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.” Back independent since 2019.
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.
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Good day Blackboarders. You may remember back in episode 23, I introduced you to this formula for calculating revenue within a business. Revenue equals activity, the amount of leads that you generate, multiplied by the conversion rate, how many of those leads you convert into clients, multiplied by the value of those clients and then multiplied the game by how long you can retain those clients as clients within your business.
Today, we’re talking about a critical metric for most b2b companies and one that has become even more prevalent because of online development of business models with things like 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.
Your lifetime value at its simplest is a combination of these last two factors. What’s the value of that client this month and then how long can you expect that client to stick around?
Now, let me give you a real world example for one of my clients who wanted to calculate the lifetime value of their clients because they were trying to understand whether their marketing initiatives were actually proving profitable for them.
Here was the situation that they had. They were spending some money on Adwords. Like so many of us in business they’d heard and understood that good AdWords appearing in the paid section on the top of Google would help generate some leads for them, and so they were spending about a thousand bucks a month on Google Adwords.
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. On average for each month, AdWords specifically, how much activity? It was generating one lead.
Now, thankfully my client had some excellent sales training, he was using the Gratitude Sales model, and so he was actually converting a hundred percent of the clients that came in from that so one client lead was turning into one actual client but the average value of each client was $200 a month.
For him, he’d sat there and done the numbers and it gone… well for every thousand dollars I spend on AdWords, I’m generating one times one times two hundred and bringing in $200 worth of revenue.
So prima facie, AdWords is not working for mem I’m losing money every month. 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.
Now for him and for most businesses the easiest way to do that, to pull out a spreadsheet of every business client that you’ve ever invoiced, and the number of invoices that you’ve sent them, and that’s a rule of thumb, a very easy way to understand how many months they stayed on as a client and then what you’re looking for is the median average.
Don’t use the standard mean average because some of the outliers, clients that came on and left immediately or clients that stuck around for ten years, will start to skew the numbers. You’re looking for the median average and what my client here discovered was that on average his client stayed with him for thirty six months, three years. And so when we did the calculation properly, we worked out that each of his clients was actually worth $7200. Two hundred dollars a month times two thirty six months.
So in other words instead of him calculating a thousand of a spend the $200 return, he was actually spending $1000 in order to generate $7,200, a 720% return on that investment. That didn’t mean that we let his AdWords provider get away with spending that much money to just generate one lead.
There’s a lot more that needs to be the top end of this sales hourglass but by calculating the lifetime value of the clients, my client was able to understand that working on that as opposed to discarding it was the way to grow revenue and profit in his business.
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