Stillwell Design Group
Calculating Lifetime Value Can Help You Double Or Triple Your Profits
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The lifetime value (LTV) of a customer is the amount of profit each customer brings to your business over the course of their buying lifetime with your business. Now, I will show you a simple way to calculate the LTV, but unless you keep great records you should probably hire a bookkeeper to dig through receipts and calculate the numbers for you.
So, in the example I used above, when someone buys from that business, on average they represent at least $165 in profit. However, it doesn’t have to stop there. In fact, your goal should be to increase the lifetime value of each customer by getting them back into your business to purchase from you more often.
The reason why the lifetime value of a customer is so important is because it gives you an idea of how much you should invest in marketing to get the customer in the first place.
So, in the example above the business owner knows that if he spends another $5,000 in marketing in the same ways he’s investing in marketing now, he can reasonably expect to double his profits.
Without knowing the lifetime value of his customers, he wouldn’t have the confidence to make that kind of investment in marketing.
By knowing your numbers, what you’re really doing is buying customers with the goal of selling them more and more of your products and services over time to make your initial “purchase” profitable. That’s why this works. You’re giving people a risk-free and enticing way to try your business. At that point it’s up to you to win them over.
People are creatures of habit so once you get them used to coming to you; it becomes a habit to use your company over someone else’s. Someone else would have to spend marketing dollars and convince them (through their advertising) to leave your company (which they’re familiar with) and do business with them.
More often than not, your competitors don’t know their numbers so it would be difficult for them to win over your customers because they don’t know how much they can afford to spend to do it. Once you know your numbers you can outspend competitors to acquire customers and if you can do that, you win.
Knowing your numbers also allows you to expand and grow your business because you know exactly how much money you can spend to “buy” a customer on the front end. It’s always FAR easier and less expensive to sell to someone who is already your customer as opposed to someone who’s had no exposure to your business. That’s why it’s worth it to know your numbers and get people to buy from you with the best offer you can make.
At that point, up-sells, down-sells, cross-sells and back-end sales all become profitable options because you’re selling to people who are already your customers, who are already in your database and who you can reach for pennies on the dollar in comparison to the advertising dollars you would have to spend to reach new people.
Current customers are also more receptive to offers you make because they already know if you provide quality products or services. Once you know how much you can spend to “buy” a customer, you can beat most of your competitors because they’d go broke trying to compete with what you would be able to do. For this to be profitable, you MUST have your next offer in mind. The money-maker that makes what you spent to get the new customer profitable, be it an upgrade offer or some sort of monthly continuity offer. Contact us for help with that.
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