Mini Episode: Why LTV in Shopify and TripleWhale is Wrong

Episode Summary

In this mini episode of the Free to Grow CFO podcast, Jon Blair discusses the concept of LTV (Lifetime Value) in the context of DTC brands, emphasizing its importance in measuring customer value over time. He highlights common misconceptions about LTV, particularly the confusion between LTV and LTR (Lifetime Revenue), and stresses the need to measure LTV in margin dollars rather than revenue. Jon also explains the significance of time-bound LTV and its role in assessing profitability against customer acquisition costs (CAC).

Key Takeaways:

• LTV is the cumulative value that a customer represents to your brand over time.

• LTV should be measured in margin dollars, not total revenue.

• LTV must be time-bound, expressed in specific time frames.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

00:00 Understanding LTV: Definition and Importance

03:14 Measuring LTV: Common Mistakes and Correct Approaches

04:59 Using LTV for Business Decisions: Profitability Assessment

Jon Blair (00:00)

What is LTV? How is it measured? And why do most brands get it wrong? Hey everyone, welcome back to another mini episode of the Free to Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale. I'm your host Jon Blair, founder of Free to Grow CFO, and today we're gonna dive into a well-known, but often misused DTC metric, LTV. Alright, so first, what is LTV?

If you've been in the DTC world for any amount of time, you hear this term get thrown around all the time, usually by marketers, right? LTV is the value that a customer represents to your brand over time, right? So they're gonna, when you acquire a customer, in the first month that you acquire them, they're a new customer, and in the first month that you acquire them, their first order, unless they order twice in the first month. But generally, the amount they spend on their first order is their LTV. But as they come back and they purchase over time, they repeat purchase over time, their LTV increases. The value that that customer represents to your brand over time increases as that customer comes back and repeat purchases. So LTV is the cumulative value that a customer represents to your brand over time.

How do you measure it? This is where brands go wrong, honestly, I think 99% of the time. If you look in Shopify or TripleWhale at the cohort analysis that exists with any of those platforms or any other platforms that give you a cohort model, oftentimes what is called LTV in those models is actually what we call at Free to Grow CFO, LTR, lifetime revenue because it's measured in the average amount spent per customer within a given cohort over time.

So let's definitely not call revenue amount spent per customer LTV because it's not, it's lifetime revenue. Why is it not lifetime value? Because your brand doesn't keep 100% of the revenue value, right? You keep your margin dollars on that revenue value you should actually measure LTV in margin dollars. What margin? Some people call this fully loaded gross margin. We Free to Grow call it contribution margin before ad spend. Effectively, you take revenue, you subtract landed product costs, shipping and fulfillment costs, and then credit card and merchant fees, not ad spend. So whatever that margin is before marketing, whatever that percentage is, you wanna multiply that by your LTR, lifetime revenue, the amount spent per customer in a given cohort. That then gives you the margin dollars, right? The cumulative margin dollars that that customer cohort represents to you over time. So, we always want to and need to express LTV in terms of margin dollars, and that's margin before ad spend the next thing that's really important in defining LTV is it must be time-bound. You can't just a non-bound LTV. It needs to be what is the 30-day LTV? What is the lifetime value of that customer cohort over a 30-day period? What's the 60-day LTV? What's the 90-day LTV? What's 120-day LTV?

So, now that you understand these things, let's take a step back here and say, how do you use LTV in a meaningful manner to make decisions within your business? One of the most important things is to take a time-bound LTV and compare it to your CAC, which is the ⁓ cost per customer that spent in ad spend to acquire that customer. And as soon accumulated LTV in margin dollars surpasses the CAC for that cohort, that cohort is now profitable. say we say the 60 day LTV for a cohort is $50, the CAC for that cohort was $55, so at the end of 60 days that cohort is still turning a $5 loss. $50 LTV minus $55 CAC. Let's say that the 90 day LTV for that brand measured again in margin dollars is 65 and the CAC was 55.

Now that CAC has a $10 contribution margin dollar profit at the end of 90 days. reason I'm breaking this down for you is because it's very, very important to understand what LTV is and isn't so that you can calculate it the right way to actually assess the profitability of a given cohort. If you were to use LTR, lifetime revenue, you would think potentially you wouldn't be able to measure the profitability of a given cohort against CAC.

So in summary, LTV is the value a customer represents to your brand over time in margin dollars and it must be time bound. It must be expressed in a number of days.