In context: Silicon Valley companies live and die by buzzwords. After decades of unregulated growth, tech giants and up-and-coming startups are facing a growing reduction in the number of paying customers or a much higher cost to acquire new users, so they need to get more money with less.
After surging in popularity in 2022, the buzzword “lifetime value” is poised to become one of the top quarterly review topics for much of Silicon Valley’s tech activity. Once-abused buzzwords like “total addressable market” or “flywheel effect” are no longer so popular because the market has changed so much and customers face tougher economic conditions for their high-tech spending.
Lifetime value (LTV), or customer lifetime value, is a buzzword that dates back to the 80s, while early adopters started using the new model in the 90s. by venture capitalist Bill Gurley, the LTV formula describes the net present value of a customer’s profit stream. In other words, LTV forecasts the net profit that is expected to come from a company’s entire future relationship with a customer.
Many consumer Internet companies (and especially their executives) particularly liked the LTV prediction model in the 2010s, Gurley said, and the model has literally become one of the most widely used buzzwords among tech companies. in 2022. A analysis by Bedrock AI showed how executives and analysts mentioned the currency “lifetime value” more than 500 times between October and mid-December 2022. In Q1 2019, the buzzword was used only 47 times.
Customer-centric tech companies try to steer shareholder interests toward LTV prospects, even though they all have different ideas about what customer-for-life deals actually mean: DoorDash believes 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 during an “average business relationship” .
As Gurley noted in 2012, the LTV formula is indeed often “confusing and misused”. Lifetime value is a tool, or it should be, not an overall business strategy, especially since it is a business topic and “business is not about physical”. The formula isn’t absolute, yet many companies may soon become obsessed with it.
From a business perspective, the search for a continued stream of net benefits comes 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 occasional Uber rides or yet another internet entertainment subscription. Lost customers don’t come back, so the collective mind of Silicon Valley tries the drafting strategy to bring back the magic (the money).