Today we are going to do some math! In marketing, it is essential to know what it should cost to acquire a customer. That way you can quantify your ad dollars. One part of that formula is understanding your customer’s lifetime value.
What’s up Fish Fans! My name is Marcus. You’re watching Marketing Madness, the Blue Fish vlog!
Let’s start by defining what exactly we mean by lifetime value. In marketing terms, customer lifetime 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.
Some seasoned entrepreneurs may say “break even,” or another 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.
You may be asking why this number is so significant. 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 on the acquisition of the particular customer.
Once you know how much a customer will buy or spend with your company, you will better understand how to allocate your efforts.
Let’s head over to the whiteboard 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)
Let’s observe an example here. Bob owns a Dance Studio. His average monthly membership is $60.00, paid monthly on average of 12 months per year for an average of 3 years. How would we figure this out?
$60 x 12 months x 3 years = $2,160 TLV
Once you have identified the lifetime value of your customer, you have two options in deciding how much to spend in the acquisition process.
#1 Investment acquisition cost.
Investment acquisition 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, you 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. In plain English, this is you as a business owner, spending $1000 this month to try and gain customers knowing it may take a few months to recoup that expense. But your LTV is so high that even if you gain one customer you know you will be ok.
#2 Allowable acquisition cost.
The allowable acquisition is the total cost you are going to spend per customer per campaign. With this tactic, the value 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. In plain English, this is you spending $20 to get clients for a $100 product because your built in expenses are $80.
These calculations can get a lot more complicated, but focus on the Lifetime Value for now. If you Google any of these terms you’ll get the actual formulas used to calculate them.
Regardless of whether you choose to follow an Investment or Allowable Acquisition Cost, you’ll never know how to develop an estimated spend for a campaign unless you know the Lifetime Value of a client. This is crucial info because it helps you make educated decisions based on the reality of your numbers.
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.
Well, that’s a wrap for this week! I want to thank you for checking in. Make sure to hit that like button. And if you have any questions or comments leave them down below. If you want to talk about how Blue Fish can help you grow your business just send us a message and we’ll get the conversation started!