Saturday, 23 June 2012

Can you get £100 million turnover one day by using Customer Lifetime Value (ltv)?

Can you get £100 million turnover one day by using Customer Lifetime Value (ltv)?: by Jason Li 2012 ©

You may have come across customer lifetime value (ltv) before...

But did you know it is one of the most important parts of maintaining a sustainable and growing business.

You also may have heard of ‘customer is king’...

And they are King if you treat them well over years as your profits will soar.

If you’ve heard of the phrase ‘scaling up’ then it is based on increasing the scale of your business in a sustainable way as you have a formula to look after a greater amount of customers.

(You can even estimate at which point you can start looking for that new car or holiday you always wanted with ltv analysis)

What is Customer Lifetime Value (ltv)

It is simply: ‘what is the customer worth to you over their lifetime of doing business with you’.

(Even though you knew, it’s good that we got that out of the way)

If you are a good company that keeps customers and clients happy, then you should be able to maintain repeat business. If not, then you will always have to rely on new business to sustain the business. Every morning and every week is a brand new slate.

When instant business setups (who just focus on one-off transactions sales) are struggling to find new customers that week, they may do unprofitable things such as over promise which means too much time spent on servicing the customer; or offer a huge discount which is close to making an offer at cost price.

Repeat business vs instant sale (one-off new business transactional businesses)

The repeat business type focuses on keeping a portfolio of customers who will come back to them to use their products and services regularly. In order to do this, there are three main ways:

1.       The emphasis is on building a good trusted relationship.

2.       Feedback loops so you can understand the ongoing needs of the customer better.

3.       Regular consistent contact with your customers

Businesses that focus on the instant sale are a lot less relationship focused. The aim is to take the order. After this, some instant sale businesses are not really too bothered about the customer after the purchase.

Although, you will find some excellent instant sale businesses that do focus on making sure the product or service matched the customer’s expectations and can gain referrals from those they just sold to: these are owners who know how to create a steady business by focusing on long-term stability and good reputation.

Unless you have an enormous market that you and your competitors are struggling to fulfil the orders for, then in an instant sale business setup you will be living one-day-to-the-next. If competition becomes really fierce, cash flow can be severely tested.

On the flip side, a good repeat business setup usually has a customer database that place orders on a regular basis, so cash flow is more predictable than instant sale business setups.

Repeat business setups grow the quickest

If your business focuses on building relationships and offers that gain repeat business then you will likely grow.

In fact, you can possibly predict pretty close to how your business will grow 6 months or even 2 years from now.


Having a business that pleases customers over-and-over again will lead to referrals too in the long run.

This means a stream of new repeat customers. And even better for you, a huge saving in pre-sales acquisition costs on promotion and sales costs, so these customers are even more profitable for you in the long run.

How to calculate return on investment for ltv

Let’s say your product xxx costs the customer £100, and they buy 3 times a year. Over ten years that’s £3,000 of takings.

The upfront promotion costs of advertising and pre-sales (staff, business cards, leaflets, events etc) equal to a one-off £50 per customer.

Then you have an account manager with other business costs, and product costs which equal £30 for every time they buy a product.

So total earnings are: £3000

Total costs are: £50 upfront + (£30x10) = £350

The lifetime value is £3000 - £350 = £2650 profit over ten years.

The only way to keep a customer for ten years is to meet their requirement for customer value

What is customer value, and how do you use this to scale-up sales revenue?

Customer value is the basis of marketing strategy.

In a nutshell: to find the needs and wants of the customer so that you can create a product or service of value which they are willing to pay for.

Even if you are an instant business set-up, or sell products that don’t get replaced for a number of years, focus on generating high customer value; the best in your niche.

Once you have sold your product, look at high value add-ons such as other related products or service contracts to create a steady income stream. Eg, if you sell cars, why not do a deal with a top MOT service station that can provide annual service, tyre checks, and in-car entertainment: offer these add-ons to your existing customers, even if it’s just referrals.

Over time, your business has to find out what is customer value on a regular basis, even if they have been with you say for 3 or 5 years. The industry you work in can change very quickly so every-so-often the customer’s perception of value can change. If this does happen you want to prove you are up-to-date. If not, then even repeat customers have a look down their vendor list to see how other vendors compare and what they can offer.

Let’s look at two exceptional businesses that operate a large scale with millions of repeat customers.

Heinz Beans for example will not have an account manager. But they’ve spent years on understanding customers’ tastes so that the beans taste great when customers eat them.

Amazon will track what products you view and give you plenty of products similar to your searches so that you can see the whole of the market – and of course Amazon gets to cross sell you too when they email you new products on the market.

How much will the above ideas be worth to your business if you improved the ability to increase the amount of repeat sales you get from customers over the years?

Can you draw up one new product to cross-sell or up-sell that is of great value to your customer base? If yes, then do it this week!

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