The Dark Side of LTV: How It Can Mislead You
How do we measure and analyze our monetization strategy? The common misconception is LTV (lifetime value) or LTV:CAC (lifetime value to cost per acquisition ratio). It's wrong!
Why Is LTV Misleading?
LTV calculations are oversimplified.
It is not enough to simply look at LTV to come to a comprehensive conclusion.
Consider this following scenario:
📈Company X → 5:1 LTV to CAC ratio | 1 year payback period
📈Company Z → 4:1 LTV to CAC ratio | 6 month payback period
In the absence of the additional data on payback periods, you would have derived the incorrect conclusion that company X's monetization strategy is more effective since its LTV is higher.
In reality, company Z is more effective, because you’ll get your money back sooner.It's hard to make decisions based on LTV on a day-to-day or near-term basis.
It doesn’t tell us How, When, What to change in our monetization strategy.
If not LTV, then what?
There are four aspects of monetization metrics:
Revenue Creation Metrics → What is the rate at which we create revenue from different acquisition points?
Payback Period → What is the rate at which we make our cost of customer acquisition back?
Revenue Retention → How well do we retain revenue & revenue-generating users?
1 Year ARPPU → What's the value of each of our paying users?
Conclusion
While LTV may seem like an attractive monetization metric at first glance, it can be deceptive and lead to incorrect conclusions.
In order to truly measure and optimize your monetization strategy, it is important to take into account the following metrics: revenue creation, payback period, revenue retention, and 1 year ARPPU.
Then, you can derive deep insights to make informed decisions as to how you would optimize your monetization strategy and maximize your revenue potential.