Customer lifetime value is an important metric for every business, but it is especially critical for e-commerce, daily deal and flash sale sites. For companies like these, a key to success is profitably acquiring new customers. Without a firm grasp on customer lifetime value, companies run the risk of acquiring unprofitable customers or getting outspent and outgrown by a competitor who better understands the metrics of their model.

In this post, we’ll use the customer acquisition strategies of Groupon and LivingSocial to frame a discussion about the importance of optimizing customer lifetime value, customer acquisition cost and other analyses for daily deal sites.

Groupon versus LivingSocial Customer Acquisition Debate

Groupon and LivingSocial have different views on “loss leader” customer acquisition deals, which may be due to different views about repeat purchase rates and lifetime value. As a publicly traded company, Groupon releases statistics on its customer acquisition costs to the public. LivingSocial, a private company, does not disclose such data. However, we can find proxies for acquisition cost by examining some of their deals (more on that later).

Acquisition costs in the daily deal space have increased dramatically from when these two companies pioneered the market. In fact, Groupon’s customer acquisition costs grew 485% between the first quarter of 2010 and the first quarter of 2011 to more than $30 per email address. However, once customers are acquired, they are believed to be create a profitable annuity of repeat purchases, although how profitable and the duration of that annuity is still unknown.

Groupon CEO Andrew Mason explained the company’s acquisition cost philosophy in an email memo to employees: “Once we have a customer’s email, we can continually market to them at no additional cost…. There is no cost of reacquisition — that’s unusual. If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day”

Do Deals with High Profile National Merchants have a Lower Lifetime Value?

If customers are as valuable as Mason says, and the incremental cost per sale once Groupon acquires a customer is trivial, why not acquire customer in large volumes at a loss like competitor LivingSocial has done with their Amazon and Whole Foods deals?

LivingSocial presumably offers deals such as promotions where customers spend $10 to get $20 in merchandise from Amazon or WholeFoods in order to acquire new subscribers. Users acquired through these deals may represent up to a 66% discount off of Groupon’s current acquisition cost.

Groupon’s CEO Andrew Mason also addressed this topic in his email to employees by stating, “…Our marketing team has tested this tactic enough to know that it’s generally a bad idea, and not a profitable form of customer acquisition.”

Depending on the proportion of the coupons that were bought by new users and the percentage of coupons that were redeemed, LivingSocial might be acquiring users for less than Groupon’s cost per acquisition. The other critical element is the value of the customers acquired through this channel. Groupon’s cohort analysis on these users may have shown that customers from those deals are unlikely to be repeat customers.

Whether or not that is the case, identifying repeat high value customer segments by acquisition source versus those likely to churn is invaluable information in the daily deal market. LivingSocial and Groupon surely have different rates of repeat purchase; the question is how much and is there a distinct difference in rates by deal type.

Learn which Deals and Sources generate Your Most Profitable Customers

In spite of the fact that customer lifetime value is so critical to success, young e-commerce, flash sale, and daily deal companies face several challenges that make it difficult to pull these numbers. First, with a limited operating history, it can be difficult to draw high-confidence conclusions about the length of your customer lifecycle or how the average customer will ultimately behave. For example, Groupon attributed a lower than expected profit to refunds associated with a specific cohort that had higher than average customer dissatisfaction rates associated with them.

Another challenge is that e-commerce sites are often started by excellent merchandisers who don’t have a core competency around technology and quantitative marketing. This can make it difficult to find the internal resources to run complex calculations and ensure that the data is clean and consistent for long term analysis.

One tactic that we recommend to all of our e-commerce clients is splitting the customer lifetime value calculation into several separate metrics that address different stages of the customer lifecycle. This makes individual parts of the product or acquisition strategy easier to optimize, and it ensures the calculations can be understood and communicated with the entire team.

A few examples of these customer lifecycle metrics are:

• Percentage of members converted into buyers
• Time from account creation until first purchase, first purchase to second, second to third, etc.
• Revenue and gross margin generated in first 30, 60, 90, 365 days
• Invitations and social referrals in first 30, 60, 90, 365 days

Groupon is not required to disclose this level of detail on their unit economics, but you can be sure that they and LivingSocial are monitoring these statistics carefully on their different customer and deal types to decide which are most profitable.

Get Industry Statistics on Daily Deal Customer Lifetime Value and Repeat Purchases

Update: We published the report, and you can access it here.

We will be publishing our first daily deal, flash sale and general e-commerce industry benchmarks of metrics like customer lifetime value, time between purchases and more in June, so please check back and get your copy.

We have a great view into the evolution of best practice metrics for e-commerce, and we would love for you to try RJMetrics and leverage our experience for your business.