Calculating Lifetime Client Value (LTV). In Blackboard Fridays Episode 62, Jacob talks about Customer Journey and Marketing. Need this implemented into your business? Talk to the international business advisor who can do exactly that – Contact Jacob, Learn More, or Subscribe for Updates.

Who is Jacob Aldridge, Business Coach?

“The smart and quirky advisor who gets sh!t done in business.”

Since April 2006, I’ve been an international business advisor providing bespoke solutions for privately-owned businesses with 12-96 employees.

At this stage you have proven your business model, but you’re struggling to turn aspirations into day-to-day reality. You are still responsible for all 28 areas of your business, but you don’t have the time or budget to hire 28 different experts.

You need 1 person you can trust who can show you how everything in your business is connected, and which areas to prioritise first.

That’s me.

Learn more here. Or Let’s chat.

Transcript

G’day Blackboarders.

You may remember back in episode 23, I introduced you to this formula for calculating revenue within a business.

Revenue
=
Activity
x
Conversion Rate
x
Value
x
Time

– Jacob Aldridge

Revenue equals

1. Activity, the amount of leads that you generate, multiplied by
2. Conversion Rate, how many of those leads you convert into clients, multiplied by
3. Value of each client sale, and then multiplied by
4. Time, how long you can retain those clients or encourage repeat purchases.

Today, we’re talking about a critical metric for most B2B companies. This is a measurable outcome that has become even more prevalent (and often misapplied) because of new business models like SaaS (Software as a Service) where understanding and calculating the value of your client over their whole life is even more important than understanding the amount of revenue they’re going to bring in just this month.

For most B2B companies, LifeTime Value at its simplest is a combination of these last two factors:

• What’s the Value of that client this month, and
• How long can you expect that client to stick around?

A LifeTime Value LTV Case Study

Now, let me give you a real world example for one of my clients who wanted to calculate the LifeTime Value of their clients.

First, we need to ask “Why?” Why was knowing their LTV important?

In this case, the question we were grappling with was where to invest their limited marketing budget. To decide where to invest, I asked which marketing channels were most profitable. They understood which channels brought the MOST leads – but can you see how that’s a different question? The most leads doesn’t help if Conversion Rates, Value, and Time were all different for different lead generation sources.

To understand which marketing initiatives were actually proving profitable for them, we needed to know the answer to those other factors.

Like so many of us in business, my client had heard and understood that Google AdWords (appearing in the paid section on the top of Google search results) would help generate some leads for them. They were spending about a thousand bucks a month on Google Adwords – was that smart, or not?

I said to them, “You’ve got to make sure you you calculate the return you’re getting on that investment.” So they went back and here’s what they discovered.

Google Adwords Activity

On average for each month, how much activity do you think they were getting from AdWords specifically? Not how many “Google conversions”, the nonsense number they provide for the number of people / robots who click on the link – how many actually, real, prospective clients came through?

(How many prospects would you expect for $1,000 per month?)

The actual answer, looking through their history? One. On average Google was sending them 1 active lead per month.

Google AdWords Conversion Rate

Now, thankfully my client had some excellent sales training. He was using the Gratitude Sales model, and so he was actually converting 100% of the clients that came in. So 1 client lead was converting into 1 actual new client every month.

Google AdWords Value

The next question I asked was “what is the average value of your new Google AdWords clients”?

And the answer was $200 – on average, those clients bought his $200/month service.

What a freaking disaster! You can see exactly where my client’s mind went. Now he had the numbers … “and for every $1,000 I spend on AdWords I’m generating $200 worth of revenue.”

Does that return on investment make sense? And remember, that’s revenue – he still had to pay his staff to deliver that work! #ProfitWhatProfit

Google AdWords Time

So prima facie, AdWords as a marketing channel was not working for my client, and he was losing money every month.

Or was he? I said, “Well, there’s one more thing we need to add into the calculation. How long on average do you actually retain your clients?”

So, he went back and he pulled a list of all of his clients through history, and he worked out how many months they had stayed on as a client. Because the LifeTime Value of his clients wasn’t the $200 they paid in the first month – it was the $200 they paid for however many months they remained.

It was a simple mistake to compare $1000 with $200, without remembering that the return on investment needed to account for the life of the client. (Cash flow and other channel opportunities notwithstanding.)

How to Calculate the LifeTime Value of Your Clients

Now for him and for most businesses the easiest way to calculate LTV is to produce a spreadsheet of every business client that you’ve ever invoiced, and the number of invoices that you’ve sent them.

If you invoice monthly, this tells you how many months they stayed on as a client. If you invoice weekly, that’s the number of weeks etc.

What you are looking for is the Median Average period of time. Do not use the standard Mean average for this purpose!

Your Mean may be skewed by some of the outliers, clients that came on and left immediately or clients that stuck around for ten years. That can be useful in some applications, but in determining the value of his advertising spend we wanted to look at the middle, average client – statistically the most likely outcome, who stays longer than the bottom half but less time than the top half.

What my client here discovered was that on average his client stayed with him for 36 months, three whole years.

And so when we did the calculation properly, we worked out that each of his clients was actually worth $7200.

Revenue
=
Activity (1)
x
Conversion Rate (100%)
x
Value ($200)
x
Time (36 months)
=
$7,200 LifeTime Value

He wasn’t turning $1000 of ad spend into a $200 return. He was $1000 in order to generate $7,200, a 720% return on that investment.

In Summary

Of course, the business coaching conversation didn’t stop there. We next made it clear to his AdWords provider that it was not acceptable to spending that much money each month to generate just one lead.

And there’s now more of a conversation to have around all of the inputs at the top of his Sales Hourglass. By calculating the LifeTime Value of his clients, my client was able to understand the different levers he could pull to increase revenue (and ultimately, to increase profit).

If he can make AdWords produce 2 leads per month, that’s $1000 turning into $14,400! And at a 100% conversion rate, maybe he needs to raise his prices to $250 – taking the LTV of each client to $9000.

And maybe we’ll find a marketing channel that produces both better numbers and a better ROI. But that’s the topic for another Blackboard Fridays episode…

Next Steps

Want to learn more about how this can apply to your business? It costs nothing to chat:

• Email me jacob@jacobaldridge.com (I read them all)
• Call, Text, or WhatsApp me +61 427 151 181
• Or just Subscribe https://jacobaldridge.com/about/subscribe-to-jacob-aldridge-com/ to stay in touch