Cons and Pros of the Lifetime Value (LTV) Formula

Lifetime Value (LTV) is a tool used in marketing to estimate how much a customer is worth over the entire time the customer remains with the company.  Bill Gurley, the author of the Above the Crowd blog, wrote an interesting post a while ago on the LTV formula and discussed several of its pitfalls.  In "The Dangerous Seduction of the Lifetime Value (LTV) Formula" he lists 10 reasons to "avoid worshiping at the LTV altar":

1. LTV is a tool, not a strategy.
2. The LTV model is used to rationalize marketing spending.
3. The model is confused and misused.
4. The formula is not absolute.  It's at best a good guess.
5. The LTV variables "tug" at one another.  The variables in the LTV equation are interdependent, not independent.
6. Growing becomes a grind.  Investing heavily in marketing doesn't necessarily lead to a commensurate drop in subscriber acquisition costs.
7. Purchased customers underperform organic on almost every metric.
8. The money could go to the customer to provide a better value proposition to the customer and to provide a better customer experience.
9. LTV obsession creates blinders.  Companies that obsess over LTV can become overwhelmed by it, whereas scrappy companies can find more efficient forms of marketing.  Bill uses a great example here.
10. Tomorrow never arrives.  It's difficult to create permanent equity value with LTV.

Here's the link:  http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/
Also, some of the comments are very interesting.

J.J. Colao of Forbes, provided a defense of LTV in "In Defense Of The Lifetime Value (LTV) Formula."  The article points out that with the proper oversight, LTV can be effective.  It also provides a very interesting real-life example.  The article offers five tips for effectively applying the LTV formula in a business:

1. Prize customer experience above all else.
2. Keep the variables clean.
3. Isolate customer segments, and then apply the formula.
4. Don't rely on conventional marketing.  Use a variety of marketing approaches, such as viral, social and PR.
5. Maximize LTV to a point, then scale.

Here's the link:  
http://www.forbes.com/sites/jjcolao/2012/09/13/a-dangerous-seduction-revisited-in-defense-of-the-lifetime-value-ltv-formula/