Thread by @dunkhippo33

Today's tweetstorm is a continuation of thoughts on lifetime value (LTV).

Here's yesterday's for context:

Read on >>

https://twitter.com/dunkhippo33/status/1354569834881662977?s=20

1) A big q that I get asked a lot about is how do you make assumptions about LTV when you are just starting your company? Do you use comps?

How do you know how much you can afford to spend to get a customer?

2) I think others will have other answers, but my thoughts on this are pretty pragmatic.

The answer is you don't. You don't make assumptions. You don't use comps.

3) And that answer simplifies your problem a lot. You just adjust you LTV as you go along.

So day 1, no sales -> ave LTV = $0.
Day 2, 5 sales of 1 widget each -> ave LTV = $20 (or whatever you make on each)
Day 90, some ppl come back and buy more widgets, ave LTV goes up

4) In other words, use what your ACTUAL LTV is as of right now. And if you do a good job retaining customers, then you adjust your LTV as you go along -- it will keep going up.

And as ave LTV goes up, then you spend more to acquire customers.

5) But Day 1, you don't know how much a customer is worth to you in the long run. AND, presumably, you don't have the cash to wait out that full payback period, so it's better for you to spend only up to what the customer is worth to you RIGHT NOW.

Play it a bit conservative.

6) A big part of this assumption is that most companies on Day 1 don't have a lot of cash to burn, so you can't afford to be wrong.

For this reason I tend to like companies I think can have immediate payback on customers acquired.

7) Now eventually this will change. As you do well, you will learn the LTV of your ave customer over say 6 months or 2 yrs or whatever it may be.

That's where capital comes in. And it can be VC $. It can be angel $. It can also be a loan.

8) And the strategy is you want to raise capital to allow you to wait out longer payback periods as your customers continue to be retained.

I.e. instead of needing CAC to be $20 to become immediately profitable on your widget. You can let CAC be $70 & get paid back 3 mo later.

9) And so you would need capital to bridge you through the 3 months while your customer is still buying widgets until the $70 is paid back and you can redeploy profits back into customer acquisition.

10) So extending that out further - now you're running a company liked Coca Cola. You know your payback period is say 2 years. That's ok because you probably have a large revolving debt line and access to capital pretty easily to wait out that payback period.

11) So in this context, debt isn't a bad thing. It helps bridge you to your full payback period.

But to take on debt, you need to be absolutely SURE that you have strong retention to keep the customer long enough to payback the CAC!

12) Wrapping this all up. If you're early (i.e. have no info), don't guesstimate your LTV. It's just what it is today, and adjust as you go along.

Once you have strong data, raise capital to bridge you through your payback period. Debt can be good for known retention.