Great. So now that we've covered the growth product, let's focus on the final lifecycle stage let's focus on mature products and what defines mature products and what makes them successful. As we start talking about mature products, it's really important for us to introduce the concept of customer lifetime value right from the very beginning, because in my opinion, this is by far the most important concept. And this is how you define success and how you manage success. So what is the customer lifetime value for the company? Basically, again, in simple terms, when you build products you want to make customers successful.

That's that's absolutely the key your product will not be successful without pleasing the customer and exceeding their expectations. But there is one more important constraint for your product to be successful, your company needs to have money in the bank, your company needs to be financially viable and needs to be financially independent. Otherwise, even if your customers are happy, you won't survive your product will not succeed. So the lifetime value concept is basically trying to make a balance between those two concepts making customers happy and make income making company profitable. In, in essence, it means it calculates the value of each customer to the company. Instead of calculating the value of the product to the customer, we talk about what's the value of this particular customer to the company.

So it's the other way of looking at product success. There are four key components of customer lifetime value, let's talk about each of them. First one is a revenue. Second one is gross margin. The third one is retention. And the fourth one is a customer acquisition cost.

What is revenue? revenues the total amount of money which particular customer pays you in a given period of time. For instance, if I purchased a subscription for Google Drive for $2, the revenue of Google Drive for the month of November will be $2. That's the revenue. What is the gross margin? gross margin is revenue cleared from cost of goods sold or cost of revenue?

So for instance, in our example of Google Drive, if the revenue was $2, it does cost Google a little bit to store files on the servers and maintaining servers and paying for the electricity of those servers. So basically, gross margin is a percentage of the revenue that is not spent on acquiring this revenue. So it's everything but the servers that explicity, etc. It's a percentage. And in simple terms, I looked up some numbers, let me share it to you like, basically, for Walmart, like for companies in the old economy, this number is more like 20, or 30%. So for Walmart is like 25.

It's one of the really lowest possible numbers of gross margin. This is how low this number could possibly go. And for the new economy for companies like Google and Facebook, for Google, it's more like 63%. For Facebook, it's like 83% is basically almost all the money you get from your customers become your gross margin because the service costs the cost of getting the revenues becoming way, way smaller for new companies like Google and Facebook, so which causes a way way larger LTV potential for those customers of Google and Facebook as compared to Walmart. Now that we've covered revenue and gross margins is third key component and easily retention and retention is probably again, the most mysterious component, we talked about it in managing growth products, we really need to talk about managing mature products, because without retention, your product will not be successful. What does it mean?

So retention is a third multiple in LTV formula, along with revenue and gross margin. And basically, retention is the number of periods of time months or years that you maintain the customer interested in your product and pay. For instance, if I'm paying for Google Drive for 24 or 25 months, and then still paying for Google Drive, then my retention period will be 24 months and my LTV formula will have $2 per month, times may be 60%, gross margin times 24 months. So that will be the aggregate value that Google is a company received from me as a Google Drive customer. So that's the retention. Finally, the magic number four the fourth component of LTV formula is customer acquisition costs.

And unlike the others, it does not get multiplied by everything else it gets deducted from the multiple of three previous metrics so that the customer lifetime value is a multiple of revenue, gross margin and retention. And then you need to deduct customer acquisition cost basically means how much money have I spent to acquire this customer? Was this customer economically profitable for me to acquire or not? In case of Google Drive, it would be how much did the company spend on me to start using the product and to start paying for the product and if this amount of money is bigger than my lifetime value for the like, then the multiple of my revenue gross margin and retention, then this product is not not profitable. If this metric if the customer acquisition cost is lower than the multiple of my revenue, gross margin and retention, then this product is profitable and is managed really well.

So that's the last component of the customer lifetime value is the customer acquisition cost.