If you are a Start-up or a fumbling business, this is the most important article you might read today!
The most under-rated metric on the Digital Marketing scale is ‘Customer Lifetime Value’.
Most businesses and digital marketers do not know what their Customer Lifetime Value is, while others don’t even know what ‘Customer Lifetime Value’ is.
It’s not their fault – most digital marketing courses tell you how to post updates and get likes – but shed no light on how to get some kind of financial value from your customer.
That is why most digital marketers feel that it is their job to get likes or comments – which doesn’t have much to do with financial revenue in itself.
Imagine getting your salary in ‘Likes’…
The Meaning of Customer Lifetime Value for a Brand
‘Customer Lifetime Value’ is essentially the difference between what a customer gets out of a brand and what the brand gets out of that customer.
Take a simple example: you buy bread by paying for it. That ‘loaf of bread’ is what you – the customer – gets, while the money you pay for it is what the manufacturer gets.
From a manufacturer’s perspective, the cost of that loaf of bread isn’t merely the cost of the ingredients that go into making it – it also includes elements like:
- The advertising and promotion cost to inform you about the product
- The packaging cost of each loaf
- Logistical costs of getting that bread to the store
- Taxes, and
- Other financial costs that get that bread from raw-material form to a loaf-form in your hands
Essentially, it’s expenses versus revenue.
That means, if you spent Rs.1,000 on advertising and manufactured 1,000 loaves of bread, your cost of advertising per loaf isn’t Rs.1.
Your cost would be based on the number of loaves you sold – so if you sold just 20, your cost of advertising per loaf would be Rs.50.
The more loaves you sell, the lower your advertising cost per loaf becomes.
Take logistics now: If you hire a truck for Rs.500, transporting 10-loaves, then your logistical cost per loaf is Rs.50.
However, if you transport 1,000 loaves, then your logistical cost is Rs.0.50 per loaf.
Wondering why advertising cost is only applied to the sold-products and not to the whole inventory, while logistical costs are?
Hmmm… we need to go back to school for that!
Essentially, it’s a game of supply and demand (Economics-101 anyone?).
The more customers you have, the more loaves you will sell and the higher your revenue will be.
Determining Customer Lifetime Value
Your loyal (or returning) customers are always more valuable to your business than new ones.
What that means for the service you are offering to each is your prerogative, but the primary goal is to try and create as many loyal customers as possible.
The reason why most companies – especially start-ups – fail is that their cost of acquiring a customer is a lot more than what the customer is spending on their products or services!
They are not failing because of lack of capital – but because of lack of sales!
The math is simple – if you make more than you are spending, you will survive!
Here’s part of the problem: Take digital marketing for example – most companies tend to spend equate their spending with “likes”.
So, if you spend Rs.1000 and get 1000-likes, it’s Re.1 per like – sounds wonderfully affordable, does it not?
Problem is: Those 1000-likes do not translate into 1000-customers.
If only 5-of those “Likes” turn into customers buying products worth Rs.10 each, then you make Rs.50 in revenue from the Rs.1000 you spent.
Now, if those 5-customers kept coming back and bought over 500-bucks of products each, that’s where you start making a profit!
Customer Lifetime Value requires Focus Shift
There are two metrics that you need to have your finger on at all times – Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV).
Here’s a simple table to predict your business’ future:
- Low CAC + High CLV = Business Heaven
- Low CAC + Low CLV = You may Survive
- High CAC + High CLV = Potential Problem
- High CAC + Low CLV = Impending Disaster!
The thing about running businesses is you’re only worth what you have in the bank!
High CAC always means that you are running through that cash really quickly.
Lower CAC means that you will have more time and budget to increase your CLV and work your ways to getting that high CLV.
For established businesses, this is a lot easier than with start-ups as they are more likely to have an established customer-base as well.
For start-ups, this process is harder as the company hasn’t been around for a long time and Customer Lifetime Value can be quite low, if any at all.
The focus is generally on expanding the customer base as much as is possible, and throwing money at it in a way that depletes the bank-account rapidly.
Low Conversion Rates are a Death Stroke
In digital marketing, as is in any other form of marketing, keeping an eye on the metrics is vital.
It is very important to generate leads but if your leads aren’t converting, then you are doing something wrong!
Low conversion rates can really make any marketing campaign look extremely expensive, and that is a problem.
Take a basic PPC or Pay-Per-Click scheme, for example, and ask your digital media company for their strategy.
It’s usually very simple: You choose your keywords, find out what they cost, calculate what traffic you are likely to receive and click on ‘Go’!
Let’s give you an example of what that would look like:
You are selling a product worth Rs.2,000 and decide to go down the PPC route.
You start with a budget of, say, Rs.60,000, which promises you 500-click-throughs on highly competitive keywords – resulting in Rs.120 per click.
120-bucks for 500-clicks: That’s quite good, is it not?
However, clicks don’t mean customers or even leads!
So, let’s bring in the next aspect and say that you have a hopeful 10% conversion rate of Clicks to Leads.
That means, only 10% of your 500-click-throughs are leads, or, you have 50-leads.
That takes your cost per lead to Rs.1200.
Finally, let’s pray that around 5% of those 50-leads become customers, or buy your product worth Rs.2000.
That means, you have around 2.5 customers or, let’s just round it off at 3.
So, you have three-customers who buy a product worth Rs.2000 each, bringing in revenue of Rs.6,000 – after you have spent Rs.60,000 on your PPC campaign.
That puts your Customer Lifetime Value at Rs.2,000, and your Customer Acquisition Cost at Rs. 20,000.
You will not break even until you have increased your CLV to RS.20,000, which means that each customer will have to make 10-purchases of your product for you to break even.
Not all your customers will do that – if any at all.
Now, you can increase the effectiveness of your marketing campaign and gain more customers, or you can lower your CAC and work on ways to improve the value a customer receives, thereby ensuring that revenue from them (CLV) also increases.
There is never just one solution to this problem – you have to figure out what works for your business.
The important first step is to identify these numbers for your business and then chart out a plan to work your way forward.
In our next post, we talk about some simple ways to increase your Customer Lifetime Value, so make sure you come back for more.
Boost Your Customer Acquisition
Ultimately, the best way to ensure positive customer acquisition is to boost your customer numbers, thereby dropping the acquisition cost per customer. To do that, there may be some aspects of acquisition you should work on developing.
- Use Videos: Right now, online video consumption is taking over the internet, particularly for those aged 18-35. According to a Nielson survey, video traffic will make up 80 percent of online internet traffic in 2019. It’s currently one of the best ways to reach the younger generation and increase your customer reach.
- Make Interactions More Personal: Marketing tools have evolved significantly in just five years, making it possible to tailor your marketing towards a targeted audience. Using personalization to your advantage can be a great way to see your acquisition rates jump. For example, personalized emails receive six times the transaction and revenue rates of traditional emails.
- Engage Around the Clock: The internet doesn’t sleep, and if you want to make your customers feel truly valued, you can’t either. Well, your online engagement can’t. As unrealistic as it sounds, consumers expect 24/7 engagement with brands. That’s where freelancers and customer service companies come in handy. They can help you tend to your customers at all times. Even if they respond at 2 o’clock in the morning to say they’ll have a better answer at 8 a.m., it’s still better than no response at all.
Consumers are demanding more and more from their retailers, and only those who keep up with such demands survive. Putting forth the extra cash to develop a strong customer acquisition strategy is essential to developing a wide customer base, and those who wisely strike a balance between money spent and money earned have the best chance of succeeding.