RHEN: Hey Fish Fans! You know Marcus, I’m Rhen…. Today we going to do some math! In marketing it is important to know what it should cost to acquire a customer. This way you can quantify your ad dollars. And BOOM make that MONEY! One part of that formula is knowing your customer’s lifetime value.
MARCUS: Let’s start by defining what exactly we mean by lifetime value of a customer. In marketing, customer lifetime value, lifetime customer value, or lifetime value (LTV) are terms used to describe a prediction of the net profit attributed to the entire future relationship with a customer.
RHEN: Some seasoned entrepreneurs may say “break even” or other number is the most important metric, in our experience “lifetime value” is the most significant figure to benchmark. I feel it’s one of the most overlooked and least understood metrics in business; even though it’s one of the easiest to figure out.
MARCUS: You maybe asking why this number is so important. For us, it is great to know how much repeat business you can expect from a customer over the course of your relationship. In turn, this helps you calculate how much to spend in the acquisition of the particular customer.
RHEN:Once you know how much a customer will buy or spend with your company you will better understand how to allocate your efforts.
MARCUS:Let’s head over to the white board and see how to break this down.
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
RHEN: Let’s see an example here. Lalah owns a Gym. Her average monthly membership is $95.00, paid monthly on average of 11 months per year for an average of 3 years. How would we figure this out?
MARCUS: Solves equation.
RHEN: Once you have identified the lifetime value of your customer, you have 2 options in deciding how much to spend in the acquisition process.
MARCUS: #1 Investment acquisition cost: This is the cost you’re willing to spend per customer knowing that you’ll take a loss on an initial or even subsequent purchase. When using this tactic, hyou should have the cash flow and other resources that allow you to absorb this initial marketing investment, knowing this is a long term strategy to acquire and retain long-term customers
RHEN: #2 Allowable acquisition cost: This is the total cost you are going to spend per customer per campaign; with this tactic the cost will have to be less than the profit you plan to make on your first sale. This is the short term solution when cash flow is a concern.
MARCUS: In either scenario you’ll never know how to develop an estimated spend for a campaign unless you know what your return on investment needs to be. This is crucial info because it helps you make educated decisions based on the reality of your own numbers.
RHEN: Take some time to work on the numbers. And remember, nothing happens in business without sales. Marketing drives your sales and keeps your company from falling into that black hole known as obscurity.
MARCUS: Guys, seriously... please take the time to do a little math here. Do not guess at this type of thing. Your business is worth more than that; this can’t be a guessing game.
RHEN: Alright that’s all for this week. If you have any questions hit us up in the comments, please give this video a like and share on facebook and be sure to click that subscribe button on YouTube if you want notifications each week on the most up to date and relevant marketing tactics brought to you by your boys at Blue Fish.
MARCUS: Thanks for tuning in and we look forward to seeing you all next week for episode 35 on SEO in 2017; bye guys!