Let me set the scene before I get into this.
We have all started with an idea of what we want to do in business, then, we have a vision, and then we launch. Nothing wrong with that, right?
We are surrounded by technology and overnight billionaires and have the ability to buy something with one click and even get it the same or very next day. We are in the NOW era, we want it and we want it now. We are also in the “lazy” era, let me explain.
In our quest to find the answer to our problems, we seek out information. In fact, we have an information overload with 1000s of websites, so-called advisors, unlimited mentors, books, courses, videos, and events. You have to filter through the quagmire of rubbish to find the key point(s) you are attempting to answer and more often than not, end up none the wiser after spending far too much time searching.
The truth of all of this is that you have the answers inside yourself. You know your business, and you know your subject. With whatever you do learn, it’s essential to extract actionable points that fit or can be adapted to your business today and tomorrow.
The expectations are set high from your first day in business. After consulting with hundreds of business owners and building my own companies over 29 years, there is a common failure amongst us. This failure (and no, this isn’t an elevator pitch) could be the single most damaging and restrictive thing you do.
Even the majority of mentors I have listened to do not seem to advise on it. Perhaps because they do not understand it themselves as I never hear a business owner talking about it and when asked the question, they cannot answer.
We are talking about customer lifetime value (CLV). Sound obvious now I have mentioned it, right? But guarantee that 98% of you will not be modelling your growth around it and do not understand it yourself.
The reason this is so important is that it changes the way you market and your view of the world in business. I quite often see business owners pulling back on marketing because they are not making a profit NOW. Yet had they continued with a long-term view, they would have been in the “money” 2 or 3 years down the line and increased their business value significantly (that’s a whole other subject I may write about later). We are all marketing led businesses no matter what we are selling, businesses are all the same.
Here are some questions for you to assist in arriving at your customers’ lifetime value (CLV):
• How long does a customer stay with you?
• How often does a customer buy from you?
• What is a customer worth to you as a business in year 1?
Here’s an example of a customer lifetime value (CLV) formula:
Let’s say a gym business generates £600 each year per customer (£50 a month membership) with an average customer lifetime of 18 months and a customer acquisition cost of £100 per customer.
The company could calculate CLV this way:
£600 * 1.8 – £100 = £980
Now you may not know your acquisition cost so make sure you understand that first. Basically, how much do you spend to win a customer right now?
Based on this calculation you could invest more into securing a new customer, and therefore be more aggressive in your marketing approach. Imagine doubling your investment into marketing and doubling your customers! Less margin but huge profits. Anyone can start a business, not many can really grow one.
If your customer acquisition cost is higher than your customer lifetime value, you have to adjust, or you will very rapidly be out of business if that continued.
Once you understand CLV you can start adjusting your financials and answering the following questions for yourself:
• How much can we spend on marketing for customer acquisition?
• How much should we spend on customer service to retain an existing customer?
• Who are our most valuable customers and how can we better target this demographic for future sales?
The better the retention rate of a customer, the higher the CLV, resulting in higher profits and the ability to invest in winning more.
As always, I write with purpose and to share my knowledge and hard lessons over 29 years in business. These are easy to execute, and you can do this, today. Create a healthy marketing budget of around 20-30% of your turnover. Be laser focused, always.