How much would you pay for a click? An introduction to lifetime value

Presented by: Brent Chudoba, SurveyMonkey

Lehigh University: Principles of Marketing – MKT 111OCTOBER, 2014

IntroductionBrent Chudoba● Senior Vice President, General Manager of SurveyMonkey Audience● Joined @SurveyMonkey in 2009

● @bchudoba● brentchudoba.com● in/brentchudoba

Goals

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• By the end of this session you will- Be ready to start your career in marketing at a

powerful Internet company. Well maybe not yet, but you’ll be familiar with some key jargon and the fundamental concept of lifetime value

- Have a working framework for how to evaluate the value of a customer and how it impacts marketing decisions

Notes

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Session notes

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• This session is about how the value of a customer connects to how marketers think about spending on advertising

• We will use a real company example, but numbers are based on Internet research on sites like Quora, Forbes and Netflix Investor Relations

• Numbers are simplified to facilitate discussion and explain concepts but may have inaccuracies due sources and changes over time

Scope notes

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• Customer Lifetime Value is a complex topic- The focus in this presentation is on basic

lifetime revenue value of a monthly subscription service customer

- A starting point for more information on Customer Lifetime Value (CLV) can be found in this Wikipedia Article

How many of you have access to a Netflix paid subscription?

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Key questions

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• How much are you worth to Netflix?• How much is Netflix willing to pay to get

another subscriber like you?

How much are you worth to Netflix?

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Let’s establish a reasonable value ceiling

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• What is the total amount of money (one key measure of value) that you will pay Netflix over time?

- This is the concept of Lifetime Revenue (LTR)• How do we figure out this metric?

Components of basic LTR

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• Average monthly cost of a subscription- Often referred to as AOV (average order value)

or ARPU (average revenue per user)Multiplied by• Average number of months customers

subscribe (aka: average lifetime)Equals• Average Lifetime Revenue of a subscriber

Average monthly cost of a subscription

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• Typically a weighted average of the different subscription prices and the % of customers who choose each package

• We’ll use $10 as a simple average for our example

Average months customers subscribe

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• One simple method to calculate is the “half-life”- If customers cancel or “churn” at a consistent rate, at the time

where only 50% of a cohort of customers are still paying subscribers, this is the average lifetime of a customer

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 960

20406080

100

Remaining Customers

Month

Cust

omer

s

Lifetime Revenue value

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What could be missing?

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• Average monthly cost can be more complex, and may need to incorporate

- Price changes and discounts- Package shifting (moving from one subscription type to another)- Upselling & cross-selling of other services

• Lifetime calculations can be more complex- Many subscriptions don’t have a constant cancellation rate

• Cancellation rates can be much higher in early months and drop significantly in later months, extending the lifetime

• Viral marketing benefits and word of mouth sharing increase the value of each customer

How does Lifetime Revenue value connect to marketing?

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How much is this click worth?

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Starting with Lifetime Revenue (LTR)

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• If a business spends more than LTR ($180 in this example) to acquire a new customer, it will go out of business quickly

- Remember that $180 takes 18 months to collect• Most businesses seek

- Long term profitability- Have operating costs (e.g., employee salaries, rent)- Have costs for providing services (e.g., servers,

data hosting, content licensing)

Marketing as a % of LTR

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• For our example, let’s assume Netflix is willing to spend 10% of its customer LTR ($180) on marketing

• This would give it $180 X 10% = $18 to spend to acquire a new customer

Click value

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• If we assume Netflix can convert 10% of people who click on paid search ads to paid customers

• It can afford to spend $1.80 per click ($1.80 / 10% = $18) to meet it’s target of $18 in customer acquisition costs

Business objectives are key to optimizing marketing strategy

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Marketing strategy is a balancing act

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• A company’s business objectives will have a major impact on how is runs its marketing strategy, and how it answers questions like:

- What % of our customer LTR are we willing to spend on acquiring new customers? 10%, 50%, 150%?

- Where should we set our initial price point?- Should we offer monthly or annual subscriptions, or both?- Do we need to account for sales costs (e.g., commissions)?- How important is early traction for a new product or

geography?

What can influence marketing strategy?

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May optimize for:

• Conversion / Market Share

• Cash

• LTV (long term revenue)

• Profit

• Supply/Inventory mix

Business scenario:

• Bootstrapped startup• VC backed startup

• Established business• Unknown LTR

• Physical product retailer

Price point implications

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Subscription term implications

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How complex can LTR get?

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Really complex

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Does anyone have an iPhone?

How would Apple estimate your LTR? How valuable did you become to Apple when you bought an iPhone?

After your iPhone purchase, you became:• Much more likely to spend money on iTunes & the App Store• Much more likely to buy a Mac, which makes you

- Much more likely to spend more money on iTunes- Much more likely to upgrade to the next iPhone

• More likely to buy an iPad• More likely to buy an Apple Watch• Much more likely to upgrade to new versions of all these products• More likely to tell your family and friends to buy Apple products…It’s safe to say that $199 is only the beginning of a new buyer’s LTR

Appendix

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Marketing acronyms

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What about the acronyms…

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I overhear conversations like this every day…Marketing: “This test failed, the LTV impact was too negative despite a higher AOV.“Exec: “But first period churn may be better given the source, and with the higher AOV and ARPU, the LTR is going to look better.”Marketing: “The main AOV impact was related to higher conversion because of the source mix, but that also means CAC is higher for these users so LTV will be lower.”Exec: “Ah, gotcha. Makes total sense, let’s keep testing.”

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• There are about a dozen inputs that go into many of the spend calculations for marketers

• Most businesses rely heavily on core metrics that allow them to gauge performance

• Advice: when you hear a metric you don’t understand, raise your hand, figure out what it means…

But they are important to understand

Bonus: Pricing tactics

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Which package does Spotify want you to buy?

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They are really trying to drive to this package w/ a badge and a different color CTA

Using images to show the major differences, which is device portability, extremely helpful cue

This is a freemium product, if I downgrade I revert to free

A marketer might see…

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Which package does Netflix want you to buy?

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Avg. price/month is likely in the ~$10 range, Avg. lifetime in the 18 month range, so LTR may be around $180…

A marketer might see… Packages 1 and 3 may be used as bookends, with the price 33% higher making “Camera” look like a great deal

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Thank you!