The LTV myth

Over the last 5 years, I've noticed how many digital businesses justify their high Customer Acquisition Cost to a high Lifetime Value (LTV). The basic assumption is that customers remain sticky, and purchase multiple times from the same platform. Very often, the LTV argument surfaces early into the company's life cycle, without any empirical evidence provided for the same. Here's a typical example of how this pans out.

A: I'm selling wares with an average price of Rs.250. So, with 20% margins, I make 50 bucks.

B: But you spend Rs.85 per install, and 2 in 10 people transact - so....

A: Yeah, but I'm chasing LTV. My customers are real gold mines!

B: So, you're spending Rs.425 per transacting customer. Forget the additional cost of retention, you're assuming that the same person will come back 9 times?

A: Yeah, Amazon does it! <End of discussion>

From my recent experience, Indian consumers are extremely value conscious. They spend time finding discounts, or real (cost-intensive) operational value like 1-day-delivery. On top of this, COD is a major way of ordering, with a very high return rate. I've read and heard from people that return rates/rejection of COD are initially very high, and can be close to 35% for new businesses. (I have no citation, but you can ask any small scale eCommerce business owner who allows returns)

Essentially, I'm calling the LTV myth out - The one where you ascribe a random value based on figures you read on the internet, and chase it with complete conviction. It's been alive for really long, and has led to a lot of money being invested and not retrieved. Sure, it's super important to ensure that customers stay sticky, and keep returning. It's also important to have faith, but blind faith that customers are going to love you, come what may, could lead to your undoing faster than you think.

Yes, some businesses have managed to spend at scale to ensure that their consumers remain sticky. But far too many businesses fail trying to emulate this model that works best at a really large scale. For businesses operating at a smaller scale, I do believe that the focus towards profitability should not be clouded by an uncorroborated belief that you can achieve the same LTV as the world's most customer-centric company :)

Disclaimer: The views expressed here are my own and don't represent the views of any of my employers present or past. In fact, I believe that my workplaces instilled the belief that business fundamentals remain of paramount importance.