You Gotta Know the Lingo, Vol. 3: Customer Lifetime Value

Fans of The Motley Fool can't help but be aware that it's practically impossible for Wall Street pundits and writers to communicate without some obscure terminology slipping into the mix. It's not their fault, of course. The purpose of specialized argot in any arena is to provide folks with shorthand so they don't have to keep repeating long phrases to describe things like "employer-sponsored, tax-advantaged investment accounts whose funds are intended only to be withdrawn in retirement." So much easier just to say "401(k)."

But if you want to play the game, you have to comprehend the conversation, so in this week's Rule Breaker Investing podcast, Motley Fool co-founder David Gardner is bringing in a trio of special Foolish guests to explain six terms that investors might not know as well as they think they do or as well as they'd like to. In this segment, Abi Malin of Stock Advisor and Hidden Gems lifts the fog from the phrase "customer lifetime value," the kinds of businesses you'll see using it, and why an investor should pay attention.

A full transcript follows the video.

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This video was recorded on Feb. 21, 2018.

David Gardner: What is term No. 2?

Abi Malin: Term No. 2 is "customer lifetime value. " We use this term a lot around Fool HQ, both internally and when we look at companies. It is the present value of the projected revenue attributed to the entire future relationship with the customer.

Gardner: LTV is the acronym a lot of people use in the field. Lifetime value. Roughly, Abi, when is this appropriate to use or look at? What kinds of businesses?

Malin: Certainly, subscription revenue businesses, but also businesses that aren't necessarily subscriptions, but have high order frequency and repeat orders.

Gardner: Now, for companies that are subscription businesses, if I'm listening to a quarterly earnings report or conference call, would this typically be a phrase that I would hear?

Malin: Occasionally you will hear this, typically because companies tend to highlight it when it moves in a positive direction, not necessarily a negative direction. It definitely influences a lot of decision-making.

Gardner: What are a few companies that you follow that would typically be using lifetime value? It's not necessarily my consistent experience that companies would put it right out there, like what the number is...

Malin: Right.

Gardner: ... but what are some companies that you think make good use of this tool?

Malin: I think one that's maybe not necessarily so explicit, like you said, but definitely something to watch would be Starbucks (NASDAQ: SBUX). They have a high margin, high frequency of orders, and really long customer relationships, which sort of offsets that really low price per drink. I think it's one to watch, there, that's kind of interesting.

I think conversely, on the flip side, somewhere you maybe wouldn't see, or wouldn't want to look at this metric is maybe like a mattress company. People only buy mattresses every five to 10 years, and it's not really so relevant there.

Gardner: Because we talked earlier about how lifetime value is typically used by subscription companies, it might almost be fair to say I do subscribe to Starbucks with the frequency and regularity of my visits -- maybe you, too -- but it is not technically a subscription company.

Do you think that Starbucks is sitting back there with their computers dialed in and knows exactly how much you and I have ever spent at Starbucks? And projecting forward, you're significantly younger. You look like a more attractive candidate as a lifetime value Starbucks customer than I am. Do you think that they're that numerical about it?

Malin: I absolutely think that they are, and when you look at their app for the phone, that is a perfect way to track all those frequencies and values, especially over time.

Gardner: So, lifetime value is a tool that enables companies to make probably better and better decisions about how to allocate their dollars. To whom to advertise, or what areas, or what times of life and not to, all focused on LTV.

Malin: Yes.

Gardner: Abi, do you feel prepared to use LTV in a sentence?

Malin: Yes, I could use this in a sentence.

Gardner: Great.

Malin: One company that I think uses lifetime value very strategically would be The New York Times. We've seen them have a tremendous comeback in the past one or two years. I think this is one where you've seen their customer lifetime value grow for the past year as they institute higher prices and continue to increase their value per customer.

Gardner: That was an amazing sentence. That definitely had a semicolon or two, and I think it was off the cuff, which was most impressive, Abi. And I agree. Not only that, but you've previewed one of the five stocks that a year ago I said the world really needs right now, so we'll be reviewing later in the podcast how The New York Times stock has done. Abi Malin, thank you very much! We're going to have you back with the advanced term in a little bit. That was term No. 2!

Abi Malin owns shares of Starbucks. David Gardner owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.