As I mention in my resource The Business Growth System, one of the best ways to grow your business, and ensure continued growth of your business is by understanding, and working to increase the Life Time Value (LTV) of your customer.
I’ll let you in on a little secret on something I’ve noticed about how clients valuate their businesses: they determine the success of the business by the number of clients they have, and not the value that each customer will provide the business in terms of growth over time.
Life Time Value (LTV) is your assessment on how much money your clients will make with you over their life time or the life time of their relationship with you as your customer. LTV is a way to be able to predict the growth of your company, providing you are taking the necessary steps to retain your clients on a long-term basis.
Here are three simple ways to assess the Life Time Value of your customer:
- How much does your average customer spend with you on their first purchase?
- How many times a year will they be purchasing from you?
- How many years over their life time would they be purchasing from you?
Value of First Purchase + Value of Annual Purchases + Value of Years of Purchasing = Life Time Value
I’ll provide an example, but I will remind you that for those for which Life Time Value is a relatively new concept, it may be a little complex.
Here is an example of calculating Life Time Value: A client spends $1,200 for their initial purchase with you and they come back to you once a year for three years. Their LTV would be $3,600.
Now, once you’ve seen what the LTV of that customer is, determine how much of that LTV is actually profit to you. For instance, of that $1,200 first purchase, you made $400. If they come back once a year for 3 years, you will make $1,200 of profit off that client during their Life Time Value.
It’s important to recognize too, when calculating the LTV of your client that you also need to recognize the cost of getting that client. So while you may have made $1,200 of profit from that client, you may have spent $400 in your efforts to gain them as a client in the first place, which would mean your LTV would be $800, which is still alright!
Life Time Value is a complex concept to grasp at first, so I would recommend you read this post to get the concept of LTV down and take some time to think through some of your clients to see where you can calculate their LTV.
Getting More Profit with Less Clients
I mentioned earlier in this post that I have seen many companies base their success and value of their operations on the number of customers they have, thinking that if they have hundreds of customers, they may be doing something right. Where this falls short is that while it is a great thing to make as much money as you can by selling your product or service, you are literally leaving money on the table if you don’t put efforts into increasing the Life Time Value of your client.
Would you rather have 100 clients that are worth $1000 each to your business through their LTV, or would you rather do the work to sell your product to 200 clients who will maybe only provide $500 of profit?
Ways to Increase Life Time Value
Life Time Value invites you to take an approach towards your client relationships that will show them that you are not in it for the short-haul when you take them on as a client. It is all about retention, and doing what you can, including to never stop marketing to your current and past clients, to help maintain and increase their Life Time Value.
Here are a few ways that you can increase the Life Time Value of your customer:
- Increase the amount of things they buy from you: When you have a new client, you may see new needs that they have emerge that you will be able to fill. Perhaps it’s offering them a different product or service, upselling them on the product or service they already have, or if you don’t have what they need, being resourceful enough to find what they need in a way in which you will profit.
- Get them to come back to you more often: As we know, Life Time Value depends on how many times a year they’ll buy from you and for how many years. If they are only buying from you once a year, are there any ways that you can increase their needs to wanting to buy from you several times a year? Maybe you have another product or service that you can offer them that enhances the products you have already sold to them. How can you increase the amount of times they are coming through your door?
I can’t stress enough how important it is that you spend as much effort, if not more effort, on your marketing and advertising towards your existing clients in order to increase their desire to work with you, and in turn, increase their Life Time Value for you. If you can set up your business so that your relationships with everyone you work with are what drive your business growth, you will be on your way to making millions through a steadily growing company.