How To Use Lifetime Customer Value to Increase Sales and Make Better Decisions
How To Use Lifetime Customer Value to Increase Sales and Make Better Decisions
Here’s a question from a member of the Aligned Action Mastery Program that came up on this week’s business development coaching call.
If you’d like to listen to the audio excerpt from this week’s mastery call, click here for the first 16 minutes of the call where I explain this concept in more depth.
Question: How do I evaluate an opportunity to sponsor a marketing campaign with a partner?
Here’s a two-part answer that will make you a lot more money when you understand and integrate it:
1. Before you make any marketing investment, you need a framework to make decisions.
2. Once you understand this framework, you can use it in conversations with potential clients to connect the dots on your value.
The key concept at work here is Lifetime Customer Value.
Economic Profit in a business is determined by Lifetime Value and Client Acquisition Cost.
What is a client worth to my business over their lifetime?
And how much did it cost to acquire that client?
Here’s how it works:
Economic Profit = LTV – CAC
LTV = (Transaction Revenue – Cost to Deliver) X (Transactions/Year) X Years
Lifetime value essentially quantifies or estimates the total profit you will earn from a client. You look at the profit on an average transaction, how many transactions occur in a year, and how many years the client stays with you.
Client acquisition cost estimates or quantifies all of the cost of marketing and sales — time and money — associated with bringing in a new client.
You can’t spend more to acquire a customer than you will earn in profit from them over their lifetime with you.
If you are going to increase profit, you need to increase LTV or decrease CAC. Or both.
Increasing LTV can only come by increasing revenue, decreasing delivery cost, increasing transaction frequency, or increasing retention. That’s it. Decreasing CAC comes from really understanding the performance of various marketing channels and improving your sales effectiveness.
For example, if you go to Starbucks three times a week and buy a latte, over ten years your value to Starbucks would be something like this: ($5 Latte – $3 Cost to Deliver) x 150 per year x 10 years = $3000 ten year value. I made up those numbers but you get the idea.
How to use this concept?
1. As CEO of your business, use it to make good decisions about investing your marketing time and energy. If you know your estimated client LTV, then you know what you can spend to acquire that client. Is the marketing investment you are considering fit with the economics of your business?
2. When selling to potential clients — ask them about the LTV of THEIR clients! Frame the investment in your services in terms of paying for itself by adding just a few clients or increasing LTV. IF your fee is $10k and you know the client’s client LTV is $30k, then they recover their investment with 1/3 of a new client.
If you’d like to listen to the audio excerpt from this week’s mastery call, click here for the first 16 minutes of the call where I explain this concept in more depth.
