Calculating LTV — Paul Orlando // USC

Paul Orlando, Incubator Director & Adjunct Professor at USC, shares some of the most important metrics for marketers. When building a business, LTV is often a highly sought after number. Rather than a single, static number, understanding LTV starts with understanding the behavior of your customer segments. Today Paul takes us through the process of calculating LTV.

About the speaker

Paul Orlando

USC

Paul is Incubator Director & Adjunct Professor at USC

Learn to calculate Customer Acquisition Cost, Lifetime Value, and why businesses behave the way they do

Part 1 Calculating LTV — Paul Orlando // USC
Part 2Calculating CAC — Paul Orlando // USC

Show Notes

04:11

How to calculate LTV

To calculate LTV, we must look at the price per unit sold, cost of production, and repeat purchases. LTV should be calculated over time, not as a static, singular number.
06:41

Calculating LTV based on your business model

Its about understanding how youre going to recoup your margin from your customers. Lifetime value can potentially be extended through product improvement.
09:19

Timeframe for calculating LTV

Growth can be restricted in cases where its completely dependent on customer purchases. When venture capital is involved, growth can happen in a shorter timespan.
11:48

Balancing out CAC and LTV

Essentially, you want to avoid having high CACs costs and low LTV. So, instead of pumping money into customer acquisition, aim for sustainable growth.
13:52

Churn ratio when evaluating LTV

This is a part of the retention metric. It can be tracked month over month to get a weighted gross margin for the customer, over that period.
15:28

Normalizing data to ensure LTV is accurate

First, separate LTVs by customer type. Then, determine your ability to grow those segments and whether the CACs will be favorable over time.

Quotes

"LTV can be separated out by customer segment, channels by which you reach your customers, and by cohort." -Paul Orlando, USC, Incubator Director & ADJ PROF
"There's a few pieces to LTV. You have your price per unit sold, the cost of producing that unit, and then you have a metric around repeat purchases." -Paul Orlando, USC, Incubator Director & ADJ PROF
"Think of LTV as a sequence of flows rather than a single static number. Instead of $100, it might be, I'm getting $5 a month for 20 months." -Paul Orlando, USC, Incubator Director & ADJ PROF
"Put the numbers into a spreadsheet, and go through how you are getting margin back from your customers. Then you can start to talk about a payback period for customer acquisition." -Paul Orlando, USC, Incubator Director & ADJ PROF
"Customer acquisition is often an upfront thing. But, it takes a little while to understand LTV. " -Paul Orlando, USC, Incubator Director & ADJ PROF
"For physical product companies building their inventory before selling, 4 months can go by. Then, waiting for the payment processor to deposit the money in their account restricts growth." -Paul Orlando, USC, Incubator Director & ADJ PROF
"When companies are paying high customer acquisition costs, that can sometimes be the result of being guided into growing faster than they should." -Paul Orlando, USC, Incubator Director & ADJ PROF
"Tracking my retention monthly will give me a weighted gross margin per period. Then, I can talk about the sum of all the margin I'm getting back from the customer in a year." -Paul Orlando, USC, Incubator Director & ADJ PROF
"For a segment where the LTV is relatively low, but there are a lot of people like that, and it's cheap to acquire them, you could really grow there." -Paul Orlando, USC, Incubator Director & ADJ PROF
"For a potential small niche segment, that's really expensive to gain, if you can, they're really profitable. So it really depends on the kind of business that you have in your market." -Paul Orlando, USC, Incubator Director & ADJ PROF