LTV and cohort goals in ecommerce
The holy grail of ecommerce is to grow your cohorts over time. In other words, the customers you acquire today spend even more the following year and year after that, such that your existing customer base is a source of growth. It’s a very healthy position to be in as you aren’t dependent on acquiring new customers to grow.
Chewy, which IPO’d in 2019, is a beautiful example of a company with growing cohorts. At the time of IPO, Chewy sold pet products online to nearly 11 million active customers. Their cohort repeat rate is so strong, “existing customers account for approximately 90% of our net sales in any given period,” and “our net sales in fiscal year 2018 would have grown by 20% fiscal year over fiscal year as a result of increased spending among our customer base without any net increase in customers.“ As an example, the 2015 cohort generated sales of $287mm in 2018 which was 165% higher than sales generated in 2015. A chart of healthy repeat cohorts looks like the below:
Generating higher revenue from cohorts year after year means getting those customers to buy more. At the time of Chewy’s IPO, they’d done just that; “active customers spend roughly $500 in their second year. By their sixth year, active customers spend roughly $750, or 1.5x the spending in their second year. This number continues to grow as the cohorts mature.” A chart of what this looks like is below:
Chewy achieved this holy grail of ecommerce a few ways: i) they expanded the breadth of products they offer customers and now have 45,000 SKU’s; ii) they improved the way their customers purchase from them by offering services like their autoship subscription program which automatically sends you products on a schedule, as well as an app for easy ordering from your phone; and iii) they improved the customer experience with things like overnight shipping, which they can do to 80% of the US thanks to 7 strategically placed fulfillment centers. In summary, growing your cohort spend is not just about offering more products, it’s about offering a better experience and more ways for your customers to buy.
The very best ecommerce businesses look like Chewy did at IPO, but even if your cohorts don’t spend more next year than they did last year, so long as your CAC is low and LTV is high, you’ll be in good shape. Below is Chewy’s LTV to CAC which as you can see is below 1.0x in the first year, meaning they actually lose money on the customer in year 1, but then grows to 4.0x over time. For ecommerce companies we look at, 3x+ LTV to CAC within 4 to 5 years is where we like to see the data.
If you can, be like Chewy: grow your cohorts over time by offering more products and ways for your customers to buy, or at a minimum keep those customers long enough so that LTV to CAC is 3x in 4 years.
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