The lifetime value of customers should guide your marketing decisions.
Savvy marketers understand the lifetime value of a customer. As a result, they build their acquisition formulas around long-term success, not one day revenue.
To gain a competitive advantage, follow this “not-so-secret” four-step formula:
Step 1: Determine the lifetime value (LTV) of your customer.
LTV is the forecast of a customer’s worth over the lifetime of your relationship:
- Multiply the average revenue collected from a customer (including initial sale, continuity, upsells, etc.) over a customer’s life span.
- Understanding LTV is critical to help determine the best business model for long-term success.
Step 2: Calculate the impact of raising and lowering your cost-per-acquisition (CPA).
CPA measures the aggregate cost to acquire a customer:
- You can acquire a small number of customers at an initial profit, a larger number at a breakeven, or a massive number at a slight initial loss.
- If your LTV is high enough, it’s a case for taking a short-term loss in exchange for more scale and greater long-term profits.
Step 3: Test your assumptions.
Even if your plan makes sense on paper, go further:
- Test and monitor all assumptions to avoid surprises.
- Iron out any kinks before you expand.
Step 4: Execute.
After analyzing the numbers, take the next step:
- If you conclude that the long-term approach will grow your business, implement that plan.
- Continue to monitor the numbers to ensure your assumptions remain valid.
The lifetime value of customers should guide your marketing decisions, which may mean acquiring a lead at a small short-term loss in exchange for a big long-term gain.
Marketers who take the long view typically grow faster and achieve optimum results.
Source: The Marketing Insider, reported by Drew Kossoff