Lifetime Value of a Customer: How to Grow a Thriving Business on Tiny Revenues
Posted by Brad Smith
Consumers today expect things for free.
The internet has driven down the costs of almost everything.
Old businesses have seen their revenue disappear overnight.
Being the low cost provider today doesn’t matter when someone else undercuts your business tomorrow.
You need more than a low price to compete. You need to escape becoming a commodity business.
But how do you do that when people expect low prices?
You focus on the lifetime value of a customer. Here’s how to focus on the lifetime value of a customer, so you can build a big business on tiny revenues.
Image courtesy of HackingNetflix
A Lesson from Software Companies
“Cloud computing” is empowering software-on-demand.
Anytime you need the service, you can just log-in to their website from your desktop computer or mobile device, and all of your information is there.
Software as a Service (SaaS) is better for customers because,
- It’s more flexible (You can access anywhere from any device)
- No long term commitments (Only pay for a month at a time)
- Always up-to-date (You always have the latest, newest, best version)
- Your information is always backed up, and
- You pay for the service over time, not all at once and up-front
Think about the old days when you used to buy Microsoft Office for hundreds of dollars up-front, all at once.
Instead, that cost is spread out today. So you only pay $9 per month for as long as you want to use the service.
This month-to-month pricing also decreases risk for customers, which will get you more sales. Because you’re asking for less of a commitment, customers can try out your service for very little, and don’t risk losing a lot.
That’s why Netflix can put Blockbuster out of business by charging only $7 per month.
So How Do You Increase Sales?
Ok, $7 a month sounds great. But you can’t build a business off that. So how do you really make money?
Your sales funnel tracks how many strangers become leads, prospects, and then customers.
It’s pretty easy to track these steps, and optimize each to make more sales.
The next step is measuring the lifetime value of a customer. It’s about keeping customers loyal and happy.
You can then increase sales through repeat purchases, cross-sales, up-sales, and new offerings.
Netflix is successful because they’re able to predict the average value of each customer. Most people don’t just sign up for one month. The average person may be a Netflix subscriber for 36 months… or longer. That predictable, recurring revenue is a powerful income stream.
But remember to never sacrifice trust. Don’t squeeze out an extra sale at the expense of a costing you that relationship.
Instead, focus on improving the value of your product or service, and creating a loyal community.
The reason people stick around with Netflix is because it’s a great service. Their “product” (digital video on-demand streaming) is the best available in the marketplace, hands down.
Your “product” is extremely important… but remember that’s not what you sell.
You should also prioritize activities that foster relationships and build communities of like-minded people. Creating a loyal audience around your business is a great way to keep people happy… and keep them paying customers longer.
What’s Stopping You from Focusing More on LTV?
It’s probably due to the lack of data, and how to tie the pieces together.
Then it might be time to invest in something like Infusionsoft, which combines CRM, Email marketing and e-commerce capabilities.
It helps you connect your marketing and sales activities, and gives you more insight into how much customers are really worth.
Instead of separating marketing and sales into two different buckets, you need to tie them together. Create a new position called Chief Revenue Officer if you have to.
When you know how much a customer is worth, then you know how much you can spend to acquire them.
And when the Cost to Acquire (CoA) is less than the Lifetime Value (LTV), then you have a proven, winning formula for creating a thriving business.