“Just Tell me Dr… Will She Make it?”
Many people ignore critical indicators that can quickly diagnose the REAL health of their marketing, and business as a whole.
They think as long as they’re making sales it’s ok.
Or that just ‘getting more leads’ will solve all their problems.
If only it were that easy…
What these poor people don’t realise that their business can have a huge amount of ‘leads’ and still lose money.
They can have a massive number of people visiting their website and still lose money.
They can even be making plenty of sales, and yet… still lose money.
How is this possible?
I’m not an accountant.
Nor is maths my strong point.
But if your business is spending more money on acquiring a customer than it’s making back over that customers lifetime, it’s dying a slow death of a thousand cuts.
Basically your going broke.
The 3 Critical Indicators of the Health of Your Marketing
That’s why the first thing you must look at to understand the health of your marketing, is how much money do you spend on customer acquisition and how much money do you make as a result.
So far, not exactly rocket science, I know!
The second thing is to break this down by channel.
How much do you spend on each, and how much do they bring in?
This is also crucial as not all channels are created equally. You may find that certain ones are performing very well, others terribly.
Third you ABSOLUTELY MUST know your Customer Lifetime Value (CLV).
It is so important that I’m still shocked by the amount of times I ask people what this is for their business, and they have no idea.
I’m not judging here. Naturally, most businesses focus on immediate return. Basically how much they get back for every pound spent on sales or marketing within a week or two, as they have to pay bills, staff and themselves.
Then I get excited as I realise how big an opportunity they have to improve their results. It simply needs a few small adjustments in how they look at this number.
What if we thought about how much a new client is worth to you over the next year, the next three years, or the next ten years?
What if by understanding this you could grow your business faster than you ever thought possible?
To do this you need to think about the various factors that affect it.
- How many times on average does a customer buy over their lifetime with you?
- How much does each customer spend on average per transaction?
- How many customers do they refer to you on average?
Let’s get the calculator out…
There are many different ways to calculate your CLV, I’m keeping it simple here for our example.
- Say that you see a client on average twice a year, and they are only with you for 1 year.
- Each customer spends on average £300 per transaction
- You have a 50% referral rate (i.e. 2 in 4 clients refers someone to you through a structured referral programme)
So the calculation is £300 x 2 transactions x 1.5 referral rate = £900 Customer Lifetime Value.
To get a true reflection of this number, you would take off your costs, which includes delivery, staff, overheads and marketing/advertising, but again, I’ll keep it simple for this example.
So now what?
Now you need to decide how much you’re prepared to pay for each new client. This is your maximum allowable client acquisition cost and will inform you how you plan and spend your marketing budget.
I don’t know the answer for you specifically, that is for you to decide based on your overall business strategy and the stage of your business that you’re in.
But when you’re testing your marketing effort and, say for example, your Facebook advertising costs you £1,500 per month and gives you on average 5 new customers from it, you can decide if it is working well enough for you based on your objectives.
In this case your Facebook advertising is costing you £300 per customer. With a CLV of £900, that’s a 3 times return on your investment (revenue).
Now, the eagle eyed among you will have noticed that if you’re paying £300 per new customer, you’re not making any money upfront. In fact if you take costs into account, technically you’re losing money.
That sucks! Or does it?
That’s where the importance of Customer Lifetime Value comes in. If you only looked at the initial return, you’d be likely to throw out this acquisition strategy that is giving you a 3X return on your initial investment!
That sucks even more!
When you view your marketing through the lens of Customer Lifetime Value everything changes. Your goal with your initial marketing efforts is customer acquisition, and to do this at break even or better.
And if you have the cash flow, you can even do this at an initial loss as you understand that it will pay you back over the lifetime of this new customer.
The really exciting part is that once you know this number, you can focus on improving it. I won’t go into how you do that here, I’ll cover it in another post. I’ll just pose a few questions to get you thinking…
All things being the same, what would happen if you:
- Increased the number of times a customer bought from you to 3 times on average?
- Increased the referral rate to 70%
- Increased the amount of time a customer remained a customer with you to 2 years?
I’ll leave you to do the maths on these. But it’s pretty cool right?
Only when you know these numbers can you start to make informed decisions on which marketing strategy or tactics to do more of, or which to remove, so you can confidently grow your business.
It’s that simple.
Looking for more marketing tips? You can check this post on how Ryan Deiss taught me how to build the perfect offer.
If you have any suggestions for future posts, need a friendly bit of advice on how you can improve your offer, drop me an email on email@example.com.