is data I always need access to before starting an engagement with a new client.

There are many more bells and whistles you can add to your standard LTV/cohort analysis like:

1. LTV projections: Helps you forecast monthly customer values while aiding you in determining CAC payback times in the future

2. Churn rates for brands that operate on subscriptions

   1. Determine the critical points when customers are most likely to cancel

   2. Determine the products and marketing channels that correlate with lower churn rates

   3. Align the timing of your email and SMS marketing to reduce churn

Finally, if you’d like to work with a marketing team that deeply understands LTV analysis and how it fits into your media buying and retention framework, book a call with me to learn more.

If you prefer a DIY approach, consider signing up here to learn how to improve your customer LTV with branded direct response strategies.

In a few days, we’ll dive deeper into retention strategies and the interplay between LTV and email and SMS marketing.

I’m also working on a newsletter breakdown focused on upsells, which I’ll share in the coming days. Stay tuned.

Talk soon,

Sharad

@pmktg00

P.S. If you own or operate an e-commerce brand generating at least $1,000,000 in annual revenue, feel free to book a call with me to discuss how we can improve your ad creatives, landing pages, or email/SMS marketing strategy.

To further enhance your e-commerce and marketing skills, you may be interested in signing up for one of the options below:

1. Learn branded direct response copywriting and how to create high converting cold traffic funnels here.

2. Learn how to write advertorials here.

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