A great write up on the Lifetime Value equation. Basically, the LTV model is an equation that tells you how valuable a user is in terms of dollars and that gives you an idea of how much you can spend to acquire a user (or customer).
This is an equation that can be gamed and it often is. Bill Gurley’s main points are listed below.
- It’s a Tool, Not a Strategy
- The LTV Model Is Used To Rationalize Marketing Spending
- The Model is Confused and Misused
- Business Isn’t Physics – The Formula Is Not Absolute.
- The LTV Variables “Tug” at One Another
- Growing Becomes a Grind
- Purchased Customers Underperform Organic on Almost Every Metric
- The Money Could Go to the Customer
- LTV Obsession Creates Blinders
- Tomorrow Never Arrives
It impresses me that a VC can show that he understands this as an operator would.