Calculating Lifetime Value to Disrupt the Kitchen Appliance Industry
Lifetime Value (LTV) matters to every business, but in one-time transactional businesses like the kitchen appliance industry, calculating that value can be very difficult. Historically, brands have been reliant on warranty cards, service calls, third-party surveys and, more recently, social media to get a view on the likelihood that a one-time customer might become a repeat customer. All of this can be summed up in one word: reactive. But what if you could forge a more direct relationship with your existing customers and calculate an increased LTV?The advent of Internet of Things (IoT) for Consumer Electronics and the wave of connected products hitting the market offer a ready-made solution for the historically one-time transaction business. The very nature of connected products puts kitchen appliances manufacturers in direct contact with their user base. By capturing data about your users, you have more insight than ever before. What’s more, you now have the ability to respond to user actions and behaviors in real-time, opening the door for an LTV approach to your revenue stream. This trend enables you to more effectively calculate the LTV for your smart kitchen appliances.
What is LTV for kitchen appliances?
In general, LTV is the net revenue expected from a customer over an expected lifetime. Note that customer profitability is a metric looking back (historic view) and LTV is a forward-looking model based on current available parameters. One of the basic adjustments required when applying LTV to kitchen appliances is the need to deal with net contribution of every device sold, which basically means product billed price less variable costs. These costs include the Bill of Material (BOM), retail margin and any other costs incurred per appliance sold.
Why do I need to measure LTV?
Well, if you are going to be investing in customer satisfaction, you will want to see the monetary return of longer customer lifetime as well as happier consumers. That’s obvious. However, beyond a benchmark to measure change over time and assess progress, LTV will also give you a good sense of what Customer Acquisition Cost (CAC) you can afford in your marketing plans and what kind of retention plans to employ since retention changes impact LTV directly.
How do I measure LTV?
LTV calculation should take many pieces of information into account to make it fully accurate, but for most companies, this exercise may prove too complicated and requires data that is not readily available. The formulas presented below are a simplified version of the complete model that essentially requires the net contribution of a device sold (price less variable costs) with all other parameters that can be automatically extracted from a customer experience platform or database of user information.
Note that consumer electronics companies all have an initial purchase but then vary in the ways they can see further revenue from a customer. The most basic LTV available to all products-–even those without any recurring replenishment, accessory sales or line of product sales–is Refer a Friend (RAF). At the very core, each of your users can and, if addressed properly, will refer a friend for a discount and some personal incentive. The formulas below start with this most basic scenario and add other revenue streams incrementally.
* Be aware that this kind of LTV modeling does serve the purpose of LTV calculation as presented above, but will not stand the sanity check of dividing overall revenue contribution by number of products sold.
The simplest case for LTV calculates the contribution of customer referrals only. The second most frequent source of incremental LTV revenue comes from accessories and/or other lines of products sales. Products that also have consumables will obviously be able to add that to the mix, as well as any subscription service sold on top of the device, if one exists.
We start with the most basic formula for the most basic products and start adding from there:
LTV = Initial Purchase Contribution
LTV = IPC
With refer a friend program:
LTV = Initial Contribution + Recurring contribution from Referees
LTV = IPC + IPC * RAF(m) * LT
Up Sell — For companies with a recurring revenue stream such as replenishment and/or accessory sales, basic LTV will be:
LTV = Initial Contribution + Recurring Profit
LTV = IPC + RRC(m) * LT
With refer a friend program:
LTV = Initial Contribution + Initial Contribution from Referees + Recurring Contribution + Recurring Contribution from Referees
LTV = IPC + LT * ( RRC(m) + RAF(m) * ( IPC + RRC(m) ))
IPC — Initial Purchase Contribution
RRC(m) — Recurring Revenue contribution, monthly
LT — Lifetime (months)
RAF(m) — Refer a Friend Rate, how many users on average an active user brings in a month
To summarize, in a world of ever-diminishing margins, companies who are quick to adapt their business model and introduce Lifetime Value into their metrics and efforts will have a better chance of surviving the rapid transformation the Kitchen Appliances industry is going through. Accurately measuring LTV is a great place to start, but embracing tools and processes will enable you to act on and improve the LTV (and customer experience) are critical to the success of those products.
October 2, 2019