Mar

27

Using Lifetime Value Calculation to Grow your Business & Dominate your Competition

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Creating Life Time Value

What is life time value? (LTV) The Lifetime Value Calculation

In a nutshell life time value is the value that a business places on its customers. Some businesses have customer segments where they may have 3 types of customers in each with a certain amount of life time value. For example top level, middle level and bottom level.

As a rule you treat your top level customers the best by spending more to retain them than you would say a bottom level customer.

Lifetime value is important for two main reasons as it can show a business owner where they have opportunities to grow their business. By focusing on the different segments and trying to move customers from one level to another. A lot of what I do with the clients that I work with is work out what their businesses life time value of their clients are and how they can maximise it.

The second reason it is important is that when you know what the life time value is and how to maximise it then you can work out how much you can spend on new client acquisition. A powerful bit of data to know, as this will allow you to dominate your competition by spending more than them on getting a new customer and its handy knowing how much you can spend to get a customer while staying profitable.

But what i have mentioned only works, once the life time value is maximised by different Leverage strategies. This will allow you to grow and devop your business better.

And a basic formula for this is…

New Customers X Average Spend X Number of Transactions

This always shows us where we can improve that particular businesses performance either by generating more customers, or getting each customer to spend more or in fact getting past customers back more often to spend more money.

And a small improvement in LTV is a good way to use leverage to make more money in your business. Let’s demonstrate this.

Say you increased LTV by 10% in all areas. So you had…

100 new customers X Average spend $500 X 1 sale per year = $50,000.00

Now let’s increase that by 10%

110 new customers X Average spend $550 X 1.1 sale per year = $66,500.00

That is an extra $16,500 in extra profits that the business would receive and that is only improving Life Time Value by 10% how easy is that to do. Many businesses can improve Life Time Value by 25% to 40% no problem.

How to Beat Your Competitors and Leave Them Wondering How You do it!

There is business A and business B,they both do the same thing and sell the same product or services.

Business A sells a product for $500 and has a profit of 40% this = $200

And Business B sells the same product for $650 because they have systems that allow them to sell more to their clients either via up sells or ways to increase margins.  But also business B knows that they have a system that will get the customer back into their store 2 more times that year and they will spend another $300 on average.

All of a sudden Business B has a LTV total of $950 with a profit of 50% because they have maximised Life Time value so this customer is worth $475 to business B.

Which business can spend more to get a new customer A or B,

That’s right B is the winner and if B wanted to they could set out to pick up more new customers than business A because they can spend more on getting a new customer.

In effect they could really put the pressure on business A to do better and in time business A wouldn’t be able to compete with business B.

If you would like to have a chat about making your business more profitable by utilising some profit leverage strategies then get in touch. We have improved profits by 10% to 25% pretty rapidly, all while not spending anymore on advertising.

Click Here to Contact Us!

Category: Design

About the Author ()

Tom Caraccio is an internet marketing consultant for small business and he is on a mission to help small business survive and thrive in the new economy of digital. If you would like further updates join our blog and get a free gift "The Small Business Internet Marketing Guide"

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