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The Ultimate Guide to my Ultimate guides
As I look around for content in B2C Growth, I’m always left wanting more. Most of it feels like a tease but more accurately it’s an incomplete picture. It’s rarely enough to know enough about the topic and definitely not enough to action on it.
Its like I opened up a recipe to bake cookies and got the following:
Measure 150 g flour
Enjoy
So, I’m trying to change this by creating a series of Ultimate Guides. Yes, it’s a cliche name but it seems to stick so let’s roll with it.
My first one starts today with the Ultimate Guide to LTV. Over the next 4 weeks, I’m going deep on LTV and how to action it in 4 parts.
*For paid subscribers only
Let’s go!
How to calculate LTV
I want my… I want my… I want my LTV!
LTV is this mythical metric that everyone likes to bring up without any clue about how to calculate it, what it truly represents, and all the assumptions they’re making with it. It’s frustrating but more importantly dangerous. Everything from models to investments to venture funding is based on it so you owe it to yourself and your company to have a better understanding of it.
If there’s 2 things I want you to remember:
It’s never lifetime
LTV or Lifetime value is NEVER based on a lifetime. For reasons unknown to me lifetime value stuck , but it doesn’t make sense.
Align on what you mean by “value”
Value means a lot to many different parts of the organization. Value to whom is what we should be asking.
Now that I’ve asked you to throwout every part of the abbreviation, let’s build it up from scratch.
Defining Lifetime
Every LTV should be prefaced with some time value. Otherwise it’s incomplete. When you hear LTV, your brain should instantly jump to “How long we talkin bout here?!”
1 Year? 3 Year? 5 Year? more? In my career, I don’t think I’ve ever seen anything longer than 3 years and that makes complete sense in B2C Tech. I found this timeline on the webz and thought it was really cool.
Timeline of Social Media / Tech launches
It’s not the easiest to read but basically stuff is happening ALL the time and it truly disrupts what you’re doing. Imagine being Myspace only to see Facebook destroy you a few years later or any of the myriad of stories. Imagine your “LTV” model pre pandemic… looks reaaallly different I bet. The point is, you can’t predict more than a few years in the future so don’t try to.
So, pick a lifetime that reflects a mix of ambition and reality. If you’re a startup that just started yesterday, don’t even try and calculate LTV. If you’ve raised a Series A, maybe think about 6m - 1yr. Beyond that start to expand to 1-2yr and so on. LTV is a lagging indicator but when done right it can also be a rallying metric.
Defining Value
When we talk about value in LTV, it’s important that you understand there’s a giant asterisk there (LTV*). The V doesn’t stand for value. It stands for value to company (V2C) but LTV2C doesn’t sound as cool.
Anyone who is calculating LTV based on just revenue is simply shooting themselves in the foot.
Let’s go to an extreme example (because that’s where most models breakdown).
A customer buys a t-shirt on your website for $15
You pay $15 to the maker of the t-shirt and you keep $0
What is the LTV of this user? Is it $15 or $0?
The answer is $0. This person is worth absolutely $0 to the company. Companies that use revenue only in LTV will invest in the wrong efforts and will always runout of money.
What does all this mean?
