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I’m a marketing guy, so, like many marketing guys, I’m not so much a numbers person. I know I should be, but, there you have it.
All business owners could benefit by much better tracking and measuring of the numbers. Knowing things like how many leads you generate, how many leads you convert, and the average $ amount each customer produces is a minimum starting point for those who want to measure the results of their marketing.
You’ve probably heard this many times before, because it’s a fact - what gets measured, gets improved.
To me, the real magic in number crunching (that’s for my accounting readers) is when you start to understand, measure and focus on what’s called the life time value (LTV) of a customer to your business. In simple terms LTV is what a new customer is worth for the entire time they remain a customers. If they buy $10 per month for 5 years that customer is worth $600 LTV.
This number gets really interesting when you marry it with actual marketing costs or what it costs your business to acquire a new customer. Know this stuff and you can start to understand just how much you can and should spend to get a new client (most people don’t spend near enough.)
But, the reason I really love LTV is that by understanding and focusing on ways to increase LTV through increased offerings, special programs, and strategic partnerships you put all your focus on the most profitable form of business.
Once you have a benchmark for LTV, the game is to find ways to consistently raise the number. When you can do that you will find that you can also confidently and dramatically increase your marketing budget with almost guaranteed returns - now that’s music to a marketing guy’s ears.
Comments
This entry was posted on Saturday, August 4th, 2007 at Aug 04, 07 | 9:12 am and is filed under Lead Conversion, Lead Generation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Life time value is a dangerous and misleading concept. It has spawned a million business mistakes. The “new economy” debacle of the late 90’s was fueled, in part, by exaggerated estimates of the life time value of customers. Customers are fickle and demanding. It is better to focus on satisfying them in the short term than assuming their loyalty in the long term.
Ad - No argument from me on that, but why not do both? LTV depends totally on satisfying them in the short term.
Lifetime value is indeed a very important number. However, I advocate using a 3 year horizon becuase “lifetime” often drives internal debate about how long the lifetime should be. This just detracts from the real substance of the issue — what can be done to improve it.
LTV is so useful that we have created a tool to estimate the impact on LTV of changes in customer retention rate. Download the free return on retention tool from our site.
LTV can work well if you also understand that your customers are personally going to change over time. This can be in terms of their tastes, income, aspirations and overall requirements. So in many cases it may not be appropriate for a business to keep trying to sell the same product over time to the same customer. But by building a relationship with your customers it should be possible to present them with more appropriate products over time, this should help to increase the LTV of the customer.
People will quiet rightly be fickle if the businesses they choose to spend money with do not value them and continue to interest them with product offers that appeal to them. Taking this view it is possible to develop long term profitable relationships with customers and the concept of LTV still has a valid role to play.
LTV is especially important when a business is developing a new marketing strategy. It is best used to play “what if” with a new database marketing or customer loyalty plan. If you have to put unrealistic expectations onto a new strategy to get it to make sense from an LTV standpoint, then don’t do it. Then you have to watch your results like a hawk, make adjustments along the way and be prepared for wholesale strategic change, when current tactics get tired and stop working.
I agree with John here. I see no weakness in measuring LTV whatsoever, but I see potentially large problems in not measuring it.
Misunderstanding a customer’s value could be potentially hazardous; but having no idea of their value in the long term seems much more ludicrous.
I find that most B2B firms can make tremendous improvements in marketing results simply by paying attention to the numbers period. We start with annual revenue goal, sales closing ratio, lead-to-opportunity ratio and average annual value of a customer, which most clients come to us already knowing. We use these figures to establish lead generation and pipeline goals. It is nearly miraculous how quickly that exercise focuses marketing efforts and accelerates results. You’re right, John. What gets measured gets improved. Whether you’re measuring annual value or lifetime value – at least you’re measuring!
One other thing to add to the LTV of a client is the amount of business they generate for you in terms of referrals.
While this reduces the amount of money you have to spend on marketing to gain new clients, it increases the amount of time and quality of service you must put into each existing client.
Cindy - Amen to that!
[...] article titled ‘Life time value, now there’s a number I love’, by John Jantsch on the Duct Tape Marketing Blog makes an important point about measuring [...]
Liked your comment ‘What gets measured gets improved’
Made mention of it in our blog
http://www.employeeincentives.com.au
We are trialling at present, soon to have attractive graphics added.
Cheers John and good luck out there
Mark
[...] Determining the value of a customer based on data such as your average sale is important information to know when you are measuring the return on your marketing investment. But, if you take the time to figure out what the life time value of that customer is, you have the power to make better, more informed decisions about your marketing budget and ways increase that LTV to dramatically impact your business. Check out this post from John Jantsch over at Ducttapemarketing.com “Life time value, now there’s a number I love!” [...]
The light went on for me when one of my clients asked if I had taken into account the margin rate in my Life Time Value calculations. That is, $10 today is not worth $10 five years from now–it is worth a lot less!
[...] Life time value, now there’s a number I love | Duct Tape Marketing Blog [...]
[...] Life time value, now there’s a number I love | Duct Tape Marketing Blog [...]