Marketing InEfficiency

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Relying on the assumption that customer acquisition costs will drop as marketing spend increases is unrealistic. In reality, marketing channels become less efficient and more costly over time. As businesses compete for a limited resource - customers - the cost of acquiring them tends to increase. This leads to exhausting the best quality customers, forcing companies to either pay more to acquire good quality customers or settle for lower quality customers who churn faster or contribute less revenue.

Episode 119: LTV, or lifetime value, has become the gold standard for startups, specifically how they measure the effectiveness of their various marketing channels. LTV does have merit, and it is a helpful proxy to prioritize marketing and understand the economics of each customer you acquire, but if relied on entirely, it can be misleading at best and harmful to your business at worst. I’ve found what I believe to be one of the best pieces on the internet about the challenges of this methodology, a 12-year-old essay by investing legend Bill Gurley that is as relevant today as it was then.

The Dangerous Seduction of the Lifetime Value (LTV) Formula: https://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/

DTC Metrics, Explained: https://www.nasdaq.com/articles/dtc-metrics-explained-2020-02-12

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