- Eli's Newsletter
- LTV: Is It a Metric to Live and Die by?
LTV: Is It a Metric to Live and Die by?
I should probably introduce myself by first explaining that my relationship with LTV is complicated.
So, let’s start there: As someone who has made my living in SaaS, a customer’s predictable, compounding revenue contribution to a business quite literally supports my family and pays my bills.
But as someone who has spent that time in SaaS marketing and selling to ecomm teams and DTC brands, I’ve questioned its application in the world of consumer goods. In fact, I’ve gone so far as to call it “a metric that can be some combination of theoretical, unachievable, and overly achievable.”
Part of my distaste, if you will, is that LTV isn’t really life-time value. In an early-stage business, it’s a guess, at best, since customers haven’t been around for a “lifetime” and often discussed through the lens of compressing it into as small a timeframe as possible, which, really, is just a perverse version of payback period. So, let’s call it what it is.
But, also, it doesn’t feel actionable.
Eli’s been kind enough to give me this space to work out my feelings, so if you’re conflicted about LTV (or wondering why it isn’t actionable), let’s call this newsie a bit of therapy for us both.
Let’s get into it.
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LTV is one part justification metric and one part planning metric.
The idea is that if you can model out what the average customer is worth to you over their “lifetime,” you can conceivably justify acquisition costs for that customer and plan for future acquisition investments to fuel your growth. (We often hear a 3:1 LTV:CAC ratio as being an ideal balance.)
The Basics of Creating an Ongoing, Transactional Relationship With a Customer
But maybe we’re getting too far ahead of ourselves.
If we back up for a minute, the goal of any consumables business is to get a customer to buy more from you.
Do you have a consumer who hasn’t bought from you? You want to get them to buy.
Do you have a customer who has bought once from you? You want to get them to buy again.
So on and so on.
If you create a great product, customer experience, and brand (in the eyes of your customer), you’ll likely earn your customers’ repeat business until one of those variables changes—or a new product, customer experience or brand becomes easier for them to buy or becomes more interesting to them. (There is, by the way, no predictable timeframe in which that will happen. You could have all three of those things for a “lifetime.”)
Though a customer may use other brands alongside yours, the variables listed above are mostly in your control.
If your product isn’t great, if it isn’t easy to buy, or if the customer doesn’t have a great experience, you’re not as likely to earn much repeat business—at least not as much as the brand that does have those things.
I’m speaking for Eli here (and maybe he’ll want to add an editor’s note), but these two scenarios are why this newsletter exists: to help you improve one of those variables, such that you improve the likelihood of earning a customer’s repeat business.
One of these scenarios is preferable, but you might argue neither is great—not if you’re using LTV to drive assumptions.
Say, for instance, you’re a brand that fits the first scenario, and a subscriber churns a month or two after they hit your LTV assumptions. In other words, they’re more valuable to your brand than you projected a customer to be.
Are you still considering them a customer?
Are you running anything outside your traditional winback campaign to them?
Are you digging into why they, a better-than-average customer, churned?
Or are you cool with the fact they beat your benchmarks?
The problem with LTV is that it suggests there’s a point at which a customer no longer needs to be valuable to a brand—an endpoint of sorts.
Yet I’ve never met a marketer or founder—and certainly no one in finance—who has said, “You know what? We’ve made too much money from that customer. Maybe we should let them go.”
I’d guess you haven’t, either.
In my experience—and probably yours, too—it’s actually the opposite. Questions roll in around “How do we find more customers like this?” and “How do we get them to buy more?”
It’s that second question, simple as it may be, that I like more than LTV.
Leave aside all the weaknesses outlined above, one of the other fundamental issues with LTV is that it’s inherently hard to track for a consumer brand.
Consider this portion of a LinkedIn post I wrote two years ago (yes, I have had a hard time letting go of this issue):
I’ve bought 13 cases of Liquid Death (very on brand) in about three months, but LTV ends up being a useless metric for Hamid Saify since my DTC repeat behavior is about to fall off a cliff (merch notwithstanding).
And you know what? That prediction was only 1/3 correct.
I now primarily buy Liquid Death at Whole Foods because my Target is usually out. But I’ve also bought them on Amazon and at my local co-op, which just started carrying them.
How do you possibly track any of that?
It’s pretty much impossible. Hamid, to his credit, suggested the goal wasn’t LTV: “Just buy more Liquid Death,” is what he wrote.
“Buy more” is way more actionable and holistic in nature than “improve LTV,” and others, too, are suggesting this.
Drew Fallon, COO at Mad Rabbit, tweeted a year ago:
i’ve got a new found scorching take for yall:
DTC isn’t a viable business model at scale. LTV:CAC, is only useful for evaluating DTC businesses.
Therefore, LTV:CAC is mostly useless. A guideline worth contemplating, but until the day u can tie cac +ltv across retail/dtc/amzn
— Drew Fallon (@drewfallon12)
Sep 27, 2022
So, if LTV (or variations on LTV’s guidance) are “mostly useless,” what’s the solution?
N+1 > LTV, where N equals the last purchase. This “equation,” if you will, breaks down LTV into its underlying components: repurchase rate, purchase frequency, and average order value.
These metrics are more actionable and influenceable by a brand.
And, let’s be honest, it just makes more sense: a brand’s job is to earn the next purchase. If you do that, your repurchase rates will go up, and your purchase frequency has the potential to go up.
AOV is the missing component here, but even then, just focusing on N+1 will likely net you better AOV: The more you get a customer to buy from you, the more they end up buying.
So, really, it covers all the bases. And if you pull any of those levers? You end up improving LTV. So, you’re likely to keep the people who care about LTV happy, anyway.
A Final Appeal to Keep it Simple
LTV, to Drew Fallon’s point, was imported from SaaS and used to market early DTC businesses to investors such that they could land SaaS multiples.
Since then, conversations became filled with buzzwords, concepts from other industries and verticals invaded the space, and everyone started preaching different metrics that we, perhaps, forgot about the coolest part of the consumer space: the dizzying number of people a single product can serve.
Sure, some of this is positive. And, sure, your marketing efficiency is important, and maybe you use CAC to understand that. Cool.
But most of this stuff?
It seems to be tactics-level details at best and noise at worst. Somehow, we find ourselves wrapped up in it. And that’s dangerous. Stay there too long, and we run the risk of thinking about the brand-customer relationship in absolute terms. That we own the customer because we own the channel.
What traditional consumer brands have always recognized is that the brand-customer relationship is relative—that the customer has incredible choices and that it’s on the brand to find ways to get the customer to buy more.
But notice that “buy more” isn’t segmented or cohorted. It’s just buy more: whether you’ve bought your first can of Liquid Death or you’re on your thirteenth case in three months.
Because getting someone to buy more is complicated enough as it is. You don’t need to track your LTV to solve that.
That’s it for this week!
Any topics you'd like to see me cover in the future?
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