So long, “total addressable market”. Farewell, “flywheel effect”. Silicon Valley has a new buzzword. As the cost of signing up new customers rises, “lifetime value” is set to become must-use jargon for technology executives, investors and analysts in 2023. Companies like Uber Technologies, DoorDash and Spotify Technology want shareholders to know they can squeeze more revenue out of users than it costs to recruit them. As with previously popular jargon, though, the idea can quickly get garbled.
The concept of lifetime value is not new, but a common definition remains elusive. The venture capitalist Bill Gurley defines it as “the net present value of the profit stream of a customer”. Hollywood uses it to estimate the cumulative income from streaming movie titles, after deducting the cost of making the film.
It’s catching on in the tech world. Uber boss Dara Khosrowshahi and his team invoked the term seven times during the ride-hailing firm’s investor day. At a similar event in June executives from music streaming service Spotify mentioned it 14 times, with another 47 references to the abbreviation LTV. Earnings transcripts for 4,800 U.S.-listed companies analysed by Bedrock AI show executives and analysts mentioned “lifetime value” over 500 times between October and mid-December, up from just 47 times in three months to March 2019.
The growing enthusiasm for measuring customers’ long-term value comes as many companies grapple with slowing growth in users. Rising prices and interest rates are squeezing disposable incomes, forcing some consumers to ditch Uber rides or entertainment subscriptions. The lost customers are harder to replace. Marketing company WordStream reckons the average cost for a business of making one sale through a Google advertising campaign rose 19% in 2022 from a year earlier.
The problem is that everyone seems to have a different definition of lifetime value. Food delivery firm DoorDash looks at it as a metric to measure “customer retention, order frequency, and gross profit per order” over a fixed payback period. Uber and its Southeast Asian peer Grab treat it as the ability to bring in one customer and then cross-sell different services at a lower cost. The $49 billion e-commerce firm Shopify defines lifetime value as the total amount of money a customer is expected to spend with the business over the course of an “average business relationship”.
But lifetime value isn’t a silver bullet, as Gurley noted a decade ago. As capital becomes more scarce, generating free cash flow remains the most important target. As with previous buzzwords, investors may find that references to lifetime value do more to confound than clarify. Reuters