by Tammy "Grouchy Marketing Lady" de Leeuw
Over and over again I see it...
Recalcitrant business owners unwilling to spend a dime on marketing themselves.
Or, even worse, business people who allow themselves to be sold epic marketing packages that keep them forever broke, always behind the eight ball, and still frustrated by their lack of customers.
I've talked with dozens of these business men and women and have come to this conclusion:
The number 1 reason most business owners balk at the idea of doling out cash for marketing consultation, tools, advertising, or wind up panicking and buying expensive, yet often useless marketing tools is...
They simply don't have an accurate idea of the lifetime value of their customers.
I conducted an informal poll of some local business owners recently, asking them the question:
"What is the average lifetime value of your typical client or customer?"
Not surprisingly, only one out of the ten I asked had any idea of how to answer that question.
From a purely mathematical point of view, LTV looks like this.
However, computing a client's value to your business is more of an art form than a immutable exercise in math. Unlike pure mathematics, there are variables which don't compute nearly into a formula.
Let's say you own a dry cleaning store with a repeat customer named Sam. Sam brings you a stack of shirts each week that, after subtracting costs, nets you $7 in profit. Allowing for Sam's yearly 2 week vacation, and knowing that your customers stay with you and average of five years, it would be tempting to assign Sam a lifetime client value of $1,750.00
But what if Sam was really worth MORE than that?
Sam is a salesman and he knows everyone in town. He loves the way you clean his shirts and he can't stop talking about your shop to others. As a result of Sam's praise, you get 4-5 new customers every year.
Now, you could safely assume that Sam's worth is at least double your previous estimate.
So spending $500 to acquire one more customer like Sam would be worthwhile investment.
Caveat: Don't Get Hooked on LTV Or You Could Wind Up Way Over Budget
LTV is simply a planning tool to help you plan your marketing budget. It is not a license to spend like the government.
I agree with Bill Gurley, a general partner at Benchmark Capital in Menlo Park, California, who wrote an article in Forbes magazine warning against Lifetime Value addiction.
Writes Gurley:
"Some people wield the LTV model as if they were Yoda with a light saber: “Look at this amazing weapon I know how to use!” Unfortunately, it is not that amazing, it’s not that unique to understand, and it is not a weapon, it’s a tool. Companies need a sustainable competitive advantage that is independent of their variable marketing campaigns. You can’t win a fight with a measuring tape."
To sum it up:
No matter how large or small your business may be, it does pay to have an idea of how much the average customer brings to your bottom line.
That being said, however, you don't want to go around chasing unicorns; looking so far into the future and trying to determine what MIGHT happen that you overspend on marketing. A steady, conservative, and realistic approach to ROI is the best way to go.
The very best way, after all, to acquire new clients is to work on bringing uniqueness and value to your business and building a sustainable advantage over all your competition.
