"Lifetime value" is US technology companies' new mantra

[Alfonso Maruccia]

In context: Silicon Valley companies live and die by buzzwords. After decades of unregulated growth, both technology giants and promising startups are facing an increasing reduction in paying customers, or a much higher cost to acquire new users, so they need to get more money from less.

After picking up popularity in 2022, the "lifetime value" buzzword is set to become one of the main topics in quarterly reviews for a good chunk of the Silicon Valley tech business. Previously abused buzzwords like "total addressable market" or "flywheel effect" aren't that popular anymore, as the market has changed so much and customers have to face harsher economic conditions for their hi-tech spending.

Lifetime value (LTV), or customer lifetime value, is a buzzword that dates back to the eighties, while early adopters started using the new model in the 1990s. As presented by venture capitalist Bill Gurley, the LTV formula describes the net present value of the profit stream of a customer. In other words, LTV forecasts the net profit that should come from the whole future relationship of a company with a customer.

Many consumer internet ventures (and especially their executives) were particularly fond of the LTV prediction model in the 2010s, Gurley said, and the model literally became one of the most used buzzwords by tech companies in 2022. An analysis by Bedrock AI showed how executives and analysts mentioned the "lifetime value" motto over 500 times between October and mid-December 2022. In the first quarter of 2019, the buzzword was used just 47 times.

Customer-centric technology companies are trying to steer shareholders' interests towards LTV prospects, even though they all have different ideas about what client lifetime milking actually means: DoorDash thinks the model is based on "customer retention, order frequency, and gross profit per order," Uber identifies it with the ability to sell more services to a new customer at a lower cost, for Shopify, LTV is the total amount of money a customer is expected to spend over the course of an "average business relationship".

As Gurley remarked in 2012, the LTV formula is indeed often "confused and misused." Lifetime value is a tool, or it should be, and not a whole company strategy, especially considering that it's a business topic and "business isn't physics." The formula isn't absolute, and yet a lot of companies could soon become obsessed with it.

Looking at it from a business viewpoint, the search for an ongoing stream of net profits stems from a significant slowdown in user growth. Prices and interest rates are rising everywhere, inflation is eroding wages and there is less and less disposable income to spend on casual Uber rides or yet another internet entertainment subscription. Lost customers aren't coming back, so the Silicon Valley collective mind is trying the milking strategy to bring the magic (money) back.

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https://www.techspot.com/news/97130-lifetime-value-us-technology-companies-new-mantra.html

 

[Neatfeatguy]

So....raise prices, drop quality and expect consumers to return for more punishment.

In other words, make no changes and consumers will continue to take up the tail pipe.

 

[Alfonso Maruccia]

So....raise prices, drop quality and expect consumers to return for more punishment.

In other words, make no changes and consumers will continue to take up the tail pipe.

...Or so they said :-D

 

[bviktor]

Good luck with that.

 

[waclark]

Lost customers aren't coming back, so the Silicon Valley collective mind is trying the milking strategy to bring the magic (money) back.

That's a pretty "glass half empty" take. It has long been the case that retaining a customer is cheaper than acquiring a new customer. And, correct me if I'm wrong, but the purpose of a company is to make products customers want and to make a profit doing so. Why is it always bad for a company to focus on sustainability and profitability? I guess Silicon Valley et al, could just throw in the towel and say, **** It, We can't make money any more so we quit. How is that good for anyone, especially the employees that work there?

Or, maybe, they could find other products and services that their customers do want and provide them at a reasonable price. Maybe they should care about customer retention which means a long-term relationship and a long-term revenue flow. How is that inherently a bad thing? Using terms like "milking" show a bias against the idea that companies can care about their customers, produce good products the customer wants, and still make a profit. None of those are mutually exclusive.

 

[p51d007]

You don't "buy" things...now you "subscribe" to it now.

 

[dangh]

Game pass is a great example of squeezing sheeps.

 

[McMurdeR]

Game pass is a great example of squeezing sheeps.

Gamepass is decent value in fairness. It remains to be seen if it stays that way.

 

[McMurdeR]

Sounds like the kind of thing you would say when you can no longer attract new customers. I once worked for an entreched bank where folks would bandy about the term 'share of wallet'. Left a nasty taste in my mouth.

 

[Angga B]

Do you realize that many of buzzwords you reckon today on so many issues are "made up" by those who seeks profits, from you?
Or you only selectively realized it as in this case?

 

[hwertz]

Well, hopefully they get the right takeaway from it. The wrong takeaway is deciding they should try to figure out how to pump dollars out of someone as fast as possible, maximizing "lifetime value" by (possibly) keeping them as a customer for a short time but pumping lots of cash out of them during that time. The right takeaway is if they treat the customer right they will end up with loyal lifetime customers. Charge a fair price, have good product, have good (or at least not actively bad) customer support*. They will probably get good free advertising too, as their enthusiastic customers tell others about how great their products and pricing are.

*Ideally if they have an easy, friction-free sales process and well designed product, they may be able to have a small, focused support team so they can have top-notch support at fairly low cost. Of course some types of products are inherently complex enough they could have the "ideal" design and they'd still get plenty of support calls.