So far the posts in this series have described how to identify and rank opportunities for business improvements in acquisition, renewal and cross sell orders. The obvious next step is to combine these into a single list. That’s easy enough for acquisition and cross sell orders, since both are being ranked by return on (marketing) investment. But renewal orders were being ranked with a different measure, change in Lifetime Value per customer. So there’s no direct way to mix the two.
I suppose we could translate the acquisition and cross sell opportunities into change in LTV per customer and then rank all three on that. But return on investment is important. It addresses the business reality that there are limited resources and you want to employ them in the most productive way possible. LTV, by contrast, is ultimately a net present value measure, which implicitly considers the cost of capital but doesn’t really address the fact that its total quantity is limited. So far as I recollect from my long-ago finance classes, there is no truly satisfactory reconciliation between the two perspectives. You simply have to consider both when making business decisions.
Another possibility is to treat the change in margin costs for renewal orders as an “investment” and calculate a return on investment for cross sell in that way. But I don’t think that makes sense in terms of financial theory—variable costs aren’t drawn from a limited pool in the same way as investments. And, as a practical matter, the disparity between return on marketing vs. return on all costs would give ratios that were not directly comparable.
We could also build a combined list of opportunities ranked by change in total LTV (as opposed to LTV per customer). This would bring the largest opportunities to the top of the list. It makes sense on the theory that management can only consider so many changes at once, so it should focus on the opportunities with the greatest potential impact. But it does bother me that this approach would not yield optimal results in terms of return on investment. Also, from a practical standpoint, each type of opportunity (acquisition, renewal, cross sell) would probably be explored by a different group (marketers for acquisitions and possibly cross sell; operations managers for renewal margin), so it might make just as much sense to keep the lists separate for that purpose.
In reality, the LTV system could easily produce several sets of rankings, so this isn’t something to agonize over.
Whether the lists are combined or stay separate, the same product will appear more than once if it is flagged in more than one category. It is possible to combine the estimated opportunities for a given product, since each type of opportunity impacts different components of the LTV formula: acquisition affects number of new customers and acquisition costs; renewals affect renewal margin and years per customer; and cross sell affects cross sell revenue per year. A single estimate based on the combined changes would certainly be of interest to the product managers, although chaining together the different assumptions—each of which is very tentative—may give them more weight than they deserve.
This brings us to the issue of implementation. Acting on opportunities to reallocate marketing budgets is fairly straightforward: marketers look at the products and advertising sources in question and decide how to best increase or reduce spending. Renewal opportunities are a different story. Knowing that the margin on a given product is unusually high or low doesn’t begin to indicate where the additional dollars should be spent or removed. It could be in service, manufacturing cost, or even pricing. All this approach can do is point to areas that look like they have above-average chance for improvement. The detailed assessment must take place outside of the LTV system.
I think this is about as far as I can take this topic for now. Certainly the One Big Button seems like a practical idea that managers would find useful. As you can imagine, I’m eager to try adding it to my sample LTV system. Things are a bit busy right now but it shouldn’t be more than one or two day’s work. I’ll let you know if and when I get it working.
No comments:
Post a Comment