Lifetime value can mislead you into excessive spending on marketing

From The Dangerous Seduction of the Lifetime Value (LTV) Formula by Bill Gurley:

The LTV Model Is Used To Rationalize Marketing Spending

Marketing executives like big budgets, as big budgets make it easier to grow the top line. The LTV formula “relaxes” the need for near term profitability and “justifies” the ability to play it forward – to spend today for benefits that are postponed into the future. 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. Consider that most companies limit any “affiliate fee” they would be willing to spend to 5-10% of sales. Yet when they are marketing, they use different math. They use LTV math, and all the sudden it’s acceptable to spend 30-50% of revenue on customer acquisition. Find the most boisterous executive recommending excessive spending, and you will usually find a loyal servant of the LTV religion.

Notes:
Creativity and excellence result from constraints. LTV imposes almost no constraints on your marketing budget.

2 thoughts on “Lifetime value can mislead you into excessive spending on marketing

  1. In food/beverage/consumer packaged goods, where I work, customer LTV is sometimes shockingly small. In this situation, customer LTV can be very helpful in scaling back marketing ambition.

    Early in my CPG career, I worked with one company that wanted to give away reusable shopping bags to some customers. The total cost, including fulfillment/shipping, would have been around $15 each. I thought that was too generous an offer and ran some back of the envelope LTV numbers. It was somewhere around $4-6. Even though it was a limited promotion… it much better informed the right price to pay to incent a customer. (I probably could have delivered the message better — but that’s a different story!)

    Also — when I look at LTV, I look at profit, not revenue. Does that change any of your opinions?

  2. Interesting post, neatly summarised as pushing for “jam tomorrow”. I also love your point about constraints being linked to creativity. In my experience, marketing money spent on branding, the jam tomorrow type marketing, should be limited to a certain phase of business development, certainly not early stage. That type of spending can work, but there still needs to be a short term ROI also.

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