Jason Droege explains how companies misuse the CAC/LTV framework, often defining LTV poorly or leaning too hard on paid marketing instead of product, PR, and partnerships. He breaks down channel-level metrics and how consumer and B2B acquisition differ.
Glad you jumped into the to the mention of the tweet as far as Cacti LTV. So I did want to cover that a little bit.
So yeah, happy to.
Yes, let's actually dive into that if you don't mind. And can you kind of like walk us through what you were referring to with it?
Yeah, I mean, you know, you sort of had a lot of people agree. Then you had some people, mostly marketers, who were like, "There's no you know like da da da. You can't launch a product without marketing." And then you had academics who just I think just missed my point. You know, who just didn't. that I didn't know how to divide a number by another number. And the problem is that LTV in particular, and Bill Gurley did a write-up on this that you should all read like 10 years ago, which I didn't realize when I wrote the tweet, where basically what happens is that once you get to a point where you have customers, you then say, well, how much is my customer worth? And you're highly incentivized to say they're worth a lot because, you know, then you'll need a lot of money, or, you know, then you can use money to solve your problem, right? And that's not your— you don't start out there, but that's what LTV becomes because you go like, well, one, what does LTV even mean? And, and this is super nitpicky of me, but lifetime, like, it's just a stupid— it's like, it's just a terrible— time to payback would make more sense. Lifetime doesn't even make any sense. Like, it's like people aren't even decomposing the words. And so, you know, how do you even know what the lifetime of your customer is? Shouldn't it be like 20 years? And so then if, you know, and so people will say 2 years, or they'll know what they'll do is they'll say 12 months, and then, oh, we're spending— well, it turns out Facebook got more expensive, so that's, uh, 2 years is probably good. 2 years is probably pretty good. Okay, so we're spending the first 20 months of profit on the customer. It's 22, that's fine. So, so, so you sort of get hooked on, slowly hooked on this drug of like LTV. And then on the CAC side of things, I think there's just this presumption, assumption that, that like because people spend money on marketing, that those people are smart. And it's like, yeah, you might be in some way. Like if you're Coca-Cola, the marketers at Coca-Cola need to do it because there's no interactive format. But you have this like wonderful thing called the internet where like things spread. And when they're really good, people talk about them. People go to forums, and people like, you know what I mean? Like, so, so if you're, if you're building consumer business, and I was mostly directed at consumer, you know, certainly for B2B businesses, you do need to hire a salesperson for a lot of these things, although, although that shouldn't be your starting point. So I think it stimulates really lazy thinking. And so that's number one. And then number 2 is people don't even use it right. You know, if you're gonna do it, you need to decom— you know, like, like break it down by channel. But then even if when you break it down by channel, you're already down this path of like thinking about like marketing, spending on marketing is my solution rather than like spend that energy on product. And if you do that, then, you know, then you're like, okay, well, I've done everything I can on my product. And then you're like, okay, well, what's the cheapest way to get customers? Well, PR is one, right? That's not free, but it's a heck of a lot cheaper than spending on it. At least in a, you know, because, because cost of PR, as an example, I was reading this like breakdown. I'm halfway through it on Monzo, which is a bank in, you know, the UK, and founder came out and talked about how they didn't spend any money on marketing. And at least the part I'm at in the article talks about PR. And you're like, yeah, PR is not free, but like it's highly leverageable. You know, you spend $5,000, $10,000 a month, $15,000 a month on someone who can help you do that, and you can get a huge amount of benefit if your message is on point, right? Whereas like Google, Facebook, all these other things are very linear. You spend more, you maybe get more, you usually get less. It's like even worse. And so if you've done everything you can on product and then you've done everything you can on like maybe partnership deals, you know, which you can get a lot of leverage on, PR, I don't know, there's like, there's lots of other examples. And then, you know, if that's not getting to a place where you're getting demand and then you're in spendy land, You just need to be honest with yourself that like you haven't built enough value to have word of mouth be a channel for you. And I don't think people want to sober up and realize that, frankly. And so like, I think it's a symptom of all kinds of other things.
No, that's a, that's a really great kind of take and breakdown. So I appreciate kind of walking us through it. So I can't tell you how many times we've had founders post in the fundraising space in the community and simply asking You know, what does LTV mean? Because they're getting, you know, various answers from different investors, right?
It's like the most— and it's not even like it started out as a bad idea. I get it. Like, I get it. You need to know what the potential profits rolled together into your customer, blah, blah, blah, blah, blah. You can read like a Wikipedia page on what it's supposed to be, but how it's used is like it's been completely misused, in my opinion.
