# Lifetime Value of a Customer - Secret to High \$\$ Clients

8 replies
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Lifetime Value (LTV) of a Customer

This marketing and sales analysis is not a new concept, but is often overlooked by Marketers and Business Owners (Our Clients).

I'm going to take a High Level approach to the process, and will expand if needed.

*How much do you make off each customer per sale, monthly, etc?
*How many customers?

Once a business knows how frequently a customer buys and how much he or she spends, you will better understand how to allocate your resources in terms of customer retention programs and other services they'll need to keep their customers -- and keep them happy.

The simplest way to estimate lifetime value: plug actual or estimated data.

(Avg. Value of a Sale) X ( # of Transactions) X (Avg. Retention Time for a Typical Customer)

An easy example would be the lifetime value of a gym member who spends \$50 every month for 3 years. The value of that customer would be:
\$50 X 12 months X 3years = \$1800 in total revenue (or \$600 per year)

Now you can see even from this hypothetical example why many gyms offer a free month membership to help drive enrollment. Gym owners know that as long as they spend less than \$600 to acquire a new member, the customer will prove profitable in under one year.

There are more complex ways to calculate LTV including taking a deeper mathematical approach, providing more variables and conditions, to estimate the long term value of a customer. These deeper analyses are needed for higher \$\$ ad spends.

Do you use a model to justify your clients marketing & advertising budgets... offline and online including all marketing expenses - website, SMS, any ads, etc.

• Yes I use in it my own business as well as with all clients.
I have a LTV calculator on my site.

I think knowing the LTV of a client is crucial in determining ROI
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•  Originally Posted by vndnbrgj Yes I use in it my own business as well as with all clients. I have a LTV calculator on my site. I think knowing the LTV of a client is crucial in determining ROI
That's very good. I'm going to be adding a simple calculator to one of my landing pages as well.

Right now I've been so busy with actual client work, I haven't had the time to add value to my own business. I have a list full of internal tasks to complete, including adding 2 White Label Services to my website.

I didn't go out and look at your site. What's your calculator like? simple or complex?
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• LTV should be a very important metric to any business owner.

You are mixing up profit and sales / revenue. The correct way to calculate LTV is subtract the cost of getting the client, keeping them and providing the service. So a gym member paying \$50/month may contribute something like \$35/m to the profit.

Another thing you may want to add to the formula is the average number of referrals you get per customer.
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•  Originally Posted by Alex Makarski LTV should be a very important metric to any business owner. You are mixing up profit and sales / revenue. The correct way to calculate LTV is subtract the cost of getting the client, keeping them and providing the service. So a gym member paying \$50/month may contribute something like \$35/m to the profit. Another thing you may want to add to the formula is the average number of referrals you get per customer.

Like I said, top level simple approach. You are correct, there are multiple variables to also think about when measuring specific LTV.

There are a few different specific equations companies measure LTV with and the best ones include things like Customer Rention Rates, Discount Rates, Profit Margin Per Customer, Average Gross Margin Per Lifetime, the list goes on......

Each specific variable also takes analysis as well, calculating the discounted rate of cash flows, etc.

Do you use a model for your calculations?

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• Well keeping it basic which is all you really need to do, I would definitely add the Profit Margin into the equation.

Most businesses know this as they get their Accounts made up every year.

Reason is that you can do your 'over and above' costings quickly in your head for when you get to pricing without looking like an idiot.

Not you (I hope ) but I have seen numerous people on this forum write things like Hair Salon client is \$50pm x 12 months = \$600 x 3 years = \$1800 and therefore I will charge you 25%

Yeah, course you will. :rolleyes:

Maybe my PM is 50% so your 25% is actually 50% straight off. Moreover I may need to employ an extra stylist which now wipes out increase for me.

So each new client would be worth \$450 to you and \$0 to me. Great deal.

So that is why I would at the very least include the PM in the equation.

Dan

PS: The above figures are general.
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•  Originally Posted by Alex Makarski Another thing you may want to add to the formula is the average number of referrals you get per customer.
I try adding the referral numbers, but I find it complicates a new (to the vast majority of clients) way of calculating customer value. And sometimes these numbers then become a little "Pie in the sky" sounding to the client.

The exception may be the client that depends on referrals in their marketing, and so this becomes the key figure.

Also, I always lower whatever number they give. Average sale, average number of purchases per year, average number of years in the relationship.

"What figure would you say is absolutely certain to be conservative?"

And even with the most conservative figures, these numbers are huge to the client (except in the rare case of a client familiar with this idea)

Because if you don't keep the numbers conservative, the results are sometimes unbelievable. That's what I find.

Jason Kanigan has a cold calling script that uses LTV in the first few minutes of the conversation. Quite brilliantly.
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• Why the best guys can offer 100% or 100%+ commissions and come into a new niche and take them over rapidly.
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•  Originally Posted by Fishing Why the best guys can offer 100% or 100%+ commissions and come into a new niche and take them over rapidly.
Because of the LTV of their subscribers.
The 100% commission is usually only on the front end.
They may money on the back end.

Then they can sell more to their list whenver.
Upsell, cross-sell, etc.
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