Calculating Fun And Customer Lifetime Value
I posted this photo online after finishing a conversation with a mentee yesterday.
This two by two illustrated my point that was selecting which customer to work with, much like which person to hire or which investor to pursue, should be decided using two meta-inputs. Lifetime value (LTV) on one axis and fun on the other.
And before I deconstruct it, I understand that in many cases beggars can’t be choosers. But I don’t subscribe to this notion as a default setting. In fact, I think it’s a dangerous mindset to fall into. And as I will write next week about fundraising strategy and selecting investors, you can be a ‘chooser’. It just takes a little considered planning.
There is no shortage of decisions that need to be made as a founder. And while we have access to many frameworks and perspectives to help navigate the trade-offs between which fires to extinguish and which to leave burning, the reality is we still have a large volume of decisions to compute every day.
As time marches on and founders start to compromise on sleep, diet and exercise, the ability to make high-quality decisions get harder. Perspective narrows and all the issues and burning fires can start to conflate and soon after, even the most simple choices end up running around your mind in the same way a song on repeat plays over and over. Hence, wrapping yourself around your own axel.
I use the fun/LTV two by two framework as a circuit breaker for two reasons.
First, to help founders remember that while starting and growing a company is serious business, you need to be having fun. It won’t all be fun, but the fun has to feature.
Second, to remind founders that they have access to more choice than they think. While they are in a constant state of resource constraint, a startup’s significant advantage are the choices it can make to learn and out-manoeuvre incumbents and competition.
The good news is that this framework does help founders unwrap themselves from around their own axle.
There is a method to the madness of including fun and LTV on this framework. And it’s underpinned by the idea that high-quality decision making is part art and part science.
To deconstruct this framework and make it more applicable, here is the scenario I was working through with my mentee.
We were discussing how to allocate very limited resources to develop new customer relationships. There are a number of new customers wanting to engage simultaneously. This is an excellent problem to have, but it’s still a problem. When the team is small and product availability is limited, trying to service all prospective customers would almost inevitably end in disaster.
We ended up ranking prospective customers by calculating potential LTV (science) and then examining how much ‘fun’ (art) could be had by working with each customer.
Calculating LTV is relatively straightforward.
Determining ‘fun’ is more subjective. I think about it in terms of incentive alignment and customer advocacy potential.
A self-reinforcing cycle emerges between customer and supplier when both parties want to eliminate a significant pain-point (incentive alignment). This cycle strengthens when you invest time and interest in learning more about a customers’ business. Not only does this insight fuel product development, but it is also uncommon.
So uncommon in fact that it is remarkable. Which, by definition, increases the likelihood of the customer becoming your advocate.
These are the types of relationships that make doing business fun.
By plotting where each potential customer lives in the two by two, it becomes clear how to prioritise limited customer development resources.
However, prioritising doesn’t mean investing all of your effort in one relationship. Circumstances change with time, so it’s important to be in motion on developing customers, even if on first inspection they rate low on LTV and fun.
The primary role of this framework is to act as a circuit breaker.
And remember that the reason ‘fun’ is subjective is that there might be other signals beyond incentive alignment and customer advocacy potential that might be important. Keeping a radar on to catch these signals is important.
Because we’ve all lamented starting a relationship with a customer that we knew we shouldn’t have just for the sake of traction.
Originally published at philhsc.com on March 16, 2019.
Calculating Fun And Customer Lifetime Value
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