Customer Lifetime Value (LTV) - Part 1 - Definition


With the rise of Direct-To-Consumer (DTC) and e-commerce businesses, there’s an increased focus on Customer Lifetime Value (LTV).  

Why should you care about LTV?
When used properly, LTV can be the backbone for Marketing decision making - including strategic planning, budgeting, and setting media/CPO targets.  This is why some DTC businesses seem to have endless media acquisition budgets.  They know and leverage their LTV.

Since everyone has their own interpretation of what LTV includes, how it's calculated, and how it should be used, we want to begin by offering our own definition of LTV.

LTV is what a customer is worth, outside the cost to acquire them.

But, of course, it is much more involved than that.  Let’s dig further by breaking down each word in “Customer Lifetime Value.”

You should be looking at the full relationship with a customer.  Not just one order, but a collection of all purchases the customer has made.

It is important to have a cumulative view of what that customer has purchased to date AND what you expect they will buy in the future. Revenue to date plus projections.  The projections are based on performance over a defined period of time - typically 3-5 years or more. When determining a timeframe that’s right for you, it’s key to line up your projection timeframe with your financial ROI goals.

By value we mean margin, not revenue.  Margin is calculated by taking revenue and subtracting all contra revenue (returns) and variable costs (COGS, royalty, fulfillment, etc).  The result is your margin on a per customer basis.

In summary, LTV is the margin brought in per customer over a defined period of time.  A simple example:

A customer signs up for a $20 monthly subscription and they have been active for 3 months. Revenue to date is $60 ($20x3).  Based on similar customers you forecast they will stay active for 6 months. Lifetime revenue is forecasted to be $120 ($20x6). Your contra revenue & variable costs to service them for 6 months is $50. This brings you to a projected LTV of $70 ($120 projected revenue - $50 variable costs).

This LTV of $70 can now be used to set media CPO allowables, but more on that in our next blog post.

Having clarity on the customer, what’s included and subtracted to calculate margin, and the time period you’re measuring are all essential inputs into a successful LTV model.  This blog is the first in a series of three Directade blog posts about LTV - next time we will be exploring Applied LTV.

If you don’t have a Customer LTV, or if you’re unsure your current LTV is accurate, don’t be afraid to ask for outside help.  Directade provides marketing leaders with LTV models and analysis so they can be confident in their decision making.  Contact us to see how we can help your organization.


Reporting Analysis.jpg

It’s likely you don’t have analysis that enables informed marketing decisions.

Reporting and dashboards are important, but they lack the insight that reveals what is truly happening and recommendations on which actions should be taken next.

What marketing leaders really need is better analysis.
- Evidence to support decisions on whether to grow or eliminate a product.
- Know where to best spend incremental media.
- ROI assessment for that new tech project.
- Testing to know whether a new offer is working.

When you have a great marketing analyst on your team, it's easy to see the difference.  Executive decisions are made with confidence and results are reviewed in a disciplined approach.

The Problem: finding an experienced analyst to join your team is expensive, time intensive to hire/train, and risky.  Once you do find an analyst, they may not perform to your standards.


In 2015, a group of experienced marketers developed the idea of an analyst team for hire.  Directade is not an agency or consultant group in a traditional sense.  Instead we see ourselves as marketing analyst partners - similar to accountants or lawyers you would hire to provide advice over a period of time.

Directade addresses client needs covering Customer LTV, profitability, ROI, media budgets/allowables, and operations.

Through this blog we will be digging deeper into each of these topics over the next few months.  Please leave us a comment and tell us what interests you most.


How effective is your billing descriptor?

How effective is your billing descriptor?

By Jason Solano

The Directade Business Rules Series is taking a look at the practices, processes, and settings that help to power Direct-To-Consumer and Subscription businesses. Each week we’ll cover new questions related to Business Rules best practices that can help companies optimize their sales funnel and increase customer lifetime value.

This week’s topic is on how credit card transactions appear to your customer and what impact that could have to your business.

Are you effectively using your credit card billing descriptor field?

When your company charges a customer, the billing descriptor is the text displayed next to the charge. Here’s the thing: this is an incredibly important marketing touchpoint and it should not be overlooked.

What are the repercussions or a bad descriptor?  Aside from the negative brand association from pure customer frustration, you can expect more customer service calls, earlier cancellations, and an increase in chargebacks.

So how much space do you have? It really depends on your credit card processor and the customer’s bank. You can expect to have at least 18 and up to 25 characters of text for your descriptor. Our advice is to structure your descriptions at 18 characters to avoid potential cut-offs that might confuse your customer and their partners/spouses.

Following the descriptor, it is most common for a company phone number to be listed, followed by the state where the company is headquartered. We recommend including a toll-free number for the benefit of your customer, ideally one dedicated for billing statements. Maintaining this separate number will help you understand how many calls are being driven from billing versus other customer service reasons.

Whenever possible, stay away from internal abbreviations and jargon in your billing descriptor. While it may make sense to someone in your operations or accounting team, it could confuse your customer. If you have a longer brand name, and an abbreviation is critical, go with the abbreviation and use the rest of the space for keywords that clearly describe your product. Bring in your marketing and customer experience teams to advise on what makes the most contextual sense from the perspective of your customer. Create a descriptor that makes sense, then make sure you can have it show up first in Google search results.

As an example, let’s consider the fictional company ‘Sepulveda Boulevard Pet Food & Supplies’. With the wrong descriptor, the credit card statement might look like this:

SEPULVEDA BOULEVARD 1-800-123-4567 CA $60
SBPF&S  1-800-123-4567 CA $60

Both of the above descriptors lack crucial clarity, and would certainly cause many customers to wonder about the charge. If the customer were to Google either description it’s likely they wouldn’t easily find the business, so they’d have to call customer service. With enough frustration, they might dispute the charge.

Instead, we recommend a default descriptor such as the following:

SEPULVEDA PET FOOD  1-800-123-4567 CA $60

Depending on the variety of products and services offered by your company, you can use a dynamic descriptor to better describe what is being sold to your customer. You’ll need to work with your credit card processor to clearly understand their mapping capabilities, and try to stay as close as possible to 18 characters. You’ll also want to know if your processor can generate your dynamic descriptor during authorization, settlement, or both.

In our example, the Sepulveda pet supply company might offer pet toys, grooming, and adoption services, and their dynamic descriptors could be listed as:

SEPULVEDA PET TOYS  1-800-123-4567 CA $60
SEPULVEDA PETGROOM  1-800-123-4567 CA $60
SEPULVEDA PETADOPT  1-800-123-4567 CA $60

If you offer installment billing, and you have the space, you should considering using a dynamic billing descriptor to call out each payment. Listing the charges could help you reduce confusion and additional calls/talk time at customer service. In our example, if our pet company offered many products or bundles that were charged in three monthly payments, they might consider a descriptor such as this:

Month 1: SEPULVEDA PET 1of3  1-800-123-4567 CA $20
Month 2: SEPULVEDA PET 2of3  1-800-123-4567 CA $20
Month 3: SEPULVEDA PET 3of3  1-800-123-4567 CA $20

Some companies go further by including billing-specific URLs in their descriptors. The custom landing page then goes on to explain the charge, the product, and what the customer can do if they have a question or issue. The CEO of Basecamp wrote about his company’s success with this strategy that reportedly reduced chargebacks by 30%.

Billing descriptors are an often overlooked marketing touchpoint that can occur as much as, if not more than, actual product fulfillment. You can improve your customer experience and minimize many costs by following our advice on establishing an effective billing descriptor for your brand.

Next time: 3 Tough Credit Card Processing Questions




By Jason Solano

Directade’s Business Rules Series is taking a look at the practices, processes, and settings that help power Direct-To-Consumer and subscription businesses. Each week we’ll cover new questions related to Business Rule best practices that can can help companies optimize their sales funnel and increase customer lifetime value.

We start off this week with some questions about credit card authorization.

Do you authorize credit cards before accepting a new order?

A very common answer to this is “of course I obtain a pre-auth before I take an order.” However, the practice of obtaining a pre-authorization has been discouraged by Visa since 2009 (via additional fees and declines) because the typical $1.00 pre-auth is an early sign of fraudulent card-testing. Getting an authorization is still a necessity in order to verify funds prior to accepting an order, since a settlement still takes several days to process. In order to avoid potential declines, it’s important to make sure you’re obtaining the authorization for the full amount.

What do you do with new orders that do not pass credit card authorization?

Declining orders due to a failed credit card authorization may seem like the only prudent choice, but you should consider a few other options. Authorizations fail due to two primary reasons: the cardholder has insufficient funds in their bank account or they have exceeded the limit on their credit card account. What do you do next? Both of these instances are likely to be temporary. Presuming you’ve provided a feedback loop that includes asking for a different card, you might consider still taking the order. Work with your credit card processor and fulfillment center to hold the order and recycle the authorization. Re-contacting the potential customer via e-mail or an outbound call might be worth the cost and effort. Shipping the order with an open invoice is another much riskier option, so only consider that if you have excellent fraud detection rules and a tolerance for potential write-offs. Remember that your media is a sunk cost, so any recovery will quickly impact your bottom line.

Next time: How does your billing really look to your customers?


A small leak today....

A small leak today....

By Jason Solano

“Beware of little expenses. A small leak will sink a great ship.” - Benjamin Franklin

We joke that Direct-To-Consumer and Subscription Business Rules aren’t particularly sexy. They’re complex and often technical. Rules that work well sometimes can’t be easily tracked on a dashboard. Like most things in Direct Response marketing, rules need to be tested and measured over time with accurate data. Rules can’t be maintained by a single marketing or finance department - and they definitely require IT support.

Business Rules might be seen as barriers to orders. Or tiny cents compared to thousands of dollars in sales. This assumption would be dead wrong. Every order in your company is touched by dozens of business rules.

At first glance, Business Rules are a bit like plumbing in your house. It’s there, you don’t think about it, but you count on it everyday to work seamlessly. Small leaks are annoying yet seemingly inconsequential to your budget. A big leak can cause some damage and be fixed in an afternoon. And yet the plumbing in your business is completely different than the plumbing in your house. This plumbing needs to be reviewed and monitored regularly. By the time you spring a big leak, it might be way too late.

Think of how much effort goes into acquiring an order. You’ve spent money on design, on product, on your staff and your website. Not to mention the media expense. Taking an order doesn’t mean it will ship. Just because you’ve acquired a member with an expected Lifetime Value of $250 doesn’t necessarily mean you’ll ever net a dollar. Many, many Business Rules will apply to orders that you’ve paid and captured; your media cost is sunk! So good news: any improvement can flow right to your bottom line.

Optimizing your Business Rules requires a lot of questions. So that’s what we’re going to present - questions and perspectives than can help you become fluent in DTC and Subscription-related rules.

Many of these rules contain questions you’ve asked before. Some of the rules have questions you may not have considered. Many rules should come with that irritatingly famous slogan "You think you know ... but you have no idea.”. Some rules might be better for your bottom line at the expense of your customer. We urge you to be careful and be fair. Some of these questions may not apply to your business. Some of these questions might be connected to federal or state laws - so it may also be a good idea to confer with your legal counsel.

Check back next week for our first of many business rules blog posts. We’re kicking off at the top of your funnel with some thoughts on credit card authorization.



Winter is coming this spring to Silicon Valley

Winter is coming this spring to Silicon Valley

By Rob Reynolds and Jason Solano

A ‘sustainable business’ has been defined as a green company dedicated to a minimal impact on the environment.

Now a second definition is beginning to circulate in Silicon Valley and other venture-centric hubs: a ‘sustainable business’ is one that can simply remain cash positive over time. This is somewhat of a pivot for The Valley, which was prone to shovel loads of cash at a business based on its speculative potential, not its P&L sheet.

One company taking pre-emptive, responsible steps is Optimizely.  Last October they received $58 million in Series B funding which brought their venture total to $146 million and a $585 million valuation.  Despite these impressive numbers, Optimizely laid off 10% of their workforce last week.  In a letter to employees, co-founder and CEO Dan Siroker tied the cutting of staff to the necessity of reigning-in costs and a promise for the company to be more profitable. Dan wrote “Destiny, which means controlling the path we are on as a company without having to depend on anyone but ourselves. In order to do that we must build a business that makes more money than it spends. We set a goal of getting to cash flow breakeven and we have made tremendous progress toward this goal.”

Companies in the Direct-To-Consumer and consumer subscription spaces are not immune to this emerging trend. In the first quarter of 2016 there are increasing media reports of layoffs at startups across the DTC spectrum including Birchbox, Sonos, Fanduel, Nasty Gal, Motiga and LivingSocial.

Outside of headcount reductions, what can today’s DTC and subscription startups do to build a sustainable business that will continue with steady growth and deliver responsible profits?

Directade has five suggestions:

1) Know your LTV at an offer (not just brand) level
Not only does LTV lay the foundation for your financial planning, it also enables brands to right-size their media spend to maximize new starts. It is essential that you de-average your LTV calculation at an offer level before you invest too much in an aggressive offer that doesn’t pay out on the backend.

2) Dust off and formalize your Business Rules
Subscription-based brands can protect as much as 18% of their profit by implementing optimized Business Rules in areas such as Credit Card recycling, billing and dunning processes, and guidelines for the velocity of claims and returns.  We love Business Rules and will cover the topic in depth in a new series of upcoming blog posts.

3) Protect your pricing strategies by not giving away the farm
Continuity businesses should offer trials and coupon codes to get new starts, but an overreliance on these offers to drive growth can destroy overall brand value. Challenging your teams to innovate through fresh creative, offers featuring new products and gifts, and new emerging media channels should take priority over the “Free Trial” easy button.

4) Balance retail one-offs vs a direct relationship
Consumers should have many compelling reasons to buy directly from your website.  Not just one, but many. Make sure your direct customer is sacred and preferred. Fostering an ongoing relationship with your customer is more valuable than any retail one-off sale.

5) Buy Flow Optimization
You’ve invested a small fortune on advertising to get people to visit your website.  Advertising may even be your largest expense.  Reap the full return on that investment by making sure you follow two deceivingly simple objectives.  

You’re most likely already focused on the first objective: conversion rate optimization. Capture every potential customer.  Easier said than done? Sure.  But, there are tried and true approaches which many websites don't follow.  The majority boil down to creating a low friction buying experience.

Fewer companies focus on the second objective: maximize your customer's LTV (Lifetime Value) starting with that first sale.  Retention marketing has it’s place, but in our experience we’ve seen the biggest boosts in LTV by changing the approach at the point the customer starts. How to do that? Not all customers are created equal. They often have different needs. Some potential customers are more engaged with your brand, have specific motivations or have more disposable income. Develop and offer them product configurations that meet those needs. They will be happier customers (who will stick around longer) and often those new products will increase how much they are spending.

In Summary
On the surface these five suggestions are simple to follow.  But they also take years of experience to master.  It’s also good to keep in mind that some of these approaches can work against each other.  That is why it is so important to manage your business with a testing mentality and go heavy on the analytics. Taking the time to find the right balance is always worth the effort.  Invest resources behind these approaches and you’ll go beyond being a ‘sustainable business’. You’ll bring your company to new levels of profitability.

Reach out to Directade for more detail on these ideas, and others, to ensure the stability of your DTC business.