The New "What's Your ROAS, Bro?!"

What's up, ladies and gentlemen, welcome back for another bite of Chew On This to Chew On during your lunch break (Pun intended)

Today we'll be talking about two metrics that determine whether your business will survive or not…

Sounds dramatic, right (it is that way)

Some love them, some hate them, but you can't run away from them. They are the dynamic metric-duo: CAC & LTV.

This newsletter will be structured in such a way that we start by explaining the fundamental concept of why LTV is so important to dial in on. Then we'll make it more and more advanced & actionable throughout the newsletter.

… so if you are a big-baller & DTC veteran who wants the advanced stuff - then feel free to skip the first section.

For everybody else, buckle up and let's get right into it

LT… Why Should I Care?

Back in the good ol' days of eCommerce and digital marketing - everybody was obsessed with only CPA/CAC and ROAS. It was all everybody cared about.

We're well past those days now, so we also have to shift how we think of building a DTC brand.

… because even though you might see a lot of DTC folks post flashy shopify-screenshot on Twitter, the reality of the game is (Sadly & Unfortunately) that:

• It's gotten harder & more expensive to acquire a customer than ever before (double trouble here)

• Most brands are, therefore, now losing money on the first order, and most are unprofitable on their P&L too.

Because of this harsh reality, every brand needs to figure out how they can get their customers to stick around and buy more from them. Otherwise, the unit economics won't make sense in the short or long run.

The new "What's your ROAS, bro?"

Alright, so far, so good. We've now established why you need to think long and hard about how to retain the customers you paid boatloads of money to acquire.

Now, the way to analyze or determine whether your business is healthy or not, is by looking at the ratio between your CAC and your LTV. If your CAC is $50 and your LTV is $150, then your LTV:CAC is 3.

… and for most brands, that's the magic number you should aim to hit. A LTV:CAC of 3 or above. For most brands, this means that your brand is "healthy" enough to scale it. We want to emphasize "For most brands".

But…Your cash flow can still be sh!t, even if your LTV:CAC is great

Okay, so now we've gotten deeper into the weeds of CAC and LTV.

… and even though LTV:CAC is one of the most important metrics to track - it doesn't necessarily equate to cash flow - which is the ultimate king in this game.  

As they say: "Revenue is vanity, profit is sanity, and Cashflow is king".

The LTV:CAC metric is a measure of sanity to use this reference.

But it doesn't necessarily equate to strong cash flow because you also have to look at the TIME it takes for a given customer to come back and buy from you again and the size of each order they place with you.

Because if your LTV:CAC ratio is four over an 18-month period - then you might already be out of cash before you get to month 18 (depending on how much financing you can take).

On the other hand, if your LTV:CAC ratio is three over a 3-month period - you actually have a stronger business from a cashflow perspective

So you basically need to analyze; "What is my LTV:CAC by different cohorts, such as 3 months after purchase, 6 months after purchase, 9, 12, etc."

And then after that, you have to ask yourself:

• How can I decrease the time between a customer's first purchase and their n'th purchase

• Can I change my "money model" in any way so that I can get maybe three months of purchases upfront against a discounted price, to strengthen my cash flow and still be profitable?

Get your SKUs checked.

When looking at their LTV, most brands only look at their blended LTV for their entire business.

… and that works, if you only have one SKU

But if you have many SKUs (which we recommend you to have to increase your LTV in general), then you need to understand what your LTV per SKU is too.

The reason behind this is simple: Some of your SKUs will have a high conversion rate and sales velocity (meaning: they are easy to sell and a good cash grab) but have very poor LTV.

And other SKUs will be harder to sell (lower conversion rate & sales velocity), but will have a higher LTV.

To give you a real-life example from Obvi, we have our collagenic fat burner, which is an excellent product for getting some cash in fast, but for LTV it's among our worst performers.

On the flip side, we have our Hello/Goodbye product which is for all-day energy and hormonal balance - and this product takes longer to sell and costs more to sell, BUT the LTV is 3-4x as high as the collagenic fat burner.

In practice, this means that we can pay a lot more for a "Hello/Goodbye" customer than we can for a customer who has bought a collagenic fat burner.

Not only that, but it also gives us an indication of what products we should build our business on. Every product has its place in the ecosystem and serves its own purpose, but by knowing our numbers per SKU, we can make a decision on what products we should put a lot of focus on and which ones we should just make "cash-grabbers."

If you need a tool that can help you calculate your LTV per SKU, then we strongly recommend you to check out Triple Whale, which we use as our all-in-one eCom Operation System and hence for this purpose too.

The fundamental equation of LTV, and how to get your brand LTV-ready in the first place.

In Sunday's newsletter, we'll get very tactical on specific things you can do to both increase your LTV and slash your CAC,

…but until then - we want to take you through a mental exercise (fancy word for: A set of questions) that can help you better understand which levers you can pull to increase your LTV.

The way we think about it is: LTV consists of 4 components - which are:

• Why should someone buy from you again, and why should they do it now?

• Do YOU give THEM the ability to buy from you again (We'll elaborate in a sec here)

• How is the experience of buying from your brand?

• What value do you add to your customers other than the product?

Now, to increase your LTV, you need to think long and hard about each of these components - and work on making your answer to these 4 questions better.

… and we want to help you do that, so we've broken each of those 4 question down to more "digestible" sub-questions you can chew on (pun intended, again) .

We have set this mental exercise up so you can go through the list of questions below, from your customers shoe, and then answer yes or no. The more questions you can answer yes to - the higher LTV you'll have. The more questions you answer no/sort of no to, the lower LTV you'll have and the more work you need to get started on.

Why should someone buy from you again, and why should they do it now?

• Do you have any new and exciting products?

• Do you have any sales or discounts that I can only get if I buy right now?

• Will I miss out on any limited-edition products if I don't buy them right now?

• Is your product adding so much value to my life that I absolutely need more of it, even in a recession?

Do YOU give THEM the ability to buy from you again

• Can I buy on my own terms? I.e., can I Buy Now and Pay Later

• Can you deliver on my terms?. I.e. Auto-Ship every X months?

How is the experience of buying from your brand?

• Is the experience of getting the product a "wow experience"? (i.e. your packaging)

• Is the experience of buying the product frictionless? (i.e. your UX)

• Is the experience of using the product for the first time a "wow experience"

• Do you communicate to me in a way where I feel that the message is personalized and tailored to me, or do your messages (for instance, emails) feel very generic and like you don't care about me

• Do you recommend other products based on my previous shopping history with you, and based on my unique needs?

What value do you add to my life other than the product?

• Do you have a community I can join and feel like I am part of a group?

• Do you help me with how I should use your products, or am I left alone to figure it out? (for example, through guides or recipes)

• Will I get access to any exclusive content, deals, products, or the like by choosing to buy from you instead of your competitor?

That was quite a lot to chew on, huh?

We hope you enjoyed this week's newsletter. If you thought this was a lot to chew on, then just wait for Sundays newsletter, where we'll get even more tactical into what exactly you can do to slash your CAC and increase your LTV (with examples, explanations, and everything)

… so tune in on Sunday for an even larger meal than what we served today

Also… if you've read this far: Then know.

We really, really, really appreciate each and every one of you, and we'll continue to do our very best to serve you with the absolute best content. Each. And. Every. Single. Week.

As always, you're more than welcome to reply to this email or reach out to us in any other way and let us know what you think about the newsletter and what we can improve.

Thanks for reading along.

Till' we see you next time,

Yours Truly,

Ron & Ash.