August 29, 2022

Target Better Buyers Using LTV & VARB

Commercialization Fast-Forward® Market Landscape

7 minute read

“What’s your LTV?” It’s tough to get very far in discussions with Venture Capitalists without being able to answer that question. LTV, or Lifetime Value of a Customer, is one of the key tools Venture Capital firms and entrepreneurs use to understand the value-creating potential of a business. Yet, oftentimes, intrapreneurs at big companies don’t think about this question, focusing instead on a traditional P&L to understand business potential. And that’s a problem for anyone who wants to compete against smaller, more nimble start-ups or wants their organization to be more entrepreneurial.

How Entrepreneurs/VCs Create Advantage With LTV 

Entrepreneurs and their investors are using LTV to create an advantage in two ways:   

• Deeper Buyer Understanding Delivers Greater Value:  LTV is an indicator that long-term value can be created by a consumer or customer. As good marketers know, high levels of trial can be bought, which juices the early years of the P&L but clouds understanding with strong short-term results driven by lots of one-time buyers. However, focusing on LTV forces teams to clearly define, quantify and justify, why the chosen customer target will generate value beyond the trial experience and become high-value repeat buyers that deliver recurring revenue. By focusing and finding these high-value buyers, the entrepreneurs and investors minimize marketing spend against low-value buyers and thereby maximize their ROI.       
• High-Value Buyers Provide Fuel For Growth:  Every time an entrepreneur raises money, they give up equity. To minimize what they give up, entrepreneurs focus on finding high LTV customers who can generate gross profits that can be used to fuel additional growth, minimizing what they have to give up in equity to get more VC money to fuel growth. Net, understanding LTV is a big part of their value optimizing strategy – the more gross profits can drive growth, the less outside money is needed and the greater the equity they retain.  

How Big Company Intrapreneurs Can Regain Advantage 

While entrepreneurs have used LTV to gain speed to market advantages, Big Company intrapreneurs can “steal” the LTV idea and use it to build stronger brands and move their projects more quickly through stage gate. 

• Accelerating Innovations To Market: One of the advantages Big Company intrapreneurs have is access to capital, but this advantage is often negated because projects get stuck in stage gate. Management teams see plenty of rosy innovation P&Ls and it’s no surprise they are skeptical given the amount of information that can be hidden below the surface (e.g., how much of business is really trial volume). However, a clear understanding of buyer value provides a different lens. With clarity on the value of the buyer being sufficient to create a sustainable long-term business, management confidence increases and teams are often more able to more quickly secure the resources needed to launch.  
• Create Stronger Brand Positionings: Oftentimes, companies build their brand positionings to appeal to the target with the most people. While this may lead to the largest user base, this positioning could struggle if there are too many low-value users. If you are in one of those categories where 80% of the value is driven by 20% of the consumers, finding the positioning that captures those 20% will naturally have a small user base, but it will be the strongest, most profitable positioning (unless their CARB is substantially higher).   

Encouragingly, Big Company Intrapreneurs typically have all the data they need to calculate LTV with existing scanner and market research data so let’s dig into the LTV calculation and its one key shortfall.  

The Simple LTV Calculation 

Quickly calculating LTV is not an onerous task for a team.  In its simplest form, LTV is the present value of the average contribution/profits generated from an average customer over their average lifetime.   

LTV = Avg Annual Contribution * Avg Years a Buyer * Discount Factor 

This is a fairly straightforward calculation that works in some situations, and you can find more detailed write ups here and here.   

Beyond LTV 

The problem with most LTV calculations is they use averages, which typically misses important granularity needed to manage an innovation. Specifically, as we mentioned earlier, smart marketers can drive trial, so understanding the average buyer is less useful than understanding “repeat buyers” and the “recurring revenue” they generate that typically drives the long-term sustainability of a business. So, we need a more granular equation to separate out trial and repeat elements to deepen the understanding:  

With that as grounding for the VARB calculation, let’s turn to how it can be used to enable better positioning of your innovation.  

Using VARB To Improve Targeting 

Let’s look at a client’s landscape for a potential new product to help visualize an opportunity (blinded to heartburn category). In their original landscape (below), the landscape had 75M users, and the 5-Year VARB for the average user across this category was $194. However, segmenting this category highlights two key sub-segments: the biggest cluster of users (37M people in Target B) has a $153 5-Year VARB and a second cluster (Target C) with less than half the number of people but with a $289 5-Year VARB .  

With this, two targeting strategies emerge: 1) focus on the largest segment (Target B) to drive highest trial for lowest cost, and 2) focus on driving penetration in the smaller but highest VARB segment (Target C). While each target is an option with its own strategic choices (e.g., concept, sales channel, pricing, etc.), the implications of spending $10M in marketing are best seen by looking at the impact of the size of the marketing spending on return:  

Target C delivers 45% greater return on the same $10M in spending! If you are a Big Company incentivizing marketers on trial, Target B would be the target, but that strategy will struggle to outperform the typical entrepreneur who would focus on first extracting the most value for their spend by Targeting C and use those proceeds to further invest to grow their business.  

Building Your Company’s VARB Database 

Now that you have a deeper understand of VARB, an easy first step would be to build a benchmark database in your company by looking at historical launches, as well as back calculating from your company’s market research, to understand the average value of the repeat buyers your innovations are attracting.  

Key Points 

1. Entrepreneurs are creating an advantage by understanding the value of target buyer segments, enabling them to steal the most valuable buyers to create a solid business foundation and help fund the growth of their business with initial buyers that deliver high levels of gross profits.  

2. Big company Intrapreneurs have the data to win back this advantage by using their historical spending and market research to focus their launch marketing spend on the most valuable repeat buyers (i.e., the buyers who become the profit engine of a business), which in turn enables them to accelerate selling/marketing with the higher levels of gross profits coming off the business.  

3. Quantifying your VARB – and understanding how it compares to your CARB – is at the core of building a successful new business. Even if you’re unable to quantify either precisely, pursuing a directional understanding will strengthen your thinking about how to best build your business 
    

VARB & Fast-Forward® 

VARB is a key component of our Fast-Forward® approach both in guiding the choice of your core target in your Value-Based Landscape and when Prototyping to determine the best Business Blueprint. Fast-Forward® is our proprietary methodology that brings together the strengths of the Big Company and Startup approaches to enable a team to rapidly design and optimize multiple plans to determine the best plan to turn an innovation into a successful business, pre-market. To learn more about how Fast-Forward® works and how it will help you turn your great idea, technology, product or service into a valuable new business, Contact Us or schedule a specific time to talk here.