Why the Future of Retail Starts and Ends with LTV

Why the Future of Retail Starts and Ends with LTV

As facts and behaviors change, so too should your approaches to meet the needs of the customer.


Not long ago, software was sold in a box. Literally.

If you wanted to use Microsoft Word or Adobe Photoshop on your computer, you would drive to a store, pay for the contents inside a cardboard box, bring it home, install it via floppy disk or CD-ROM on your PC, enter a license number, and you were up and running.

And that’s where the journey typically ended.

No updates. No communication with the company that developed the software. Limited customer support.

From the business’s end, there was little opportunity to understand how people were using the software or identify ways to improve it. There was a product launch with a (mostly) one-time lump of revenue and an expected 1- to 5-year gap until the next release was ready – and that was assuming the software was good enough to convince the customer to come back in a few years and buy the updated version.

But in the early 2000s, a (then) small company called Concur had the idea of bringing their software online.

By distributing their software over the internet, they were able to provide ongoing value, support, and upgrades to customers while simultaneously transitioning their revenue to a more consistent stream. The rest, as they say, is history. The company was acquired 13 years later by SAP for $8.3 billion on $600 million of recurring revenue. Most software today is distributed over the web by companies who charge on a monthly and/or recurring method.

I believe retail is getting ready to go through a similar renaissance of its own.

Here’s why…

“People do business with people who they know, like, and trust.”

This old sales adage still stands true. But when it was uttered previously, it was based on personal, one-on-one interactions at the flower shop or the local car lot. The ability for an individual salesperson to remember your daughter’s name or where you went for vacation last year can only scale linearly. And frankly, soft skills aren’t what move products in today’s digitally-focused world of commerce.

Today, I believe brands have the ability to know their customers far better than any individual salesperson could, which sets the brands themselves up to be liked and trusted by customers at scale.

The crucial ingredient that makes this possible is – of course – data.

It’s the same ingredient that enables software developers to understand the usage of their product, iterate quickly, and ship code changes in near real-time to their browser-based software to the benefit of their customers now to capture future value. And as I explained in a previous post about building a digital flywheel, data is what will fuel commerce given the deep links between the physical and digital worlds.

In short, data allows smart organizations to generate future revenues. Better data, better experiences, more consistent revenues, higher valuations.

The LTV of a Retail Customer – and Why It Matters

If you ask a good marketer or business leader in the software-as-a-service space (SaaS) what their CLTV (customer lifetime value) is, they will be able to tell you. They’ll also be able to tell you if that LTV is going up or down over time. LTV helps businesses understand how much they can afford to pay to acquire new customers and how long the payback period is until they recoup their investment to acquire that new customer.

Secondly, cohorts – groups of new customers within the same time range – help explain satisfaction and retention based on the state of the product or service at the time they joined. Cohorts help quantitatively answer questions like:

  • “Is our product offering strong? Is it getting better or worse?”
  • “How sticky is our product based on the improvements we just made?”
  • “Are there other competitors/market forces that are impacting the LTV of our customers?”
  • “Are we building the right features?”
  • “Are our customers getting more value from our product(s) over time?”
  • “Are our customers leaving and then coming back?”
  • “Are we delivering our product or service as seamlessly as we could?”

The reward for delivering an indispensable experience to your customer is an ongoing, predictable stream of future revenues.

This business model isn’t just reserved for SaaS companies, either. We have seen companies like Disney (Disney+), Rent the Runway (Memberships), Netflix, The New York Times, Peloton (Membership), Dollar Shave Club and others latch onto the concept of providing ongoing value in exchange for a monthly fee.

The “rundle” (recurring-revenue subscription model + bundle), as Professor Scott Galloway puts it, is where countless industries are heading. The race is on to provide so much value to your customers by bundling adjacent products and services at an affordable monthly price they couldn’t dream of shopping anywhere else.

The Future Retail Is RaaS (Retail-as-a-Service)

In its most simple view, retailers have relied on 1) physical stores that serve local markets and 2) their selection of products within a specific niche or vertical to attract local customers for the past 20+ years.

But the shift to digital has eroded both of these legacy moats.

At-home delivery has become nearly ubiquitous. Changing preferences means consumers are more likely to order products that they’ve never physically seen or held before. Digital commerce also means near-infinite shelf space. Now that consumers have an endless array of options to choose from, are retailers really going to compete by touting the broadest or most unique selection on their shelves? My guess is no.

The future is data-powered production and distribution. By knowing your customers – both individually and in aggregate – brands and manufacturers have the ability to understand what they want, know what they’ve bought and liked in the past, and recommend what they’ll want or need in the future.

What’s more is that digital-first retailers will be able to build obsolescence into their business model and amortize it over the lifetime value of a customer. Rather than wondering if or when a customer will return, hoping they manufactured enough of the right SKUs, and carrying huge amounts of inventory, they can deliver value in the form of a monthly/quarterly/annual rotation of goods that fits their customers’ needs at that time.

 

Matthew Russo
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