A Twilio exec explains what metric should always accompany customer lifetime value

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Good morning,

Over the past few weeks, I’ve been speaking with academic experts and CFOs about emerging KPIs (key performance indicators). As I previously wrote, customer lifetime value (CLV) is in; and 30-year-old KPIs are out. I thought it would be particularly interesting to talk to a company expert who is in the business of customer engagement to dig deeper into what measures matter and why.

If you interact with DoorDash or Uber via text—you’re also interacting with Twilio. The San Francisco-based company provides a customer engagement platform powering digital communications through SMS (text messages), voice calls, video, and email. Founded in 2008, Twilio closed Q2 2022 with more than 275,000 active customer accounts.

Yesterday, I sat down with Khozema Shipchandler, who joined Twilio as CFO in November 2018 and became chief operating officer (COO) in October 2021. Customer acquisition cost (CAC) is just as important at CLV, Shipchandler says. “CAC shouldn’t be measured independently,” he says. “It needs to be measured in relation to customer lifetime value.” Ideally, you should spend less to acquire customers than you make back in long-term profit from those customers, he says.

How Twilio thinks about CAC and CLV when taking on a new customer:

“How much does it cost me?” Shipchandler explains. “I think about the account rep that services the customer, all of the associated costs that go with the account rep—like a solution engineer, the marketing cost associated with the transaction, all of the support costs, perhaps R&D, as well as the technology like a CRM (customer relationship management)—that’s being utilized as a part of the transaction. What is the fully loaded cost before I ultimately end up signing up a customer?”

He continues, “And when I sign up that customer, estimating the amount of value that they’re going to create for themselves first, and then ultimately for me, because we’ll end up taking a buck off of the broader value that they’re creating with their consumers.”

How a prospective Twilio customer would think about CAC and CLV:

“I’m gonna go and buy this technology from Twilio,” Shipchandler explains. “It could be the data asset and capabilities with Twilio Segment (a customer data platform) and likely it’s going to be paired with some of our communications capabilities. And so they’re gonna evaluate, what am I paying for Segment? What am I paying for the core communications software stack that Twilio offers? And then in addition to that, how do I use those capabilities with my own marketing efforts with my own sales reps’ costs? And then, am I generating so much more value for that consumer base? In most cases, they have 1,000s of consumers, sometimes millions.”

Shipchandler also says CLV should be “well in excess” of the CAC. If your CLV isn’t a minimum 2 to 3 times the CAC, “you’re probably looking at an unprofitable business,” he says.

He gave an example of how Twilio’s clients use the company’s technology to lower their CAC. Domino’s Mexico division used first-party data powered by Twilio Segment to decrease cost per acquisition by 65% and saw a 700% increase in return on ad spend for Google ad campaigns, according to Shipchandler. 

Employee experience (EX) is also a metric that “a lot of legacy companies, and certainly technology companies have begun using,” he says. “We run our internal employee experience surveys and I think we get excellent information that we take very seriously. We try to correlate it quite closely to employee sentiment and then connect employee sentiment to employee retention,” Shipchandler says.

Twilio started out with the basics of just creating APIs (Application Programming Interfaces) for businesses and consumers to digitally communicate. For example, “you receive a message that your prescription is available or someone’s confirming your doctor’s appointment,” Shipchandler says. But Twilio later focused on providing a customer engagement platform with the acquisition of Segment in 2020. An example? “We can use data-rich communications where we know something specifically about you,” Shipchandler told me. “This is Sheryl and we know something about her and we know her purchase history. We know her likes or dislikes. And by the way, you’re providing consent for all these communications.”

An acceleration in digital transformation along with a focus on consumer privacy, and the emergence of a direct-to-consumer business model where brands are looking to build direct relationships with their customers, are trends shaping the business. 

CFOs are focusing on preparing companies for these challenges. “As a metric, customer lifetime value has become important,” Harmit Singh, EVP and CFO at Levi Strauss & Co., recently told me. “We are accelerating our direct-to-consumer business, which is stores and e-commerce. Those are channels where you can build relationships with customers.”

Shipchandler now serves as the COO, but “as a CFO, I was pretty operational in the way that I would kind of think about the business,” he explains. “I would say when I talk to a lot of my peers, I find that they are quite operationally engaged, whether it’s in the CFO or COO ranks,” he says. “They like to be a part of creating that value for customers.” He added, “The solutions are much more compelling if that lifetime value can be demonstrated. And I think the finance person’s job, frankly, is to help do that.”

Twilio confirmed in a blog post on Sunday it had been hacked on Aug. 4, I asked about that as well. “I happen to own the cybersecurity team so I know a lot about that particular incident,” Shipchandler told me. “We were the victim of a phishing attack. We think we’ve contained it to a number of employees and a number of customers. It’s not massive or widespread or anything like that.”

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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