Costs and Life Time Value of your Customer
Lucas Helmke
CEO | CFO | Chartered Accountant specialising in business growth and optimisation
Dear Reader,
In recent years, we’ve watched the prices of everything go up.
A hundred bucks used to get us more than a basket in woollies and get us further with our
fuel. But today, We’d be lucky to fill a basket in half or make our fuel last for a week.
It’s not just our lifestyle, but also the cost to operate our businesses have gone up.
Commercial spaces, electricity, wages, product costs, etc.
Even advertising your business will now cost you an arm and a leg.
Which begs the question - in a world where businesses are drowning in costs...
What can you do to keep your business profitable?
Before I answer that question, I want you to go back to my newsletter about marketing.
Evergent Advantage Newsletter titled “What does your Accounting say about your Marketing?”
In that email I described in detail the metrics you need to keep your finger on the pulse of
your business. If you haven’t read it already, it should be in your inbox.
The reason for that is because I want you to look at the essential metrics there and then ask
yourself if you know your numbers by heart.
Especially:
Lifetime Value of Customer (LTV)
In a marketplace, where everybody is bidding for the highest price to acquire a customer.
The person who wins is: who can make his customers the most valuable.
Most businesses operate in a one-off way. They use one marketing campaign, and then
never again. They make a sale of their product, and then they won’t contact their customer
again. They give a quote, do a job, and move on.
They’ve done all that work and invested all that money to acquire a customer, deliver the
very best value from their product or service, and build that relationship with their client.
But they don’t contact them, ever again.
The scary thing is... this is “normal”. It’s all well and good during good times but when hard
times hit... it could be the life or death of our business.
Instead of doing business “transactionally”, Let’s do business “relationally”
If you have one most important asset in your business, That’s your customers.
Here’s a prescription for profitability and security in your business:
Deliver better and greater value to your customers and they will be more valuable to you.
In other words, Solve more of their problems so they spend more money on you. ( instead of
competitors )
When you do that - you increase your LTV (Lifetime value of customer)
Which is how much money your customers spend on your business in the lifetime of your
relationship. Emphasis on relationships.
You can calculate LTV by multiplying the value of the customer to the business by their
average lifespan.
It’s how much they spend in each sale ( Transaction size ) and how often they purchase from
you ( Frequency of Purchase ) in the lifetime of your relationship ( months/years ).
When you influence how much they spend in each transaction and you offer them your
product/service frequently and you deliver on your promises, you will have a business that
can win in tough times.
Again, emphasis on relationships. Your business is not “selling a product” or “delivering a
service”, it’s building a lasting relationship with other people who have problems you can
solve.
When you know your LTV by heart, you can be more confident in investing your capital in
growing your business.
What are some specific tactics you can employ to maximise LTV?
Let’s learn from a story about a mowing business who took one trip, did one job, and made
one day’s worth of money from one customer.
Here’s what this savvy business owner did...
If you are a veteran of the mowing business, you know very well that there’s always another
job you can do for your client.
So this savvy business owner offered exactly that, not only did he mow his lawn he also
trimmed the hedges. (upsell)
But he didn’t stop there, he walked around the property and noticed the dust, cobwebs,
mould, algae, and mildew on the house exterior. The second floor windows were filthy. You
couldn’t tell the differences between the concrete and the soil. And, the kid’s outdoor toys
and trampoline were dirty. ( Diagnosing )
The homeowner, just like many of us, has very limited time to deal with all those problems.
Sometimes the problem isn’t money, it’s time.
That’s why this veteran had always kept a pressure washer in his van. He went to talk to the
home owner and asked him if needed help with pressure washing the exterior of his home
so that it can look as good as his lawn, hedges, and shrubs. ( cross sell )
While he's at it he offered him a great deal, not only will he do his lawn, hedges, and shrubs,
and pressure washing his exterior. He will also steam clean his carpet and couches. (Bundle)
All of that for the fraction of the price that his client would pay, if they decide to do it
separately, because, it only takes one trip for him to do.
The client already knows he can do a great job, the client knows he doesn’t have the time to
do it himself, and he knows that for the money he is paying he is receiving more value. So
they shook hands on the deal.
The savvy business owner not only doubled his income, but tripled, and even quadrupled
what he made from this one visit.
We all know how a messy environment coupled with business and life problems can affect
our minds. By solving his clients problems, we know that his client would be coming home to
a clean home and a relaxed mind.
After he got fully paid, he gave the client a few tips on how to keep his lawn looking beautiful
and left with the client a formula for weeds. And thanked the client for having him do the
work. Then he offered the client a discount for his next job, telling the client the timeframe
that another job would need to be done. and exchanging contacts to make sure his house
would look the best in the neighbourhood. ( resell & incentivizing high ticket sales )
He just made a business relationship that would last for 3, 5, 10 or even 20 years. And
he increased his client’s lifetime value by a hundred fold. Imagine if he did that for a
hundred clients, How valuable would his business become? How can you do the
same?
Diagnosis: what problems do your client’s have? How can you help them?
Up-sell: what bigger problems can you solve for your clients?
Cross-sell: What other problems can you solve for your clients?
Re-sell: When can you help your client again? Or, How can you create recurring business?
Bundling: what can you offer them that would give them more value for what they pay but at
very little extra cost to you?
As you apply these tactics you will see three things happen: your customers will be more
satisfied with greater quality of service/product, you will get paid more ( Transaction size),
and they will come back more frequently ( Frequency of purchase ). When you deliver on
your promises they will become customers for life and send referrals your way.
Now that you’ve learnt many ways to increase the lifetime value of your customers to remain
profitable during hard times, I want to reiterate a point I made earlier.
There are many ways to make your business more profitable. But the best way will always
be to solve problems and build relationships.
Senior Business Analyst with 15+ years in the finance and consulting sectors | STRATEGIC & RESOURCEFUL
4 个月I hadn't really thought of this one. You say "The cost to acquire a customer will only get more expensive." Do you mean this adjusted for inflation? If yes, then why do you say it will get more expensive?
Digital Marketing Specialist at Boomering Inc
4 个月What are some other metrics besides LTV that can help track customer retention and business growth?
Business Consulting and Advisory Boards
4 个月What's your opinion on how small businesses can apply upselling and cross-selling techniques without coming across as pushy?
Would you like to control your business easily, with money in the bank and start living your dream? Let Bullivant Accounting & Tax Services guide you from Mess to Magic revealed in the trusted Bullivant Blueprint
4 个月In your opinion what’s the best way to approach a customer after a completed sale to offer additional services or products?