Using Lifetime Value In Your Marketing Video Transcription:
Thomas Green here with Ethical Marketing Service. Today I would like to talk to you about the lifetime value of your clients, how you can apply that to your marketing activities.
If you haven’t heard of it before. The lifetime value of a client is calculated by looking at as much client revenue data you have, getting an average of what each client is worth to you. Then you can determine what you can pay to acquire one.
Here’s the reason why.
The more you can pay to acquire your clients, the more difficult it will be for your competitors to compete with you. Typically competitors are trying to keep their costs as low as possible, cut spend where they can and if they can bring the cost per conversion down, that is always viewed as a positive thing. Using lifetime value, you can see that you have other opportunities available to you. This is made a bit clearer with an example:
If you take my digital marketing business. What I would need to do to calculate my lifetime value is take my average transaction value. Times it by the number of months a client would stay. It becomes a bit tricky when you have clients for years which we do. But if you are looking at one client who stays for 12 months and another who stays for 6 months. The average timeframe would be 9 months. Our package price is £495 per month, so we would times 495 by 9. A client of mine is worth £4455. The question then becomes… In order to earn £4455 in sales, what would you be willing to pay to get that amount in return?
We do have staff and overheads to consider. But knowing that number will make marketing decisions very easy. The lifetime value of most businesses is likely to be a lot higher than many would think. There is a cashflow consideration you need to be vigilant of. You have to leave room for a margin or error. But I think spending £1000 to make £4455 is highly logical. So this means in our marketing if we are able to acquire clients for £1000 each. We should do that as often as we can. But what do you think most companies are doing? Trying to get clients as cheaply as possible and struggling to scale.
If we use an e-commerce example for a moment, there are some who say that this concept doesn’t apply, because it’s mostly a one time sale and they get no continuity in the way I have described, so they can only pay £30 for example.
Then what you would need to do, is introduce an up-sell to increase your average order value. It’s quite rare that if you are in a low price, one time sale business that there isn’t something that wouldn’t be slightly relevant to offer as an up-sell and if you can increase your lifetime value of a client, guess what that means to your marketing? All of your competitors are still wanting to pay £30 and can’t scale, but because of your up-sell, now you can pay £40 and you can do the kind of scaling that they won’t be able to.
When you advertise, you can pay £40 and take more of the market, because you know that a certain percentage of people will take the up-sell, because you know the lifetime value.
To summarise, this is a good time if you haven’t already to get the lifetime value of a client to your business, I hope this has been valuable to you.