To calculate LTV, you need two things.
- The value we get from the users in the initial few transactions after they are acquired
- Percentage of users who get retained from the acquired cohort over the long run
Here, the first part represents the actual data, and the second part combines data with assumptions.
But the assumption part does the heavy lifting in the final LTV number.
While we built the model for campaign optimization, it was primarily used to justify the higher customer acquisition cost (CAC) that we incur.
We had a high growth target, and a higher CAC wasn't justifiable given the negative unit economics we were operating under.
But LTV saved us in the short run.
Looking back from today, it feels silly.
But when you're running around in madness, all you can do is build a method to the madness and keep running.
However, things changed for the better a year later when we discovered that more than 50% of our marketing spend doesn't bring in any incremental new users.
However, it took a funding crunch and budget cuts to achieve sanity.
Measuring incrementally in the marketing spend is the most rational thing to do.
But we human beings are not rational; we are rationalizing.
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