Thursday, May 03, 2007

Facing the Threat of LTV Fundamentalism

You may suspect that some of the people I mention in these posts are created by me for dramatic purposes. First of all, I’m not clever enough to do that, and secondly, you may have noticed that they’re usually smarter than I am. Rest assured I will not willingly lose an argument to a figment of my imagination. On the other hand, I do try to avoid giving away true identities, since I don’t want to violate anyone’s privacy.

So you’ll just have to take my word for it that I really was discussing marketing metrics recently when, quite unprompted, one of my companions said the one thing he would absolutely never do was run his business on lifetime value. Since we had agreed on many related issues during the conversation, I was quite taken aback.

His argument had two points. The main issue was that businesses must meet near-term profit and cash flow targets, and no manager would be allowed to ignore them. Fair enough—this almost goes without saying, but does need to be noted every so often. Even though I do still believe LTV is the One True Metric, I’m perfectly aware that it must be balanced against other objectives like profit and return on investment in the real world.

His second point was that LTV counts heavily on future behaviors, and these may never occur. This is also true, but I feel it’s accounted for by applying high discount rates to future cash flows and, more generally, by being conservative in the underlying assumptions. So I don’t consider this one to be a fundamental objection.

In short, I know I’m oversimplifying when I focus on LTV and I’m doing it on purpose. Companies need a lot of convincing to adopt LTV, and it’s much more effective to communicate a simple message than a nuanced view with many qualifications. Of course the simplicity will be compromised during implementation; indeed, I’d be horrified if it were not. But first you have get people to accept the big idea, and to do that, you have to keep it simple.

1 comment:

MineThatData said...

Maybe the best part of LTV is that you can make a ton of decisions on the basis of LTV, and almost nobody has to know about it.

Partner with the finance folks and a tiny handful of execs, and you can implement 85% of LTV with fewer than five people knowing about it.

Once that's done, you can start working on the cultural changes.