I don’t blame the VCs. I don’t blame the bankers. I don’t blame the CFOs.
We need to look in the mirror.
Everyone who spouts an LTV calc for our customers has to take personal responsibility. You could have calculated it during fundraising or for a Board meeting. But if that LTV number becomes permanently etched into our analysis and models with the unwavering exactness as calculation of the force of gravity (9.81m/s^2 on Earth), we’re doing it wrong.
But don’t be mistaken. You still have to have a hypothetical model for your LTV. Why? Because you need a framework to make decisions. But one thing is for sure. . . if you never change your LTV assumption, you don’t have a framework.
Here are a few “facts” about your LTV calculation:
- Your lifetime duration (how many months until your customer stops paying you) is a guess. I’d bet you assume you hold onto a customer for 60 months (20% logo churn) or 120 months (10% logo churn). What is that based on? Hope? Peer comparison?
- Do you have pricing power? Or will competition force you to be a price taker? How do you know?
- What are your upsell/cross-sell opportunities and conversion rates? How do you know?
- Are you treating your customers and prospects as one segment? New segments may be more expensive to acquire, of course. But they may pay you more (or less) for longer (or shorter).
This is more than an academic exercise. You need to understand how to manage your cash when you are growing. Do the work, and keep doing the work.
Because finance and strategy is an ongoing process.