Starting out in business is pretty tough. Although we live in age where it’s never been easier (or cheaper) to start a new business there is always an uphill battle to gain interest and more importantly, customers, to our new venture.
It is all too easy to burn through a whole lot of money on advertising and marketing for little or no return. Hoepfully this book will help you avoid some of the common mistakes we all make.
You can get the marketing strategies book here.
So what is ‘customer lifetime value’ (LTV) and why should you measure it?
Customer Lifetime Value is an extremely important metric that any size of business should be using to allow them to grow the business effectively. Why? Because in a nutshell it allows you to determine what you can spend to acquire a new customer and still remain profitable.
Imagine if you knew that every new customer cost you £100 to acquire but they were actually worth £200 to your business. You would keep spending that £100 over and over to grow the business.
Sounds straightfoward but many businesses don’t measure this or perhaps are not sure how to.
Firstly you need to determine your cost of acquiring a new customer. Now sadly this is where alot of systems fail, staggeringly many CRM systems, the very things that should be measuring this metric don’t! You need to track each channel you are marketing in and how many leads each channel generates. If you know your spend on a campaign and the number of customers it has produced then you have your starting point.
Now you need to calculate the total spend a customer makes over their ‘lifetime’. Now again this isn’t that straight-forward as how do you determine a customer that is dead from one that is live? Well you can use another metric called ‘latency’. Latency is the amount of time between each customer purchase.
Once you have your ‘average’ customer lifetime value and your current customer acquisition cost you can now determine if there are funds to enable you to increase your marketing spend. Many marketers use these metrics to actually lose money or break even on the initial sale to boost customer conversions as they know they can recover this cost on the ‘back-end’ by selling higher value items. This is also known as ‘moving the free line’.
There has been a huge uptake in customer relationship management (CRM) systems over the last couple of years. All businesses from small to large have been clamouring to select, buy and implement CRM as it is seen as a ‘must-have’. But I wonder, how many businesses have actually measured their return on that investment? How is your CRM system delivering benefit not just in operational process but in additional sales and new customers? Sure your CRM will tell you how many leads have been won, the status of those leads, which salesperson brought in that lead. It will also tell you how many and the potential value of any opportunities arising from that lead. But of course the real crux of the matter is you need to measure/test/refine/repeat the effectiveness of your campaigns.
And there lies the problem, whilst most CRM systems on the market allow you to create a campaign against a list of customers it is the segmentation of your customers that falls down. Why? because even if you do have an integrated CRM and financials system the chances are you cannot create what I would term as dynamic campaigns. I had this very request a few weeks ago from a Sage CRM customer. “We want to be able to create a campaign based around customers who have bought product x”. Can the system do it? No! Can it be made do it? Absolutely. Here are 4 examples, from hundreds of possible, dynamic campaigns you could be using (but probably won’t be);
- Customers who bought product x
- Customers who have spent more than (or less than) x pounds, dollars, euros
- Customers who have bought within the last 180 days but not within the last 90 days
- Customers who have only bought once from you
So the key is getting at your financials data and using it to create customer segments that are meaningful (and hopefully responsive!) to an offer in the campaign.