Wednesday, September 16, 2009

LifeTimeValue (LTV) calculation in a Freemium Model

In my role in Dimdim I have been working on making sure we can maximise the value of customers to the company while making sure that real value is being provided to all users. We adopted the Freemium model around the time it was put forward by Brad Feld without thinking too much about the impact it would have. I actually remember feeling a bit vindicated that we have chosen a promising path in Dimdim when Brad's blogpost came out. Lately this Freemium Model is being analysed (or fomalised) along with the slicing and dicing that VCs typically expect. Andrew Chen's blog on this is a good place to start off to understand this.  

There are two things that I don't agree with in Andrew's blog post:

Buying traffic (and hopefully customers) through ADs: I understand most startups fail not due to technical issues, or sales not closing but de to the word not reaching the customers. Startups fail die not getting enough customers. Internet ADs and buying clicks and traffic is seen as a way to avoid this. But there are much better ways. I believe the Customer Development Manifesto is an effort in the right direction. Having satisfied customers who can help a company avoid the Big Drop-Off is the best way.

The "Viral Growth Kicker": What does this mean? Does this mean a killer feature which is exactly what the customers want? Or a marketing campaign is wildly successful and sustainable? Is this just wishful thinking of expecting too much from a secret sauce? We should not expect that this parameter should contribute so much to a startup's success the way its factored in, in the LTV calculation in Andrew's blogpost.

What do you think?

I think there are also there are a bunch of complexities around Churn rate, Referral conversion rate and some other parameters. What about the experiments around pricing? They should also be a part of the model. Hope to address all these are more in the coming posts.

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