To get the most profit from your business, you must know your numbers.
For your website…track how many visitors you have every month, where your web traffic originates, which pages they are visiting, and what they are clicking on when they go to your website. And do those clicks convert to revenue for your business? How much revenue? Google Analytics will give you all this information and more.
For your email marketing…track who is opening your emails, your open rate, your click through rate, unsubscribes, conversions and bounces and other metrics. If you are using a professional email service, such as Constant Contact, you can track all these numbers.
For your videos…track your best performing videos, time spent watching each video, traffic sources, drop-off rate, and more. YouTube stasticks will give you all these numbers and more.
For direct mail campaigns…track when you start your direct mail campaign, cost of each piece sent, total cost of each campaign, the content in each mail piece, the calls to action, how many pieces sent, who they were sent to and response rate via incoming phone calls, sales or requests for more information. A simple spreadsheet is great for tracking these numbers.
For Facebook Ads…track the number of impressions, reach, clicks, cost per click, click through rate and total ad spend. All of these metrics are available in your Facebook Ad account. It's also important to monitor the impact any copy or image changes may have on your business.
There is one more important number you need to know in your business...customer lifetime value (CLV).
What is customer lifetime value?
Wikipedia shows CLV in several different ways...customer lifetime value (CLV or CLTV)), lifetime customer value (LCV), and life-time value (LTV). Just know that you will see CLV referenced in several different ways, but it means the same thing. As a side note, the first reference to CLV was in the book titled Database Marketing: Strategy and Implementation by Robert Shaw ans Merlin Stone.
CLV is defined as the net value of a customer relationship based on projected future value of that customer. Some people will calculate this based on gross revenue per customer. This is flawed math. It must be calculated on net profit from each customer. Otherwise, it’s easy to convince yourself that your ad spend is okay when the reality is you are going in the red every time you get a customer.
Customer lifetime value stresses the importance of long-term customer relationships and how valuable nurturing those relationships can be.
How to calculate customer lifetime value
The simple math is as follows…You have 10 customers who have paid you $10,000 each over the past five years. The average customer stays with you for five years. So in five years each customer has spent $50,000. This makes the customer lifetime value $50,000 if you calculate it on gross revenue.
But calculating CLV on gross revenue is flawed math, so we will look at the real numbers.
Let’s take a smaller number to simplify the math – the amount an average customer spends ($1000) minus cost of goods sold($200). Now you are left with $800 before spending any money to acquire the customer.
Now let’s look at the cost to acquire a customer…You invest $1000 per month to generate 30 leads. You know from tracking your numbers you convert 1 in 3 of those leads. That’s 10 new customers you will generate every time you spend $1000 on advertising. So each customer costs $100 to acquire.
If each acquired customer spends $1000 for your product or service, then you take out the cost of goods sold which was $200 for a net profit of $800. So if each new customer cost you $100 to acquire, then you have a net profit of $700 per customer.
Now you know you could potentially increase your ad spend to acquire a customer. And the most important part of these calculations is now you can make an informed decision on how much to spend on marketing.
But, as you know, sometimes the math is not so simple…You may have a sales funnel where you are selling your book as a lead generator on the front end of your funnel as a loss leader. But some visitors continue through your funnel to eventually purchasing a $499 product. You lost money on the book but made money on the backend.
Or you may have a subscription service or membership site, then you have to consider churn rate, the number of people who cancel their membership over a certain period of time and retention costs. Then the math gets even more complicated.
But here is the bottom line. How much money you spend on marketing is in direct relation to your CLV. By understanding your CLV, you can make better business decisions about marketing, advertising, customer retention efforts and more.
I remember being at a Dan Kennedy event and he said whoever can spend the most on marketing to acquire new customers can dominate their market. By understanding your CLV, you will have the ability to make a more informed decision on how much you can spend on marketing your business or service.
How much should you spend on marketing?
You know you have to spend money on marketing. I don’t care if your business is going through the roof, there must be money allocated for marketing because the bad times will come. A pandemic, weather, change in the economy or something else will happen. That’s not a gloom and doom statement. It’s just a statement from someone who has been in business a few years and knows things will happen that are unexpected and out of your control.
Here is a quote from John Wanamaker, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
What do businesses generally spend on marketing?
I’ve seen businesses spend 15% to 25% when first starting their business to ramp up quickly. The Small Business Administration (SBA) recommends spending 7% to 8% on marketing. So if you take 8% of the $700 net from the scenario above, that would be $56. But, as with everything concerning marketing, the amount of money depends on many factors. For example, if I can sell twice as much by spending more on marketing, or if I have a high-ticket product or service I'm promoting, I’m spending more money.
Every situation is different. You just have to assess your specific situation, test your marketing to get your real numbers, and make a decision.
Final Thoughts
Now you know how to calculate your customer lifetime value (CLV). You also know approximately how much money you can spend to acquire a customer. You have more insight into how much you can spend on marketing your business or service.
Think about the math when considering how much you can spend on marketing. Then the next time someone is trying to sell you ad space, a marketing campaign, Facebook Ad or whatever it may be, you can calculate your customer lifetime value (CLV) and do the math to see if it makes sense for your business.
Let me know how I can help.