Mar 13, 2024 · 24m · founders-journal
The Dangers of LTV
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Host Alex Lieberman breaks down venture capitalist Bill Gurley's classic essay on the hidden pitfalls and mathematical abuses of the Customer Lifetime Value (LTV) formula. The episode highlights why quantitative marketing metrics cannot replace organic distribution, product excellence, and disciplined business strategy.
Statements from this episode (21)
Lieberman: Word of Mouth and Social Are the Only Podcast Growth Drivers
“Podcasting is a super competitive game these days, and the only way to grow is through word of mouth and promotion on social.”
LTV Obsession Replaced Creative Marketing Managers With Quantitative Growth Roles
“In a lot of ways, I believe LTV and the obsession with marketing metrics like this is what has given the rise to more quantitatively focused growth marketers, a role that has replaced creative, more qualitative marketing manager roles at Silicon Valley startup…”
Relying Entirely on Customer Lifetime Value Metrics Is Highly Harmful
“Now, LTV does have merit, and it is a helpful proxy to prioritize your marketing and understand the economics of each customer that you acquire, but if relied on entirely, It can be misleading at best and extremely harmful to your business at worst.”
LTV-to-CAC Is Paid Acquisition Arbitrage, Not a Business Strategy
“LTV and calculating LTV is not a business strategy. It is a way of optimizing your marketing channels. And at the end of the day, LTV to CAC, lifetime value to acquisition cost, is simply just an arbitrage game. It is an arbitrage between what you can pay to a…”
Companies Heavily Emphasizing LTV Metrics Frequently Suffer Massive Pre-IPO Losses
“It is no coincidence that companies that put a heavy emphasis on LTV are also the ones that have massive losses as they scale, frequently even through an IPO.”
LTV Math Justifies Spending Up to 50% of Revenue on Customer Acquisition
“Consider that most companies limit any affiliate fee they would be willing to spend to five to 10% of sales. Yet, when they are marketing, they use different math. They use LTV math. And all of a sudden, it's acceptable to spend 30 to 50% of revenue on custome…”
Finance Departments, Not Marketing Teams, Must Monitor LTV Calculations
“Frequently, the same group that is arguing for more spending is the same one that owns the LTV calculation. This is a mistake. Finance should monitor LTV.”
Organic Customers Must Be Excluded From Customer Acquisition Cost Calculations
“If you have organic customers, they shouldn't be included in the spend calculus. They would have arrived regardless of spend.”
LTV Calculations Must Discount Marginal Cash Contribution Rather Than Raw Revenues
“Also, many people discount revenues rather than marginal cash contribution. It is critical to bundle all future variable costs of supporting the customer in order to fairly estimate the future contribution.”
Lieberman Slams Kissmetrics' Flawed LTV Formula as 'Voodoo Math'
“Not only do they include a version of the model that specifically ignores future costs, but also they recommend taking an average of three different results, two of which are clearly flawed. This voodoo math has no place as part of a multi-million dollar marke…”
Startup Projections Showing All Unit Metrics Improving Simultaneously Are Unrealistic
“Many company presentations will Show all metrics improving as you head into the future. This is unlikely to play out in reality.”
Google AdWords Is an Increasingly Finite Global Marketing Resource
“The number one place on the planet for marketing spend is Google AdWords, and make no mistake about it, this is an increasingly finite resource.”
Scaling Ad Spend Exhausts Top-Tier Customers and Forces Higher Churn
“And as you spend more and more money to acquire customers, you are going to exhaust The best quality customers, which means you're going to either have to pay more to find good quality customers, or you're going to acquire lower quality customers who are going…”
Organic Users Consistently Outperform Paid Acquisitions Across Major Business Metrics
“Organic users typically have a higher NPV, a higher conversion rate, a lower churn, and more satisfied than customers acquired through marketing spend.”
Morning Brew's Highest Quality Subscribers Always Came From Reader Referrals
“For the entirety of Morning Brew's history, our highest quality customers have been people who were referred by other Morning Brew subscribers.”
Ads in Competing Newsletters Yielded Morning Brew's Best Paid Subscribers
“It's always been the highest quality channel for paid acquisition has been spending on ads in other email newsletters, because at least it is a behavior that someone already has.”
Heavy Marketing Spend Creates Pricing Vulnerabilities Against Word-of-Mouth Competitors
“When you spend a lot on marketing, you have to charge more for your product to account for having enough margin such that you're able to spend on marketing while having a, you know, good profitable product. And so that means when you spend a lot of marketing, …”
Skype Acquired Users for $0.001 Via Word of Mouth Versus Vonage's $400
“It shows that Skype's cost of adding a new user was a 10th of a penny, whereas Vonage's was 400 dollars, and that's because Skype had a peer-to-peer technology where they were acquiring customers through word of mouth, whereas Vonage had to pay for their custo…”
Resource Scarcity Drives the Best Creative Customer Acquisition Ideas
“And generally the best way to think of creative ideas for acquiring customers is when you feel like your ass is against the wall, when you feel like there's scarcity and you have to do clever, scrappy things to acquire customers.”
LTV-Driven DTC Startups Like Casper and Away Harmed Late-Stage Investors
“By the way, this essay was written before the DTC boom, but this is the story of so many direct-to-consumer companies, whether it's Away Luggage, Casper, Warby, et cetera. Ton of money was given to these brands early on to spend a ton on paid marketing. The ea…”