Who should "own" the Lifetime Customer Value calculation in a mobile company?

Posted on September 4, 2012 by Eric

Lifetime Customer Value (abbreviated as LCV or LTV, depending on the organization) is defined simply as the present value of future revenues attributed to a user -- basically, the present value of everything that a user will ever spend on a product or service. LCV is easy to calculate for some organizations -- for instance, when a product is a one-time purchase, or when revenues are subscription-based. But for mobile companies, and especially freemium app companies, LCV can be a nightmare to calculate because revenues are irregular and not guaranteed, even for highly-engaged users. This nightmare is compounded by the fact that the LCV calculation can be used as a political tool to appropriate marketing budgets.

The purpose of LCV is to derive a maximum spending point for user acquisition: LCV drives marketing spending, and not the other way around. Therefore, of the three possible custodians of LCV at a mobile company -- product, finance, and marketing -- I believe marketing is the best guardian of the formula and is in the best position to not only calculate it the most accurately but to put it to the best use.

Why not product?

While the product manager has direct responsibility over the two components that comprise LCV -- retention and monetization -- she doesn't have any ability to moderate the channels that provide users. Given that most mobile users won't convert, the PM is necessarily tailoring the monetization component to only the very "best" (read: highest monetizing) users, and she is therefore incentivized to calculate LCV at its highest possible value so that more of those users are brought into the system via acquisition channels.

Another reason that product isn't a good home for the LCV calculation is that product generally doesn't posess the infrastructure to calculate LCV at a granular level. A broad, average LCV value is of no help to the organization because user acquisition campaigns are segmented and targeted. The product group is generally (or should be) too focused on building products to spend time segmenting users and breaking down the LCV calculation for anything other than in-product targeting; understanding that acquisition channel A provides users with a higher LCV than acquisition channel B doesn't benefit the product in any meaningful way and thus shouldn't fall on the shoulders of the product group.

Why not finance?

Like product, finance generally doesn't have the infrastructure to calculate LCV at a granular level -- and, even if it did, finance has no use for multiple values of a business metric. The purpose of a finance department is to secure capital and allocate it to the most efficient possible projects. This use turns LCV on its head: as opposed to representing a revenue stream, LCV can represent an expense in the form of the marketing budget. The finance department is incentivized to under-fund marketing budgets when expenses need to be cut in order to increase the spread between LCV and acquisition spend. But since the entire purpose of calculating LCV is to derive maximum profitable acquisition spending, attempting to increase the differential between LCV and marketing spend is equivalent to eating the feed corn: less users enter the system, which not only decreases revenue but might decrease LCV if the product is dependent on an activity threshold (like in a PvP game or Q&A app like Quora) or if the product exhibits a high rate of virality (k-factor >= 1).

Because finance will use LCV in building budget projections and financial models, it is also incentivized to keep the value as static as possible. A static LCV is almost useless to a mobile company: app marketplaces change, the competitive mobile advertising landscape changes (and is extremely seasonal), and players' tastes change almost constantly. Anything less than a weekly LCV won't be effective for the purposes of making marketing bidding decisions; this information is needed in near real-time.

Why marketing?

Marketing is the appropriate habitat for the LCV calculation, for a number of reasons:

1) The marketing group at a mobile company should have the infrastructure and expertise to measure LCV at a granular, segmented level on a daily basis -- which makes sense, because the marketing group is setting the advertising bid prices. Marketing should also be managing the analytics systems that are targeting users behaviorally, meaning monetization can be affected by in-game mechanics established by marketing and retention can be affected by email campaigns established by marketing (the two things PMs don't have the capacity to do).

2) Marketing needs the LCV calculation for operational purposes, not for modelling purposes, which means marketing is incentivized to keep the calculation as accurate and dynamic as possible.

3) Both over- and under-estimation of LCV have direct, immediate, adverse effects on marketing's ability to acquire users, meaning marketing has the most at stake in the calculation's accuracy and timeliness. Finance uses LCV conceptually to project revenues; product only has an interest in keeping LCV as high as possible so as to encourage paid acquisition. Given that marketing needs the most visibility into LCV, it makes sense that marketing have the most authority in calculating its value.

LCV can be a contentious subject and its calculation can be affected by aspects of firm operation that have nothing to do with strategic operations or efficiency. Above all, the consistency and visibility of the LCV calculation -- along with a prominent LCV champion in the organization -- will ensure that it is used appropriately and effectively.

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