The basic concept of LifeTime Value (LTV) was ably outlined by Seth Godin in a great post here. If you know the average net value of a customer is $2500 over their “Life”, why would you not spend $50 (or $200, really) to acquire each one? As long as you stuck to the model, your company would be insanely profitable over time.
Their are 2 primary challenges to implementing this idea.
1. “Over time” is a concept many management folks have a hard time embracing; what matters are the profits this year, or this quarter, or this month. Unless the whole company embraces an “over time” measurement approach it is difficult for Marketers and Analysts to drive towards programs and practices supporting the LTV outcome.
2. The $2500 is an average figure. Most customers are worth less; 10% or 20% are worth much more.
Most people I talk to embrace the general idea of LTV models intuitively. It’s really a cash flow concept, isn’t it?
So Financial people get it right away, and if Marketers could align with it, there would be no conflicts and the Marketing budget becomes virtually unlimited.
In fact, many folks in the PPC world follow just this model – they have unlimited budget as long as each conversion costs no more than “X”. Because the company knows if it spends no more than X on a conversion, it always makes money. Marketers and Analysts involved with these “Cost < X” PPC programs love them, because Management loves them.
And Management loves them, why? Because the CFO loves these programs Why? Because they are based on Cash Flow analysis, which CFO’s understand very, very well.
So then, what will it take to get more acquisition budgets like these Cost < X PPC programs? We have to address the two challenges above:
Continue reading “X Month” Value
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