Life-Time Value Decoded
The idea of acquiring new clients was top of mind after I attended a chamber breakfast. Many of the business owners were asking the question, “How do I get new customers?” Every business needs new customers, but it’s sometimes easy to forget that the easiest and most predictable source of new revenue is from our existing clients.
Acquiring new customers can be five to 10 times the cost of retaining an existing one, and the probability of selling to an existing client is 60-70% versus 5-20% for a new one. I’m not saying forget about new business development, but it pays to come up with creative ways to offer more benefits to your current clients.
Small Business Focus
For a small business like mine, working with the loyal clients who already value my company’s services is a great way to grow my business. Focusing on my clients’ Life-Time Value (LTV) became a primary key performance indicator (KPI) for me. KPI is measured in terms of how long they are a client and the revenue earned over that period of time.
Once you know how frequently a client buys and how much he or she spends, you can better understand how to allocate company resources and develop effective retention plans to keep your clients.
To calculate LTV use this equation:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Years for a Typical Customer)
Here’s an example: An ad client spends an average $125 each month for 3 years. So the value of that client would be; $125 X 12 months X 3 years = $4,500 in total revenue, or $1,500 per year. Now you know that you can spend up to $1,500 on average to break-even in the first year of a relationship.
Adding an extra year can mean an additional $1,500 in revenue. Adding an extra service like email marketing and marketing automation can boost the average monthly spend to $1,150. Doing the same calculation, the numbers work out this way: $1,150 x 12 months X 3 years = $ 41,400, or $13,800 per year – a 300% increase in annual revenue attributed to that client.
Knowing the Numbers Matters
Once you know your numbers, you can develop an optimal marketing budget that focuses on LTV as a prime KPI. Knowing your return on investment is vital. LTV helps frame the question of new clients or existing clients. The answer is most likely somewhere in the middle.
Note: Want more information? Check out this infographic that lays out the cost for both options in great detail.