Have you started planning your marketing strategy for 2024 yet? Too many priorities? Concerned about hitting your numbers? You need a customer forecast.
This content was originally published in the No Best Practices newsletter on 12.10.2023.
As we’re approaching the 2024 planning season, I want to share the most powerful tool I’ve found for choosing the right priorities and hitting your sales targets for the year: a customer forecast.
For smart marketers, annual planning is an opportunity to set realistic expectations, cover your a$$ and potentially get a head start on your job search if it’s clear that your current employer is asking you to spin straw into gold.
In many companies, “planning” is the domain of finance, ops and/or merchandising. Marketers receive an annual sales goal broken out into monthly (and sometimes daily) goals, along with their annual marketing budget. With that information, they are expected to develop a plan that will “make the magic happen”.
But finance, planning, merchandising and design can sabotage your marketing objectives more than Meta ads account structure ever could. Product–what you sell–is basically the top thing impacting your conversion rate.
So if the “planners” are making decisions that could make your job harder, you need to make them aware of it. And if they’re pulling growth targets out of a hat, you need to ground them in reality.
Of course, they have the right to say “we don’t care, do what we want or you’re out”. That’s when you have two choices: take really big swings or GTFO. What I’ve found: when the “planners” get more educated on the process I’m going to outline here, they become more and more reasonable (unless they are ego-driven or mentally ill).
This week I’m going to share a tactical “how to” on customer forecasting–the most powerful tool in your planning toolkit. Next week I’ll tell you how to turn the forecast into an actionable marketing plan and share some common ways that marketers set themselves up for failure without realizing it.
Why You Need A Customer Forecast
Let’s say your CFO tells you “we need to grow the eCom business 20% YoY in 2024”. Where does that goal come from?
Typically, it comes from one of these places:
- We need to make our share price go up $x next year (in a publicly traded company).
- We need to pay back $x worth of interest on debt next year.
- We grew 20% last year, let’s do it again.
- We’re trying to sell the business within 3 years and that top line number supports our pitch/narrative.
These are dreams, not goals. To turn a dream into a goal, you need a plan. And to develop a marketing plan with any hope of a successful outcome, you need a customer-based forecast.
This is the gist of a customer-based forecast:
- Estimate how much revenue you’ll generate from existing customers in 2024.
- Subtract this from your total revenue target.
- Divide the difference by your new customer AOV.
This is the number of new customers you’ll need to acquire in 2024. Now divide your acquisition marketing budget by that number of customers. That’s your target CAC, as dictated by the “planners”.
There are several ways you can get the estimate of next year’s repeat customer revenue. The most accurate and in-depth way is outlined in Dave Rekuc’s CXL course on forecasting. I plug the heck out of this because it’s great; I do not get a commission from that link.
But if you’re pressed for time or less grounded in concepts like cohort analysis, this is the “back of the napkin” way to do it:
Step 1: Download a cohort analysis/reporting app on Shopify that will allow you to group customers by the year of their first purchase. You can also download your raw transaction data and do this analysis in Excel if you’re a masochist/don’t have Shopify. Although it will crash Excel if you’re doing more than ~$25M/year.
Step 2: Do an annual cohort analysis of your revenue for the past 5-7 years. If you can, go back up to 10 years. If you’ve only been in business for a few years, this method will be less accurate but your repeat customer revenue will also be a small slice of your pie.
What is an annual cohort analysis? You want to group each year’s revenue by the year when the customer who generated the revenue was acquired. You might wind up with something like:
- $10M total revenue in 2023
- $7M of that revenue came from customers acquired in 2023
- $1.5M came from customers acquired in 2022
- $1M came from customers acquired in 2021
- $0.5M came from customers acquired in 2020
Step 3: You’ll use this analysis to calculate what percent of revenue you acquire in year n is retained into year n + 1, n + 2, etc. For example:
- Customers you acquired in 2020 spent $10M in 2020 (this includes 1st purchases and 2nd+ purchases that happened in 2020)
- The 2020 cohort spent $3M in 2021 (30% of what it spent in 2020)
- The 2020 cohort spent $1.5M in 2022 (15% of what it spent in 2020)
- The 2020 cohort spent $0.75M in 2023 (7.5% of what it spent in 2020)
Using this analysis, you’ll see what the average “decay” of a cohort’s revenue is 1, 2, 3+ years after that cohort was acquired. Using these averages, you can project how much revenue each annual cohort will generate in 2024.
You’ll have to make some judgment calls here. But what you’ll typically see is that a cohort’s annual revenue decays dramatically between year 0 (acquisition year) and year 1, then stabilizes 3-4 years after the acquisition year.
Step 4: Take your total sales target for 2024. Subtract your estimated revenue from repeat customers (from step 3). This is your total new customer sales target.
(note: this is the section I forgot to include in the newsletter!)
Some of the customers you acquire in 2024 will make 2nd, 3rd, etc. purchases in 2024. So if your total sales goal is $10M and you’re projecting $3M from repeat buyers, you do not need to generate $7M in first orders alone.
Use a tool like Lifetimely to determine the following stats for each annual cohort of new customers: (1) first purchase revenue and (2) revenue from subsequent purchases made in the acquisition year.
Calculate #2 as a percent of #1 for each annual cohort. Look at the pattern–is it going up or down? Use this to make a baseline prediction for customers you’ll acquire in 2024.
Maybe the percentage is typically 25%. So for that $7M in new customer revenue you need to make in 2024, only $5.25M needs to come from pure acquisition–the remainder will come from 2nd, 3rd, etc. orders from those same customers.
Divide your new customer sales target ($5.25M in this example) by your new customer AOV from 2023. This is approximately the number of new customers you’ll need to acquire to hit your sales target.
Take your marketing budget for 2024. Divide this by the number of new customers you’ll need to acquire. This is your target CAC for 2024.
What To Do With This Information
The first thing you’ll want to do with your customer forecast is to factor in any predictable changes that are out of your control.
For example, your brand might be raising the prices of all products by 10% in 2024 due to inflation/increase in the cost of inputs. In this case you would forecast your projected repeat customer sales down by 5-10% and forecast up your new customer AOV by ~10% (depending on what month the price changes would start).
If the brand is discontinuing a popular product line, you’d want to forecast projected repeat customer sales down. How much depends on what role this product played in retention. A little more about that here.
Once you’ve factored in predictable changes, you want to compare 2024’s target CAC to your actual average CAC for 2023.
Is your 2024 CAC dramatically lower than your actual CAC for 2023? The “planners” might have decided to cut the marketing budget for next year, expecting you to do much, much more with less.
They’re either doing this out of desperation or lack of understanding. Walk them through the customer forecast for 2023 and 2024. Explain that you will not be able to achieve your projected 2024 CAC with paid media alone. Present some options for hitting the goal anyway (going viral), but explain that the risk of failure will be much higher.
Another thing you’ll want to look out for is the impact of a hot item or some other source of viral attention (like a viral TikTok) on your CAC. If you launched a product that drove viral attention in 2023 or otherwise “blew up”, that drove a lot of organic traffic to your website, lowering your CAC.
You either need a plan to replicate that virality in 2024 (hard, risky), you need to forecast your CAC back up and ask for more marketing dollars (unpopular) or you need to forecast your sales down (even more unpopular).
You’ve Finalized Your Customer Forecast, Now What?
Now you have a rough but very tangible outline of your goals. More important: you know if your goals are reasonable, and you know if your goal-setters are reasonable. You know if you’ll need evolution or revolution to achieve the goal that the “planners” set out for you.
The next step in the process is translating that goal into an actionable marketing plan. That’s what I’m going to cover next week: how to turn this goal into a list of focused priorities that will give you the highest probability of hitting your numbers.
This is where most eCom teams flub it up: their list of 2024 priorities is either a backlog from 2023 or a list of Twitter hacks that were secretly sponsored by SaaS companies.
If the brand is hot, priorities don’t matter. eCom teams can do whatever looks good on a resume, or chase whatever shiny object catches their eye. But if your growth target for 2024 is a true stretch, you need to make every decision count.
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