Lecture presented at Lehigh University for Marketing 111 on 10/15/14.

1. How much would you pay for a click?
An introduction to lifetime value
Presented by: Brent Chudoba, SurveyMonkey
Lehigh University: Principles of Marketing – MKT 111
OCTOBER, 2014

2. Introduction
Brent Chudoba
● Senior Vice President, General Manager of SurveyMonkey Audience
● Joined @SurveyMonkey in 2009
● @bchudoba
● brentchudoba.com
● in/brentchudoba

3. Goals
• 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
3

4. Notes
4

5. Session notes
• 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
5

6. Scope notes
• 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
6

7. How many of you have access to a
Netflix paid subscription?
7

8. 8

9. 9

10. Key questions
• How much are you worth to Netflix?
• How much is Netflix willing to pay to get another
subscriber like you?
10

11. How much are you worth to Netflix?
11

12. Let’s establish a reasonable value ceiling
• 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?
12

13. Components of basic LTR
• 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
13

14. Average monthly cost of a subscription
• 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
14

15. Average months customers subscribe
• 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
Remaining Customers
15
100
80
60
40
20
0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97
Customers
Month

16. Lifetime Revenue value
16

17. What could be missing?
• 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
17

18. How does Lifetime Revenue value
connect to marketing?
18

19. How much is this click worth?
19

20. Starting with Lifetime Revenue (LTR)
• 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
20
• 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)

21. Marketing as a % of LTR
• 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
21

22. Click value
• 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
22

23. Business objectives are key to optimizing
marketing strategy
23

24. Marketing strategy is a balancing act
• 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?
24

25. What can influence marketing strategy?
25
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

26. Price point implications
26

27. Subscription term implications
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28. How complex can LTR get?
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29. Really complex
29
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

30. Appendix
30

31. Marketing acronyms
31

32. What about the acronyms…
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.”
32

33. But they are important to understand
• 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…
33

34. Bonus: Pricing tactics
34

35. Which package does Spotify want you to buy?
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36. A marketer might see…
36
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

37. Which package does Netflix want you to buy?
37

38. A marketer might see… Packages 1 and 3 may be
38
Avg.
price/month is
likely in the
~$10 range,
Avg. lifetime in
the 18 month
range, so LTR
may be around
$180…
used as bookends, with the
price 33% higher making
“Camera” look like a great deal

39. 39
Thank
you!