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Marketing Canvas - Lifetime
The Marketing Canvas is a framework that identifies 6 main categories for building a marketing strategy: Customers, Brand, Value Proposition, Journey, Conversation, and Metrics. Lifetime is one of the 4 dimensions of the Metrics category, which is important for measuring customer retention. Customer churn rate, which measures the percentage of customers who discontinue using a company's product or service, is a critical metric for companies to monitor.
Last update: 10/12/2024
In a nutshell
This comprehensive guide delves into the significance of Average Revenue Per User (ARPU) as a potent metric in business success. Through this exploration, businesses can better understand how much revenue they generate per user and how they stack up against industry competitors. The article not only explains how to calculate and evaluate ARPU but also provides practical strategies to leverage it for sustainable growth. This includes segmenting customer bases, forecasting revenues, and even assessing the effectiveness of various growth strategies like upselling or price optimization. To illustrate the concepts, the article incorporates a real-world case study from the green cleaning industry. Whether you're an entrepreneur, marketer, or non-marketer interested in business strategy, this guide equips you with the knowledge and tools to transform ARPU from a simple number into actionable business insights.
In the Marketing Canvas
The Marketing Canvas is a powerful tool for entrepreneurs and non-marketers to build a robust marketing strategy. It consists of six meta-dimensions, each with four sub-dimensions, for a total of 24 sub-dimensions defining your Marketing Strategy. One of these sub-dimensions is LIFETIME, which falls under the METRICS meta-category.
Defining Lifetime
Customer Retention has become a pivotal concern for subscription-based businesses in recent years. The idea of prolonging your subscribers' association with your business becomes indispensable if the ultimate objective is to generate profits. The long-established belief is that retaining existing customers is more cost-efficient than acquiring new ones, typically by a ratio of 1 to 6. Although the ratio might differ, we can all concur that spending money to acquire new customers is higher than retaining existing ones. Either way, the effect on your customer base is the same (+1 customer -1 lost or evading the loss of 1 customer). We often use the concept of churn (or attrition) to gauge the number of customers departing from your service during a specified period.
Churn rate, a critical metric, represents the percentage of customers discontinuing a company's product or service over a given timeframe. This metric is critical because it provides insights into the health of a company's customer base and its ability to retain its customers. Calculating the churn rate involves dividing the number of customers lost during a specific time period (e.g., a quarter) by the number of customers the company had at the beginning of that time period.
Monitoring churn rate is paramount for companies as it offers a clear image of the number of customers leaving the company, which directly impacts the company's profitability. A high churn rate could signify subpar customer service, inadequate product offerings, or even stiff competition in the market. Hence, it becomes imperative for companies to pinpoint the reasons behind a high churn rate and initiate corrective measures to curtail it.
Furthermore, tracking customer churn enables companies to evaluate how effectively they are retaining their customer base, thereby helping them adjust their customer retention strategies. Companies can exploit customer data to better comprehend their customers' needs, preferences, and behaviors, and modify their offerings and services to meet those needs. By proactively addressing the factors driving churn, companies can cultivate a more loyal customer base and secure long-term success.
Lifetime is an alternative perspective on this phenomenon. Lifetime refers to the duration (often in months) a customer stays with you. The exact specification of this definition can vary across different industries. For instance, in the mobile business, a customer must have received or made a call/SMS/data transaction during the specified period to be considered "active." One method to estimate the lifetime is by dividing 1 by your churn rate percentage. Lifetime is indicative of how successful you are at satisfying existing customers.
In the Marketing Canvas framework, we consider Lifetime as a pivotal metric. It's not a standalone number but tied intricately to your business objectives. Let's explore how it works in a scenario.
Imagine owning a business that generates €1000 a month from 1000 customers, with each spending €1. If you have a churn rate of 10%, you would lose 100 customers by the end of the first month, reducing your customer base to 900. Consequently, your revenue for the month drops to €900, presuming that the remaining customers continue to spend €1 each.
If the trend continues, you'll witness another 10% reduction in customers, leading to the loss of 90 more customers, and leaving you with only 810 customers. The impact on your revenue will be corresponding, reduced to €810. This continuous decline in revenue has a direct bearing on your business goals, making it increasingly challenging to generate profits, let alone achieve growth, when the customer base is shrinking rapidly.
To balance the loss of customers and stabilize revenue, you would need to acquire new customers at a rate faster than you are losing them. This, however, can be a costly and time-consuming task. Therefore, customer retention becomes a cornerstone for the long-term sustainability of your business.
Tools for Lifetime
A plethora of tools exist in the market today, aimed at aiding businesses in calculating and improving the lifetime of their customers.
Customer Relationship Management (CRM) Systems: CRM systems like Salesforce or HubSpot help businesses track and manage customer interactions, allowing them to understand better and increase customer lifetime value.
Subscription Management Platforms: Platforms like Chargebee or Zuora help businesses manage their subscription billing and provide insights into metrics such as churn rate and customer lifetime value.
Customer Analytics Platforms: Tools like Mixpanel or Amplitude allow businesses to track user behavior and engagement, enabling them to identify potential churn risks and take proactive measures.
Customer Feedback Tools: Tools like SurveyMonkey or Qualtrics allow businesses to gather feedback directly from customers, helping them understand the reasons for customer churn and find ways to improve customer retention.
Translating Lifetime into Action
Transforming the concept of 'Lifetime' into tangible action involves a thorough understanding of your customer base, their needs, their behaviours, and effectively addressing their pain points.
Segment Your Customers: Divide your customer base into segments based on their behaviour, usage, or revenue generated. This allows you to understand the different types of customers you have and develop strategies tailored to each segment.
Develop Customer Retention Programs: Develop strategies aimed at improving customer loyalty. This could be through a loyalty rewards program, personalized communication, or by improving customer service.
Identify At-Risk Customers: Use predictive analytics to identify customers who are at risk of churning. Once identified, you can take proactive measures to retain them.
Improve Customer Experience: Regularly review and improve your product or service based on customer feedback. Ensuring a high-quality customer experience is one of the best ways to improve customer lifetime.
Statements for self-assessment
Is the Lifetime of your users helping you achieve your goals?
It is crucial to evaluate whether your user lifetime is aiding you in achieving your business goals. For a comprehensive evaluation, you can rate your agreement with the following statements on a scale from -3 (completely disagree) to +3 (completely agree):
You are capable to measure user's lifetime (1/churn) because you know who is buying and using your products and services.
Your churn level is below or equal to average market churn level
The historical trend of your churn evolution is positive (growth) and present a positive outlook for next year.
Your CRC (Customer Retention Cost) is aligned with your CAC (Customer Acquistion Cost). CAC+CRC is 20-30% for mature business and 50-70% for startups (% of revenue).
Your scores can help pinpoint areas of strength and those requiring attention. The higher the score, the more effective your customer retention strategy is, and vice versa. It's always a good practice to revisit these scores periodically to gauge improvement or diagnose worsening situations.
Marketing Canvas Method - User Lifetime and Churn
Interpretation of the scores
Negative scores (-1 to -3): Indicate significant gaps in measuring or optimizing customer lifetime. High churn rates, poorly aligned CAC and CRC, or negative historical trends suggest the need for immediate intervention.
A score of zero (0): Reflects partial effectiveness. While some aspects of lifetime strategy are functional, inefficiencies in retention efforts or unclear data may limit overall impact.
Positive scores (+1 to +3): Suggest a well-optimized lifetime strategy. Churn is low, retention costs are aligned with CAC, and historical trends indicate sustainable growth and profitability.
Case study: Green Clean’s Lifetime strategy
Misaligned understanding (-3, -2, -1): Green Clean does not track churn accurately and struggles to identify who is using its services. Retention efforts are costly, uncoordinated, and misaligned with CAC, resulting in unsustainable operations.
Surface understanding (0): Green Clean measures churn but lacks actionable insights. While CAC and CRC are within acceptable ranges, historical trends show inconsistent retention efforts, limiting future growth potential.
Deep understanding (+1, +2, +3): Green Clean accurately measures churn and tracks customer lifetime. It reduces churn through personalized engagement and aligns CAC and CRC efficiently. Historical trends show consistent improvement, supported by sustainable retention strategies.
Conclusion
The Lifetime sub-dimension emphasizes the importance of tracking and optimizing customer lifetime to ensure sustainable growth and profitability. By reducing churn, balancing CAC and CRC, and analyzing historical trends, businesses can build stronger customer relationships and achieve long-term success.
Sources
HUBSPOT, What is customer churn, https://blog.hubspot.com/service/what-is-customer-churn
HBR, The Value of keeping the right customers, https://hbr.org/2014/10/the-value-of-keeping-the-right-customers
Hubspot, Here’s Why Customer Retention is So Important for ROI, Customer Loyalty, and Growth, https://blog.hubspot.com/service/customer-retention
More on the Marketing Canvas
Marketing Canvas - Acquisition
This article dives deep into the intricacies of Customer Acquisition, a critical aspect of any marketing strategy. It defines key performance indicators - Customer Acquisition Rate (CAR) and Cost of Customer Acquisition (COCA or CAC), and elucidates their relevance and calculation methods. The importance of measuring these metrics is brought to life using practical examples and industry insights. The piece further delves into the arsenal of tools available for customer acquisition, and how these can be effectively harnessed to drive growth. From there, we outline how to turn acquisition strategies into action, evaluate their performance, and make necessary improvements. Through the lens of a real-world 'Green Clean' use case, we demonstrate the practical application of these principles. An essential read for entrepreneurs and marketers aspiring to master the art of customer acquisition.
Last update: 15/06/2023
In a nutshell
This article dives deep into the intricacies of Customer Acquisition, a critical aspect of any marketing strategy. It defines key performance indicators - Customer Acquisition Rate (CAR) and Cost of Customer Acquisition (COCA or CAC), and elucidates their relevance and calculation methods. The importance of measuring these metrics is brought to life using practical examples and industry insights. The piece further delves into the arsenal of tools available for customer acquisition, and how these can be effectively harnessed to drive growth. From there, we outline how to turn acquisition strategies into action, evaluate their performance, and make necessary improvements. Through the lens of a real-world 'Green Clean' use case, we demonstrate the practical application of these principles. An essential read for entrepreneurs and marketers aspiring to master the art of customer acquisition.
In the Marketing Canvas
The Marketing Canvas is a powerful tool for entrepreneurs and non-marketers to build a robust marketing strategy. It consists of six meta-dimensions, each with four sub-dimensions, for a total of 24 sub-dimensions defining your Marketing Strategy. One of these sub-dimensions is ACQUISITION, which falls under the METRICS meta-category.
Defining ACQUISITION
Every successful venture has customer acquisition as its cornerstone metric. The reality is, regardless of how innovative or unique your product or service may be, its relevance is directly proportional to the number of users it attracts and retains. Hence, we will delve deeper into the concept of Acquisition, one of the sub-dimensions of the Marketing Canvas, in this chapter.
Acquisition, as it pertains to marketing, refers to the process of attracting and converting potential consumers into actual customers. A healthy business is characterized not just by acquiring more users but also transitioning them into paid customers, thereby increasing revenue and profitability. It's worth mentioning that the current 'Growth Hacking' trend has reinforced the emphasis on acquisition strategies.
Measurement of Customer Acquisition occurs via two key performance indicators (KPIs):
Customer Acquisition Rate (CAR): This is the ratio of the number of customers acquired to the length of the time period.
Cost of Customer Acquisition (CAC): This represents the total expenditure on marketing efforts divided by the number of customers acquired during that period.
Both CAR and CAC play crucial roles in comprehending the speed at which you're gaining new customers and the investment required to achieve this. According to marketing guru Neil Patel, CAC signifies the cost involved in convincing a potential customer to purchase a product or service. Comparing your CAC per media to industry standards and competitors will provide an insight into your performance.
If your CAR falls below your competitors, it implies a slower customer acquisition rate. Although this isn't a cause for immediate alarm, considering other dimensions like Average Revenue Per User (ARPU) will help understand if it is a serious issue or not.
Some may argue that these metrics are only applicable to service businesses, not products. However, the underlying philosophy of the Marketing Canvas is to thoroughly understand your customers, be it a product or service. If your business relies on indirect distribution and lacks customer data, it might hinder personalizing your offerings. Inability to measure CAR and CAC due to a lack of direct customer interaction is a stumbling block in the application of the Marketing Canvas Method.
Tools for ACQUISITION
Effective acquisition isn't a matter of luck or chance; it's the result of strategically leveraging an array of tools and techniques. Here are a few tools that can significantly improve your acquisition metrics:
SEO Tools: Platforms like Moz, SEMrush, and Google's Keyword Planner can help you optimize your online presence and improve organic traffic, leading to higher acquisition.
Content Marketing Tools: Tools like HubSpot, WordPress, and Grammarly can assist in creating compelling content that drives customer interest and engagement.
Social Media Advertising: Platforms like Facebook Ads Manager and LinkedIn Campaign Manager can help you reach a wider audience and target potential customers more effectively.
Email Marketing: Tools like Mailchimp or ConvertKit can help you build and maintain relationships with potential customers, fostering trust and improving acquisition rates.
Translating Acquisition into Action
Once you've mastered the principles and tools of acquisition, it's time to put this knowledge into practice.
Set Clear Goals: Begin by identifying specific, measurable, achievable, relevant, and time-bound (SMART) goals for your acquisition efforts.
Identify Your Audience: Understand your potential customers, their needs, and their preferences.
Optimize Your Channels: Improve your visibility on all the platforms your target audience frequents.
Test, Measure, Refine: Regularly review your CAR and CAC metrics, identify areas of improvement, and refine your strategy accordingly.
Statements for self-assessment
Is the Acquisition of new users helping you achieve your goals?
Evaluation is the pillar on which successful businesses are built. Regular monitoring and reassessment are essential to improving your acquisition strategy. To evaluate your acquisition efforts, consider the following statements, rating your agreement from -3 (completely disagree) to +3 (completely agree):
Your Customer Acquisition Cost (CAC) is below industry average and is below your direct competitors.
Your conversion rate (from lead to buyer) is above industry average and is above your direct competitors.
Your CLTV/CAC is above industry average with a ratio above 3:1 and below 5:1
Your time to conversion rate (from lead to buyer) is above industry average and is above your direct competitors.
Interpretation of the scores
Negative scores (-1 to -3): Suggest inefficiencies in your acquisition strategy. CAC may be high, conversion rates low, and CLTV/CAC ratios misaligned, indicating missed opportunities for improvement.
A score of zero (0): Reflects a functional but unoptimized strategy. While some metrics may meet industry benchmarks, there are gaps preventing full efficiency and profitability.
Positive scores (+1 to +3): Indicate an effective acquisition strategy with competitive CAC, high conversion rates, a healthy CLTV/CAC ratio, and short time-to-conversion periods.
Case study: Green Clean’s Acquisition strategy
Misaligned understanding (-3, -2, -1): Green Clean’s CAC is significantly higher than competitors, with low conversion rates and a CLTV/CAC ratio below 3:1. The time to conversion is long, indicating inefficiencies in the sales funnel.
Surface understanding (0): Green Clean’s CAC and conversion rates are in line with industry averages but lack optimization. The CLTV/CAC ratio is acceptable but not optimized for long-term growth. Time to conversion is adequate but could be reduced with better targeting.
Deep understanding (+1, +2, +3): Green Clean optimizes CAC by focusing on high-performing channels and using automation. Conversion rates are improved through a streamlined funnel and personalized engagement. The CLTV/CAC ratio exceeds 4:1, and time to conversion is reduced through quick onboarding and targeted offers.
Conclusion
The Acquisition sub-dimension highlights the importance of optimizing CAC, conversion rates, CLTV/CAC ratios, and time to conversion for sustainable growth. A well-executed acquisition strategy ensures that your business attracts the right customers, maximizes profitability, and remains competitive in the market.
Sources
Neil Patel, Customer Acquisition Cost, https://neilpatel.com/blog/customer-acquisition-cost/