If you are a regular reader of this blog, you will see us repeat over and over that there are only three ways to grow your business:
Attract more clients.
Create more profits from existing sales
Generate more sales from existing clients.
So simple, you hardly have to give it any thought, right? That would be a mistake.
Two of these three basic components of growth have a common thread, and it’s key to growing a business; so I’d like to take some time in my next couple of posts to raise the discussion of lifetime value (LTV).
One often stumbles upon the concept of LTV, especially at Web sites about marketing, but I think there’s not enough emphasis on what LTV really is, or how to enhance the average LTV across your customer base.
Simply put, LTV is the net contribution to the bottom line that each customer adds to your business. There is often a debate over what the true definition of “lifetime” really is, and while important for consideration in fancy predictive models, we can simplify the definition of “lifetime” to mean one of two things:
the average length of time your customers remain actively with you;
or a fixed period of time such as a year, or five years.
Regardless of how you define ‘lifetime,’ you’ll need to create a definition that makes sense for your business.
LTV is calculated as the total gross profit that you accumulate from a customer over their lifetime (based on the definition of lifetime you pick as noted above), less the original customer-acquisition cost and the subsequent marketing expenses over their lifetime.
What I want to address here is a couple of ideas as to how LTV can be enhanced. In a future posting, I will discuss the impact of enhancing LTV on your overall customer-acquisition efforts.
LTV is central to the second of the three principals of business growth noted above. Yet we often don’t concentrate on how to get more sales from existing customers.
One rule of thumb that most business owners know intuitively is that it is much easier to make an additional sale to a current customer than it was to make that first sale to acquire that customer. Yet, I see time and time again when working with consulting clients, business owners don’t do enough to figure out how they can sell more to their customer base.
It is important to understand that a customer who has had an exceptional experience with your product or service is naturally going to look to you to help them fulfill their other needs with more or new products. They now trust you, and are happy with the relationship they have with you. So you should take advantage of their trust and make an offer of another product/service immediately after the initial purchase, and schedule frequent campaigns to offer more to your customer base.
When your customers recognize that you provide them with value, they will continue to purchase from you, until you disappoint them. But, you can’t assume they will just call you up and ask you to sell them something. You have to make the effort to ask for the order.
The result will be an increase in how your customers engage with you. And, that will result in a more robust LTV.
I often hear from clients that they don’t want to “bother” their customers with lots of sales messages, and there is a concern that these sales messages will repel their customers. But your customers are human, and there’s a loyalty that you can earn and you can harvest with creative marketing.
So, let’s look at some ways you can make more money from your existing customers, and enhance the second of the three ways you can grow your business as noted in the first paragraph of this posting:
I had a client who was selling books, and he increased the LTV of his customers by merely sending an e-mail to his customer base every time he got a new shipment of books. He would send a message to customers who read biographies when he received new biographies; customers who had bought books on Buddhism were sent messages about his latest shipment on new Buddhism titles and so on. His goal was to send every customer at least one message a month. His customers loved the personal touch, and relied on him for the latest information on their area of interest.
Twenty-five years ago, I ran a large catalog business, and inherited a significant amount of unsold inventory from my predecessor. Rather than dump that inventory at cost, I would have the people taking the orders first ask for the products that were being ordered. While they were entering the shipping and billing information, the computer was working in the background matching up excess inventory with the category of product being purchased. Once the match was made, we would make the offer right as the sale was being consummated and give a small discount on the excess inventory product – you see Amazon and other retailers do this today, making personalized recommendations as you go through the checkout process. This technique was so successful for us, we were able to deplete our $1.25 million excess inventory in just four months, and once accomplished, we continued this process to upsell customers at the time of sale.
The next time you go to your favorite supermarket with the intent to buy some apples for a snack, when you walk into the store, stop and look around at how the store has been laid out. Look at the displays found near the entrance to enhance quick decision making. You’ll see displays that are there to break your pattern, interrupting you to encourage you to buy something that you had no intention to buy. And, as you check out, do another quick visual sweep to see what the store has done to encourage you to add small, last-minute items to your purchase: candy and gum, magazines, books, etc. Little, apparently insignificant items that increase the size of your order. Be creative and think about how this technique can be applied to your business.
I had a client who felt that once a customer had made an initial purchase, they would come back on their own to buy more. We did a test where we isolated new customers into two groups. One group was treated as they had been normally, passively expecting them to repurchase. The second group was sent promotions and messages once a week to encourage new purchases. As you might have guessed, the second group, when evaluated a year after the test was launched generated roughly 25 percent more LTV, even taking into account the additional costs of those weekly communications.
In my next post I’ll talk about how LTV can make an impact on your new-customer acquisition efforts. Until then, look at each of your customers as a valued asset, and be creative and aggressive in your efforts to increase their LTV, one at a time.
You’ll be amazed with what your efforts will uncover.
This article is by Jack Rued from OneCoach Team.