How Overspending On CAC Hurts LTV transcript

there's a danger here over spending on customers who don't pan out if those customers are more durable than you think then there actually is an argument to be fairly aggressive for particularly High LTV Brands to go and acquire customers at real scale because you're spending that money today and you need to make sure you're tracking your Revenue you know over the next three [Music] months why a cohort forecast is so helpful you should not do what I am saying right now if you are not good at forecasting your Revenue with a cohort forecast you absolutely should not do that um you uh you also um shouldn't do it if you don't have a cash flow forecast in place if you don't have a clear sense of how cash is moving through your business like you got to be a good operator here there's a lot of details of this but if that's real there is an argument to say more aggressive and to keep building um a a better larger group of customers because that LTV does go for longer than you think this is particularly true like I said in higher LTV businesses like subscription the other type of businesses that I've seen this be the case in is apparel businesses where sometimes apparel businesses have really sticky customers and I think it's because the way apparel businesses grow Revenue I'm talk more about this in a second uh with returning customers is they they add product drops right so um if I buy a shirt from your business and I like it um that's great like if I like your clothes there's a good chance I'm going to buy from you consistently without even much degradation of my buying pattern sometimes with an even increase in my buying patterns right over a long time I've been buying my same born primitive workout shorts for a really really long time because I love them um same with their underwear like their their boxer briefs I think they're the greatest boxer briefs in the game so I'm going to buy them for forever and it's and when my last pair runs out or whatever probably not last pair I'll buy it before that but like you know you see what I'm saying right when you get a brand whose clothes you love you will keep buying from them for a really long time plus again if you are as a brand uh if you are as a brand an apparel brand getting better and this is often true with a growing apparel brand uh apparel Brands as they grow often get better at releasing more products more often getting sort of more professional about their product development process um releasing products across uh more different parts of a of a customer's potential wardrobe you know born PR is a good example of this over the last year they last couple years they released shoes and they had been working on that for a long time well guess what a lot of customers already loved you know they're female customers they sold a lot of sports bras and leggings ahead of time and they're male customers they sold a lot of workout shorts and shirts over that time well if you love those and love that brand I you know like you buy some shoes um and so I the only reason I don't own a pair yet is because they were sold out when I looked right they were doing so well and so that actually increases that value over time those customers are worth a lot so apparel businesses in particular have this dynamic in play I think where um the more that you have that and this really any brand that has like a reason to do consist consistent product releases over a long period of time that's the way you create that value for in in a category where where customers have a reason to keep coming back just to recap again number one forecast manage it and forecast it measure excuse me measure it and forecast it number two it's more durable than you think number three it lasts for longer than you think number four here's the other thing it's less changeable than you think and what I mean by that is it is hard very hard to make a major impact on your LTV now I'm GNA tell you how to do that um but at least it is hard to do that with tactics okay so it actually is very possible to make a very large impact on your LTV but it's not by um typically getting people to um change their behavior in relationship to their product like here's a classic one that people try to do um with tactics they say like we're going to acquire a customer on product a and then we'll convince them to go over to product B like that's not impossible um and again in certain categories like apparel like I just mentioned um it's much more possible because that's sort of part of what it means for a customer to buy that product but beyond that it's actually extremely hard to cross- sell to past customers the vast majority of the LTV you're going to create is going to be people reing the product they initially bought in a lot of different categories okay again there's exceptions to this probably depends on your category a little bit apparel is the obvious exception here um but people mostly are going to Reby the the product they already have so you can you know people will say this you know we'll acquire customers on this product which doesn't have very good LTV but that's because we're doing a bad job of selling them the other product you know so product a bad LTV product but easy customer acquisition product will sell them product B which is a much better LTV product and will do that after selling them product a with great email and SMS thing is it's just extremely hard to do that customers just don't actually do that nearly as much as you would think so you can don't get me wrong this can work some but it's just a less viable thing at scale than you think it is harder to do uh at a lot of volume than you think mostly customers are going to re the product they already bought in many many categories okay um sending um better segmented email sending better designed email up updating your um changing your packaging right this is another thing people do they'll say like what we can create a better experience by having better packaging and whatever all of those things may add little bits on the margin to your business and you should do everything you can you should bend over backwards to create great customer experiences and great customer funnels you should communicate about it as well as you possibly can yes yes yes yes yes right at the same time it is just much more of a genetic element uh LTV is much more of a genetic element of your company and of your product than you think it except for a few key things okay and let me get into them now so so the the actually the first warning there is this whatever your past LTV is when you forecast it this is another way of putting it you should expect your future until you can prove otherwise to look a lot like your past don't go and say like and and forecast your future LT LTV with like a giant uptick in the amount of customers who come back in the future because you're going to go do all this tactical stuff to fix it I've talked about a brand I worked with um for a while that had like 25% LTV in a year and we hammered away all this different stuff we tried to introduce subscription we tried to like you know we tried to um uh what was I say we tried to introduce subscription we tried to do send more email we tried to come up with all you know whatever it just we could not really bump it it just it just was at 25% and I don't know maybe we got it to 27% or something like that but it just it didn't really make a meaningful material difference in the business especially relative to the effort it required and that's because LTV is primarily a function of your customer's relationship to the product it is not something else it is your your customer's relationship to the product okay and so uh because of that because the way you're C in that case that was definitely the case right the the brand I just talked about the example this I use all the time actually is FC Goods wallet made out of vintage baseball gloves right like we were never going to be able to sell people more wallets once they had bought their first wallet you know some customers who bought gifts said they were going to buy as a gift for somebody else and they probably did got a little bit of LTV off that um so they you know they bought the same gift for multiple people great but like once somebody bought a wallet there was there was actually One customer who bought a bunch of wallets from us who really loved them right but like that was one customer okay I I still remember I talked to him about what he was doing like it was just like a hobby it became a hobby for him he just liked it so yeah that's like that's the way to think about this that's an extreme example but it's just it is about the way your customer relates to the product first and foremost and therefore it's really really hard to change with tactics okay all right so if you can change it how can you do it and there are there are are some things to mention here they're just not quite the thing that people think of tactically it's not like media buying in that respect where it can make a really big difference okay so let's talk about number five ways to change and ways to impact I should say your LTV okay okay so I'm going to go through a few of them here we're all going to put them in this subcategory and then we're going to split one out separately okay first send more email and SMS and I want to be clear about what I just said send more email and SMS not more targeted email and SMS not more segmented email and SMS the number one way to use email to drive more Revenue than you're driving right now is to send more email uh people are not annoyed by your emails they may unsubscribe a little bit but it's not going to really create a serious problem in your business um if they were unsubscribing sometimes it's actually good churn they weren't going to buy from you anyway U send more send more send more okay if you're sending two emails a week right now start working right now on getting it to four um now again if you have very little to talk about in your business because you have the same couple of products there's isn't much to say fair enough but send more email and SMS for most businesses is the way to use that channel to drive more returning customer Revenue that simple again probably not going to overhaul your business completely uh your LTV completely but may make some difference at least on the edges and sometimes if you have a wide enough um group of products and a wide enough product catalog you you can actually create a more meaningful amount of value here okay but it's really hard uh mostly just send more email and sms okay uh number two um this is the thing that almost everybody um thinks about wrong with LTV and it's that the way you generate LTV is not by getting a customer to um is not by getting a customer to relate differently to the product that they already bought but it is to um is to release more products uh and have more sales okay um so more sales is dangerous because you can sometimes just cannibalize your own Revenue so we're going to leave that aside um what you'll see pretty much every year at Black Friday is that there is a big bump in your cohort value at Black Friday and this is sort of the indication of what I'm talking about it will be incremental to some degree having a promotion especially for products and categories where customers might want to re at some point well-considered promotions can definitely create additional Revenue um but the point of this is that you create LTV in moments not by improving your Evergreen processes like here's the thing that people go down the road of that is just like a waste of their time they decide that the way they're going to improve LTV is by building really careful flows post um in their email uh postp purchase for customers and they're GNA let those run in the background and make it so that every customer is more valuable after they buy that's like sort of the Evergreen LTV approach where you're what you're trying to do is make it so that like like you know somewhere in the background is just kind of working for you right that's not how LTV Works actually the way it works is by releasing more um new products that are going to be interesting to customers that make sense now in some categories again this is going to be a very small needle mover I think about personal care here a lot of personal care Brands try to do this where it's like you know the core product is a skincare product let's say and all that and then they'll release on the side a body wash product and you know the body wash may get a little Revenue bump but it's not going to be a crazy needle mover um the the categories where this makes more sense actually um is something like and I Ed this example earlier when you hear Sean Frank talk about what they do at Ridge you hear him reference this when they were just selling wallets they were never going to have much LTV but at some point they add backpacks and rings and whatever else they're doing EDC stuff like like um and that is the way when when that they have been able to generate more money by doing enough of that over enough time and really transforming from being a wallet brand to a um a brand that has more uh products across I don't even know what you would call the category anymore okay [Music]