Q: Why is LTV the best metric to use for recurring revenue growth?
A:At Atlas, we refer to Lifetime Value as the ‘golden metric’. It’s a representation of the profit a customer will bring a business over their lifetime.
Many recurring revenue businesses still measure themselves on cash income, rather than looking at how revenues are – and will be – earned over time; LTV uses a customer’s propensity to renew to measure the profit that customer will deliver to the business over time.
Running an excellent subs machine is like flying a plane – there are a million dials to keep an eye on and settings to optimise. All those measurements can be confusing, even though they’re essential for day-to-day subscription management. LTV is a single metric – the equivalent of the seatback video of your plane’s location telling you where you’ve come from, where you are now, and where you’re headed.
Effectively, LTV pulls together all KPIs – yield, acquisition cost, volume, trial success, renewal rates and cost to serve to predict the amount of resulting profit that can be made over the whole period subscribers remain with you. It can tell you how the business is performing now, what offers or Cost per Acquisition (CPA) will deliver Return on Investment (ROI) and make sure you have an eye on future return and profitability.
Q: When calculating LTV, what are the key considerations?
A:The biggest challenge isn’t the calculation itself, but defining an acceptable timeframe for Return on Investment. Subscription success requires patience, and expecting an immediate ROI will limit growth opportunities. Few publishers nowadays will be able to accept a profit return after 3-5 years across their whole marketing spend, but when there are test or investment opportunities, that frequently means expanding the window for ROI to allow for the risk of failure or future optimisation.
Secondly, don’t forget LTV is a profit calculation – make sure you’re allowing for fulfilment, marketing and cost to serve. Don’t make your models too complex: the calculation is relatively simple, and giving everyone transparency on how it works builds confidence in its results.
A ROI/LTV Ratio sounds complicated, but it answers a simple question: ‘for every £1 I spend, how many ££ will I get back within x timeframe?’ Imagine a conversation with your CFO, and you can say confidently, “we have an opportunity now, if we spend £20k, I’ll be able to deliver you £55k in 18 months’ time.” Subscriptions investment cases are sometimes hampered by the host of metrics marketers love (even if they do support the business case!), but require too much explanation for strategic discussions. And it’s not just for investment – it will help to justify existing marketing spend.
Q: How should publishers use LTV in their acquisition marketing?
A:Start your budgeting with LTV – create models by channel to understand each channel’s contribution and roll up to a blended LTV across the whole of your acquisition activity. Balancing CPA and LTV in budget planning is a powerful process: a £10 CPA on a channel with poor LTV will often perform significantly worse than a £60 CPA through a channel with great LTV. Marketing planning needs to strike a balance between the two – last-click attribution can lead to reducing acquisition opportunities. Using a blended LTV approach can open up options for higher funnel activity and support business cases for investment.
If a channel has great LTV plus expansion opportunities, back it. And look out for the outliers. A cheap CPA and lower LTV can, in some cases, deliver better and faster ROI than a more expensive campaign. Understand your marketing objectives and use these channels strategically.
A robust LTV model will make sense from your most junior exec up to board level: make sure everyone understands your business definition, has access to the calculations and can use the model in day-to-day activity.
LTV can also be used as a measure of past success: looking back on campaigns, did they deliver as anticipated? Which offers have been used historically, and how did they perform? How many subscribers are left, and how profitable are they?
Campaign LTV calculations – looking at total spend and total return for a campaign is an approach uniting KPIs and building confidence in profitable outcomes over time. Being able to say “we spent £50k, delivered 1.6k orders, £72k revenue in year 1, £55k cumulative profit over 3 years and expect ROI after 18 months” is powerful. There’s a tendency to make acquisition marketing a volume game, quality be damned. LTV is an insightful way to avoid this (and the churn it usually brings!) and unite the whole team with a single purpose.
Lastly, you can use LTV to model out your entire customer funnel, to identify an acceptable lead cost or target conversion rates, with metrics that predict and evaluate response. Should campaigns underperform, it also allows the possibility of calculating a range so, say ‘a 20% underperformance will only expand the timeframe for ROI by an additional 3 months’. This insight allows marketers freedom and space to optimise – especially as tests rarely deliver immediately.
Q: How should publishers use LTV in their retention marketing?
A:This is where LTV works its magic. If your acquisition team is targeted on volume and limiting CPA, and your retention team is targeted on limiting churn, you’ll end up with high volumes of cheap and generally poor-quality orders on cheap offers– fulfilling your acquisition team’s bonus targets. Those subs then churn massively, leaving your retention teams tearing their hair out (and missing their targets). Conflicting objectives result in trial offers that can unlock volume or specific channels being banned for the wrong reasons.
So, LTV is exceptional – it’s a single metric which your acquisition and retention teams can unite behind. Using a lower quality high volume channel? Optimise the offer, and additional churn can be anticipated and targeted with additional onboarding activity.
Building business cases for investment in engagement to improve early life subscriber retention is straightforward with a good LTV model as it will pinpoint what improvements can deliver. It can provide an answer to the question, ‘how much can I spend (or do I need to spend) in order to improve retention by 1% over the next two years?’ In partnership with pricing elasticity metrics, it’s the best way to predict what your next price rise will deliver over time and identify your optimal yields to maximise return on investment.
LTV is also a measure of product quality – will your print + digital edition deliver as much ROI as your print only copy? You’d expect bundle subscriptions to have a higher LTV because subscribers are usually paying more, but if digital experiences are below par, you might make less money from because renewal rates are lower. Combining retention expectations with acquisition costs, delivery costs and yield gives you real visibility on the profitability of each product offering. LTV can deliver a surprising insight into the quality – and profitability – of different platforms and editions.
Q: When using LTV, what are the pitfalls to avoid?
A:LTV is ultimately a profit calculation; I’ve seen multiple LTV revenue calculations, but it’s useless for understanding ROI without including all of your costs: acquisition, production, mailing, and subscription management. As Felix Dennis used to say, “revenue’s vanity, profit is sanity” – LTV gives a clear view of where it’s worth spending your hard-won marketing budget.
Making models super-complex (after all, we’re subs geeks and love a complex model) is fine, but make sure at the highest level, it’s concise enough to give everyone great confidence in marketing decisions. Be transparent, and educate everyone so they understand how it works!
The final pitfall I’ve already mentioned; remember that subscription growth takes time: pick the optimum LTV return timeline to match your business objectives. Stop expecting immediate return on investment! A volume growth target needs to be paired with extended ROI opportunities so that your marketers can test new routes to market and learn. A profit return target needs to be reasonable, so it doesn’t reduce the opportunity for subscriptions growth.
Q: For senior management looking to embed LTV considerations into company culture, what advice can you give?
A:Define your payback timelines in alignment with your business objectives, and make sure everyone in your business understands how those targets work. Work alongside your marketers and data teams to build your model and unite behind it with purpose.
LTV is an expression of spend opportunity: if budgets need to deliver ROI within 18 months, define acceptable CPAs within your LTV model and identify new order volumes that can be achieved. Don’t simply set subscriptions budgets at the same level each year – performance is impacted by broader factors like market demand, media costs and even economic climate; work with your subs teams to understand the LTV on activity and build up profitable spend opportunities.
Unlocking growth often demands additional investment; don’t limit your subs team to cheap opportunities. A test budget with an accepted ROI of three years might identify a channel or campaign that can be optimised down to your regular levels within a few years. If you don’t empower your marketers to find out through spend with a longer payback window, you’ll never know. And then when you’re optimising yield, your model will be able to demonstrate the likely impact.
Trust your LTVs as a health metric for your business – a file LTV calculated regularly will give you insight on how the brand is performing, where your growth opportunities lie, price rise performance, ARPU and new product opportunities. It gives you a lens through which to predict the future as well as making great strategic decisions right now.
Q: What’s in the pipeline from Atlas?
A:Lots! In the short-term, we’re focused on setting up our US business in NYC in partnership with our US lead Jill Marchisotto. Our training offering is increasing through the Atlas Academy, plus we’re extending contracts and onboarding new clients across both B2B and B2C currently. Watch this space!
Atlas is a strategic recurring revenues growth consultancy committed to fuelling subscriptions growth in the publishing and wider media industry. Founded by market-leading experts, our solutions are data informed, customer centric and rooted in the real world. Clients reap the rewards from a focused approach to core subscription KPIs, unlocking pathways to profitable growth. With a strong track record for successful outcomes, we’re happy to discuss how Atlas can add value to your business. Contact us at email@example.com to explore further.