You’re Doing it Wrong: CAC, LTV, Google and ClassPassJun 7, 2016 - by Jason Grunberg
This week’s issue of This Week in Retention features three missives from the file folder headed, “You’re Doing it Wrong!” We’re on board with two of the three: We’d bet many companies are calculating their CAC and LTV incorrectly, and it does appear that Google analytics is making a mess of measuring time on-page. ClassPass, though? Despite the naysayers, we think they’re doing it right. Score one for customer retention.
A Cold Hard Look at CAC and LTV
Mark Suster, managing partner at Upfront Ventures, thinks there’s a good chance you may not be measuring your customer acquisition costs or lifetime customer value properly.
We know. You’ve been measuring customer acquisition costs forever, and now Suster says you don’t know how to do it? But Suster points out, rightly, that a true and accurate number for customer acquisition cost would include not just media spend (be that television, Facebook, or anything in between) but all marketing and PR costs. He refers to this as “fully-loaded CAC.”
LTV is more complex, of course, because it encompasses repeat purchase rates, which can be hard to pin down. It also requires cohort analysis, to determine how customers perform over time. Most brands also use average order value to help calculate LTV, but Suster can’t stand that. It’s not the revenues that are important, he says, but the profitability. He points out that, for a company operating on 50 percent profit margins, a customer acquired for $200 who buys $300 of product still leaves the company with a $50 loss.
There’s no doubt these can be tough calculations. But they don’t get any less challenging if marketers pretend that they’re easy.
Is This Really That Much Harder Than Building a Self-Driving Car?
In other numbers, Pressboard CEO Jerrid Grimm looks under Google Analytics’ hood and finds that its time-spent-on-page metric is “just plain wrong.” Not good news, given that, according to website profiler BuiltWith, more than 70 percent of websites use Google Analytics, and that time-spent-on-page is a key to publishers ever being able to monetize engagement.
So what’s wrong here? First, Google time-stamps your click on a page and then your click away from that page. The difference between those time stamps is your “time spent.” That looks fine–until you consider that if you get up and leave with the page open and come back an hour later and then leave the page, it looks as if you spent an hour reading, which, of course, you didn’t.
Then there’s the bounce rate problem. If a reader goes to a site, look at one page, and then move on, Google Analytics considers that reader to have bounced, and doesn’t measure the time spent on that page. According to Grimm, bounce rates for media sites are 70 percent. Again, wildly inaccurate.
Grimm says the right way to measure time spent is to “continuously monitor the reader’s attention signals — mouse movements, touches, scrolling behavior, tab activity.”
Three Reasons the ClassPass Changes Are a Smart Move
ClassPass has been getting plenty of flak lately for raising its prices. But what’s really happening is that ClassPass is moving away from its all-you-can-eat pricing, and is trying to offer something that works for both casual users and gym rats.
ClassPass has offered fitness enthusiasts unlimited access to local studio and gym classes in urban areas for a monthly fee. The company debuted its service at $99 per month and held that price steady until July 2015, when it raised the monthly fee to $125. In late April of this year, the company announced another price increase to $200 a month for unlimited access, along with less-comprehensive offerings at $135 (for 10 classes) and $75 (for 5 classes) a month.
Here’s why this is smart:
- The lower cost of entry will bring in new customers, and some of those will trade up to the higher-priced options.
- Churn will decrease, because customers who don’t take many classes will trade down to lower-priced tiers.
- The high-value customers gained by ClassPass will outnumber those who leave because they’re irate about the changes.
In other words, ClassPass is focusing on the long-term, which can only be good for customer retention.
—Jason Grunberg, Director of Content Marketing and PR