When the Gondwana supercontinent began to break apart around fifty million years ago, much of the earth at that time was blanketed by thick rainforest. As the continents as we know them today slowly drifted apart from that single landmass, the world eventually plunged into a deep ice age, followed by a thawing that continues to this day.
The combination of drifting continental plates and increasing temperatures meant the ancient Gondwana rainforest of old all but disappeared. But some patches still remain. In the North-East of Australia, the Daintree Rainforest is one sizeable remnant: covering an area of 1200 square kilometers, it’s the third largest rainforest in the world, and at its higher altitudes, by far the oldest.
Dating back 180 million years, these sections of the Daintree are true prehistoric environments, with the species to match. There you’ll find ancient trees such as the Antarctic Beech that once flourished in their namesake, the world’s oldest known flowering plants, the world’s largest moth — the size of a bird with a thirty-centimeter wingspan — and six-meter long saltwater crocodiles.
Taken together, it’s easy to see why British naturalist Sir David Attenborough referred to the Daintree as “the most extraordinary place on earth”. Representing just 0.12% of the Australian continent’s landmass, this relatively small area contains around 50% of its total bird, butterfly, mammal and freshwater fish species.
This number and variety makes the Daintree one of the most diverse ecosystems on earth. And with this diversity comes benefits for the entire planet. With millions of plants drawing energy from the sun, plus ample water and high levels of nutrients packed into a concentrated area, every year the Daintree is responsible for the creation of massive amounts of organic carbon — the basic building blocks of life.
This organic carbon is often used as a “key metric” for measuring the relative importance of an ecosystem. A lot like management consultants, ecologists refer to the amount of organic carbon an ecosystem produces as it’s level of “productivity”. The more organic carbon produced, the more productive it can be said to be.
Using this measure, rainforests are among the most “productive” ecosystems on earth, followed by coral reefs, estuaries and wetlands. What these ecosystems have in common is that they are all relatively small areas accounting for the majority of organic carbon produced across the globe.
This seems to be a common pattern. Looking at the total surface area of our planet, life as we know it depends upon just a handful of relatively small, but critical, areas. But zoom into any of these critical areas, and the pattern appears to repeat again. In the Daintree for example, much of the total productivity can be traced back to a single species of bird.
The Southern Cassowary (Casuarius casuarius), a giant and strikingly coloured ratite (of the same family as ostriches and emus), is one such species. Like much else in the Daintree, this bird is something of a dinosaur: known for its aggressiveness, the Southern Cassowary has attacked and even killed humans. In fact, it’s reputation is such that when the Cassowary patrols its large territorial boundaries, handlers have been known to use riot shields for self-protection.
But aside from the danger it poses, the Cassowary helps hold the Daintree together. Traveling large distances each day, this bird is one of the most important seed dispersal mechanisms in the rainforest. Many of the seventy types of fruit it eats and deposits across the rainforest floor would be untouched by other animals, which often find them toxic. Lacking the cassowary dispersing these seeds, the productivity of the Daintree ecosystem would be significantly reduced. So much so that ecologists refer to the Southern Cassowary as a “keystone species” – a species deemed essential for the functioning of the ecosystem it inhabits.
It seems far-fetched. But this is actually a pattern we see over and over again in nature. Regularly, total outputs seem to be always attributable to just a small fraction of the components.
This pattern is sometimes referred to as a “power-law distribution”. Looking at the graph above, the curve of the power law has a few defining features:
It’s staggering the way this one distribution describes so much in nature. You may not even realize how ubiquitous these distributions are. They occur everywhere around us, everyday:
Once you’re aware of the pattern, you’ll start seeing it everywhere. And it’s more than simple confirmation bias: these power laws really are something akin to a “Law of Nature”, as far as we can say we have anything like that at all. At the very least, it’s a very common pattern that in many guises underlies the way our world is organized.
Of course, these sorts of distributions aren’t just limited to the natural world: they’re also ubiquitous in business. What can we learn from this for our own Walled Garden ecosystem?
The 80-20 distribution, or Pareto Principle, is a well-known example of a power law distribution regularly applied in business. It takes its name from the Italian economist Vilfredo Pareto, who first noticed a peculiar pattern in the distribution of wealth in Italy. Specifically, he noticed roughly 80% of total land ownership was attributable to around just 20% of the population.
Outside of Pareto's observation, some other more recent observations of the 80-20 principle have included:
In fact, I’m willing to bet you can easily demonstrate the 80-20 principle in your own business. Try it for yourself. Open your Google Analytics dashboard. Set the date range to the past year. In the left-hand column go to Acquisition > Site Content > All Pages. In the main window, arrange your “unique users” column by descending order.
I’m confident you’ll find that across all the pages of your site, a vast majority of your total traffic comes from just a handful of pages. While it may not be a perfect “80-20” ratio as consultant Perry Marshall describes in his book 80/20 Sales and Marketing, I’m confident it will follow a power law distribution that is near to that ratio.
The Establishment stage is where we convert our ecosystem into a veritable Daintree: a productivity superpower; a thriving ecosystem.
If the cassowary were to be removed from the rainforest, the productive capacity of that system would be severely reduced. Similarly, without nurturing the equivalent of our own keystone species, we will never reach the potential of our own ecosystem of email marketing and automation.
In the Establishment stage, we seek to replicate this by improving the amount of revenue generated by our top customers. The overall revenue of the business will rise in turn. The success of certain “keystone” individuals in an ecosystem leads to the improved productivity of the overall system.
Archimedes is supposed to have said “Give me a lever long enough and a fulcrum on which to place it and I shall move the world”. Understanding the power laws in your business gives you that lever. The only unknown remaining is the fulcrum on which to place it.
Justus von Liebig’s Law of the Minimum states that “Growth is dictated not by total resources available, but by the scarcest resource”.
Liebig was an influential 19th century German scientist, known primarily as one of the pioneers in the field of organic chemistry. But he was something of a savant, and made dozens of contributions to a variety of fields. Specifically, it was in his innovations in plant nutrition where he applied his now famous “Law of the Minimum”.
Liebig knew what nutrients were essential requirements for a plant to grow. But he noted that the optimal growth of a plant was dependent upon having sufficient levels of all of these essential nutrients. While all could be present, it would be the one nutrient that was lacking in comparison to others that would always be the bottleneck to growth.
This is sometimes illustrated using a device known as “Liebig’s Barrel”.
Imagine a barrel of vertical wooden panels, but it’s old and worn out: while most of the panels of the barrel are full-length, some of them are broken at different points, making some shorter than the others. The result is that when the barrel is filled with water, the maximum amount it can carry is limited by its shortest broken panel. The water will simply flow from this opening.
Liebig’s Law of the Minimum and by extension, his “Barrel”, illustrate something similar to the saying "a chain is no stronger than its weakest link". If a plant were growing in soil deficient in, say, nitrogen, then that limited nutrient would be the factor inhibiting optimal growth.
Liebig eventually tested this and applied it to the successful formulation of some of the first fertilizers containing ammonia (a nitrogen-rich compound). He continued refining this formulation to produce the basis of modern fertilizers, now one of the most widely manufactured products in industrial chemistry.
How does all this apply to your business? Just like the panels of Liebig’s Barrel, his Law of the Minimum can be used as a tool to break down your marketing “system” into its individual components. It instructs us to identify which of the components of our system are the weakest. It’s only by addressing the weakest component in the system that the system can improve in totality.
So the growth of our business is limited by its weakest constraint. But how do you then actually apply this? The most difficult part of utilizing Liebig's Law of the Minimum is uncovering what the components of the system actually are in the first place.
In the book 80/20 Sales and Marketing, Perry Marshall outlines the three components you can address to grow your business. Together, these three components make up the total potential output of your marketing efforts:
Just like Liebig’s Barrel, the weakest of these three components will be the place where the “leaks” occur. If any one of these three areas lag in your marketing strategy, you can be sure it will be inhibiting the overall growth of your business.
So, having identified these three constraints, how do we know which one is limiting growth? If you’re at the point in your business where you’ve built an email list, I’ll assume you already have some Traffic coming to your site. Also, since we’ve just covered the Dispersal and Recruitment stages, let’s also assume our Conversions are relatively well optimized.
The one component that we so far haven’t addressed is LTV. So with the other two factors, our current constraints likely look something like this:
Understanding Liebig’s Law of the Minimum, the LTV constraint is the best place to focus our attention. It’s the shortest plank in the broken barrel, the factor limiting the total output of the system.
Interestingly, this is exactly the opposite of what many small online business owners often do. More commonly, “more traffic” seems like the answer to all problems, when in fact there are more important, and often simpler, improvements that can be made instead.
This means that the main constraint to our system, the area which we must focus on according to the Law of the Minimum, is LTV. But what exactly is LTV? How can we measure it? And what is the point of improving LTV in the first place?
Put simply, LTV estimates the value of your relationship with a customer. It estimates how much revenue a new customer will be worth to your business over their “lifetime”, or the period of time in which they continue transacting with you.
First, let’s look at how to calculate LTV. There are dozens of methods for this, some quite sophisticated. In order to illustrate its basic components, a simple formula for LTV could be:
(AVERAGE ORDER VALUE) X (PURCHASES PER YEAR) X AVERAGE CUSTOMER LIFETIME [YEARS])
Think back to Hayley’s store selling plants. A frequent customer (Customer A) who regularly buys plants from Hayley might have an LTV something like this:
(average order value = $100) x (purchases = 4 plants per year) x (buys for = 8 years)
In other terms: ($100) x (4) x (8) or $3200
Not bad for one customer. Now imagine a different customer (Customer B). Imagine this customer has an LTV like this:
(average order value = $100) x (purchases = 2 plants per year) x (buys for = 3 years)
In other terms: ($100) x (2) x (3) or $600
That’s a pretty big difference. Customer A is worth more than five times as much as Customer B, even though they’re buying the same product at the same price. The main differences between these two customers are the length of relationship and the frequency of purchases, two important factors we’ll get to later.
But more immediately, which of these customers should you be paying more attention to? Clearly, Customer A. From this example, the combined revenue of the two customers is equal to $3800. The revenue attributable to Customer A accounts for around 85% of the total. So it’s clear from this example that there are huge gains to be made from improving the LTV constraint.
In fact, the most successful companies in the world owe their success to an in-depth understanding of their customer’s LTV. The coffee franchise Starbucks, for example, knows that every new customer that walks in and buys a cup is worth thousands of dollars. They know that while there will be many customers who buy one cheap filter coffee and never return, there will be others who buy a $5 pumpkin spice latte every workday for the next ten years. There will be others still who also buy every new themed mug or logo-branded coffee machine, costing hundreds of dollars each.
The first customer who comes in to just buy the cheapest filter coffee probably only has an LTV of around $2. They bought a cheap product once and never returned to make another transaction. The other customer who buys coffee every day, in addition to every piece of Starbucks merch you can think of, may have an LTV of $20000 or higher.
With one customer having an LTV of $20000, and another customer only bringing in an LTV of $2, it becomes obvious who we should focus on to improve the overall revenue of our business. It’s here that we see the power law distribution on full display.
Just as the Cassowary creates outsized results for its environment, your high LTV customers can be the source of massive gains in revenue that take your business to the next level.
Improving LTV is what enables you to turn your email ecosystem into a Daintree Rainforest. Calculating LTV gives you valuable insights: who your best customers are; your most profitable products; and where value accrues in your business. You can then focus on continuing to deliver maximum value to your best customers and products: those 20% who yield 80% of revenue.
Without improving your LTV, you’ll never truly realize the value of your database. By ignoring the power laws describing the ways value accrues in your business, you’re leaving untapped revenue locked away in the hidden potential of your top customers.
Let’s look at some other ways improving LTV can help take your business to the next level.
LTV is the starting point to figuring out exactly how much you can profitably spend to acquire a new customer of the same type. This means you’ll have a better idea of the ROI of different marketing strategies.
Instead of hoping for the best, you will instead be able to scenario-test the efficacy of different marketing directions before you fully commit to them. This opens up all sorts of new marketing channels that may have previously been prohibitively expensive: press, advertising or paid partnerships, for example.
LTV is a great measure of customer loyalty. The longer a customer sticks around, the more loyal they are — there isn’t a clearer falsifiable metric for loyalty in business that I can think of.
Building on this, a high LTV can be a good indicator of high product quality. The first sale is a great milestone, but the sign of a truly well-loved brand are products that customers keep returning to purchase again and again. While many brands successfully lead a new subscriber through the labyrinth of Dispersal and Recruitment to attain the first sale, there are fewer who can then also attain a high LTV.
It also shifts your focus: you’ll be continually devising ways to delight and add value to each experience your most loyal and profitable customers have with your brand.
Most importantly, as the power laws demonstrate, LTV is the most powerful leverage we have for growing our business.
You can always find ways to send more traffic to your store and squeeze out incremental improvements in conversions. Both of these things are necessary — but they have their limits. The most efficient way to improve revenue is, by far, focusing on those customers right on your doorstep, already recruited inside your email database ecosystem.
It’s more profitable to focus on your existing customers not only because they’re more likely to spend more, but because it also saves you both time and money. In fact, it can be anywhere from 5 to 25x more expensive to find a new customer than it is to retain an existing one.
This makes intuitive sense: instead of going out to search for some ethereal image of what you imagine your customer avatar to be, you can instead focus on the actual market right in front of you, which you also happen to already have a huge amount of data on. They’re already there, they’ve already shown buying behavior, and they’re the best example of your market you’ll find anywhere — sell to them.
Understanding how important it is to improve LTV, how do we actually go about doing so? Just as we found the limit to growth across the components of Traffic, Conversion and LTV, we can also do the same again for LTV.
In his 1917 book On Growth and Form, Scottish mathematician D'Arcy Wentworth Thompson described the mathematics underlying dozens of natural phenomena: the formation of cells, the relationship between size and weight in animals, the rate of growth in trees, among many others.
On Growth and Form is today considered a classic. It’s regularly prescribed as required reading in many undergraduate architecture courses and it has influenced the work of dozens of prominent figures, from computer scientist Alan Turing and anthropologist Claude Lévi-Strauss. It was instrumental in the development of the field of allometry: the study of the relationship of animal body size to shape, anatomy, physiology, and behavior.
In the book, Thompson details many of the fractals ubiquitous in the natural world. These can be seen in an endless number of examples — from the swirl of a snail’s shell and the growth of branches of a tree; to the paths of lightning, rivers and the forms of mountains.
These phenomena all share the same underlying mathematical trait: the power law. In these examples, the power law distribution we described earlier not only exists, but it repeats within itself: infinite recursion. The repetition of a simple ratio at different scales results in the effect of an infinitely repeating pattern.
Being based on power laws, our components of Traffic, Subscribers and LTV also demonstrate this infinitely repeating pattern. When you seek to improve one of the constraints inside the triangle - take Conversion, for example - you invariably come across yet another subset of the components “Traffic, Conversion, LTV”. Each individual component has another Traffic, Conversion and LTV component embedded inside it.
It’s easier to understand with an example. Let’s say you send a new campaign to your email list. In the email, there’s a link to a landing page with a button to purchase a product.
So, while on one level you get a conversion rate for the whole campaign (“we converted x% of users”), when you zoom in, the pattern is there. There’s another Traffic, Conversion, LTV power triangle occurring within each individual constraint.
Let’s look only at this pattern inside the Conversion component:
This is “open to click” conversion, “click to add to cart” conversion, “cart to checkout” conversion, “checkout to purchase” conversion, ad infinitum. It’s turtles all the way down.
Knowing this, it follows that in order to improve our LTV constraint, we must look at the components that make it up and address whichever is the weakest. It’s Liebig's Law of the Minimum in effect again. With this in mind, what exactly are these sub-components that make up the LTV constraint?
Once we know this, we can easily know what we need to focus on to improve LTV.
Marketing consultant Jay Abraham has said: “There are only three ways to increase your business:
Abraham’s formulation just happens to perfectly describe the three types of constraints inside LTV.
There are only three ways to grow your business: get more customers (that’s increasing traffic to the LTV constraint), increase repeat purchases (more conversion), or increase the amount spent at each transaction (LTV, again).
So we know exactly where we need to focus in order to improve our LTV. Let’s look at how this might work in an example.
Let’s say that on average you get 200 customers per month. The average transaction is $50 and customers only purchase once. This means you bring in $10,000 per month.
Your conversions stay the same and average transaction and purchase frequency don’t move. You go about growing your business in a way common to many store owners — you work very hard at your traffic strategy. After a month appealing to the whims of the almighty algorithm on your social media platform of choice, you manage to bring in an additional 30 customers the next month:
This results in a 15% increase in revenue. While it’s definitely worth celebrating an extra $1500, let’s for a moment consider the alternative to toiling over a temporary traffic spike for a single month.
Imagine instead you implement a couple of simple changes that improve your average transaction and purchase frequency by smaller amounts.
With just a tiny 10% increase in both average transaction and purchase frequency, you end up with an additional $2100 - a 20% increase in revenue — without adding a single additional customer.
This is where the benefits of email marketing automation really become apparent. The best part about these small cumulative gains is that they can be 100% automated and delivered to your customers while you sleep. Just like the Starbucks customers who will buy every product available, your business has high value, power law customers who want to spend more. You can dramatically increase your revenue just by leveraging the power laws — the patterns of nature — that already exist in your business.
You have the lever, and you can now reliably identify the best fulcrum on which to place it. For this reason, the Establishment stage is arguably the most valuable, if not the most important of the Stages of Succession in the Natural Orders system. While you need the earlier stages, the best way to use email marketing and automation to dramatically grow your revenue is through unlocking LTV as we’ve demonstrated here.
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