Whether you know it or not, you’re in the numbers business.
And there are a select few numbers in your online business that when improved, will multiply your revenue faster than you can believe.
So what if there were no new customers?
Is there a way to increase your revenue with the customers you already have?
There is, and I’ll share it with you shortly. But first, a word of warning…
Unlike some of my other essays, this one is only relevant if you sell products on a subscription basis.
Monthly mentoring programs, membership sites, premium content subscriptions e.g. newsletters, and anything else with a recurring element.
This is the business model I built RiskHedge to $10M per year using.
And if this is your business model as well, then understanding the leverage point I’m about to share with you can increase your revenue overnight without needing to acquire any new customers.
Let’s start with an important concept…
It’s easier to sell to existing customers than to win new ones
Think about it…
They already trust and like you enough and spend their money with you. Don’t underestimate the level of trust that takes.
Just because somebody has bought once, it doesn’t mean the relationship is over.
In fact, you should have a process of trying to sell to your existing customers multiple times.
Because selling something to somebody who already trusts you and has benefited from what you’ve sold in the past, is much easier than selling to a random stranger on the internet.
This is the basis for improving your Customer Lifetime Value (CLV).
What is Customer Lifetime Value and how should it be calculated?
You have a lemon tree, and each of the lemons represents a customer.
Now your goal as a business owner isn’t just to grow as many lemons on that tree as possible but to also extract as much juice from each individual lemon as you can.
This is the concept of Customer Lifetime Value (CLV).
Customer Lifetime Value is the average value that a business earns from a single customer throughout the entirety of the relationship.
And it’s the value of your average customer that we’re looking to increase.
|Customer Lifetime Value = Customers’ average purchase value x average purchase frequency x average customer lifespan
There are 3 parts to this equation which means 3 ways to leverage it…
Increase one and you increase your overall customer lifetime value.
Increase all 3 and you can multiply your CLV (and revenue).
2 key benefits of measuring your CLV
1. It allows you to maximize the value of every customer relationship
Let’s see the financial impact of CLV on your business with a quick example.
Say you have 100 customers and you want to increase your revenue. Instead of increasing the number of customers, it’s easier to generate more from your existing ones.
Currently, the average purchase value for each one is $200. The average number of purchases a customer makes is 1 and the average customer lifespan is 6 months.
Customer lifetime value = $200 x 1 x 6 months = $1200
Example 1 you increase the average purchase value
Customer lifetime value = $300 x1 x 6 = $1800
Example 2 you increase the frequency
Customer lifetime value = $200 x 3 x 6 = $3600
Example 3 you increase the average customer lifespan
Customer lifetime value =$200 x 1 x 12 = $2400
Now imagine you managed to increase the value of all three
Customer lifetime value = $300 x 3 x 12 = $10,800
As you can see, with the same 100 customers leveraging your CLV is the difference between $120,000 or $1,080,000 for your business.
An extreme example, but proof of its power.
Following so far?
Great, let’s take a look at the 2nd key benefit of increasing your CLV…
2. It allows you to spend more to acquire customers
For this to make sense, we need to take a small detour away from CLV and look at another important leverage point in your online business…
Cost of Customer Acquisition (CAC).
|Cost of Customer Acquisition = Cost of marketing + sales / Number of customers won
Cost of Customer Acquisition is directly linked to Customer Lifetime Value. If you want your business to be profitable, you want to make sure that your CAC is lower than your CLV.
Let’s see how they work together…
Pretend that the CLV of your business was $200, and your Cost of Customer Acquisition was also $200.
As it stands, you’ll only just break even.
Now let’s say you managed to increase CLV to $2000 by incorporating some deep funnels and upsells into your marketing strategy.
$200 to acquire a customer is now extremely profitable.
But that’s not all…
What you’re now able to do is spend more money upfront to acquire customers, eliminating your competition and generating much higher revenue. I break down how this works in more detail here.
Can you see now why CLV is so important?
Increasing your CLV increases revenue and profit and can allow you to spend more to acquire customers which increases your competitive advantage ten-fold.
I told you it was powerful!
Now you know what Customer Lifetime Value is, the question is, how do you increase it?
4 Proven techniques for increasing Customer Lifetime Value
1. Improving customer retention and reducing churn
There are lots of tactical things you could try to do to reduce churn.
Measure customer satisfaction, offer incentives on new products, and identify which kinds of customers are more likely to churn than others.
But retention really boils down to one thing – value.
As long as the value you’re giving outweighs what they’ve paid, you’re sweet.
Once that swings the other way, that’s a difficult spot to come back from.
If you’re not sure whether what you’re selling is of ‘value’ – a good place to start looking is your engagement. If people are replying to emails or posting about your product online, these are positive signs.
2. Sell more to existing customers
The more each customer buys from you, the higher your average purchase value (and frequency) will be.
The best time to sell more to your existing customers is right after they bought something from you the first time around. Check out this Deep Funnels essay for more insight on how.
Beyond that, keep plugging the ‘next product up’ in your value ladder every time you send an email. Check out Ben Settle’s newsletter for a masterclass on how that can be done.
3. Encouraging repeat purchases or subscriptions
This works well if you’ve got something you can sell multiple times or on a subscription.
For example, if you sell a 1-year subscription to a newsletter product (which is the business model I followed at Risk Hedge) then try selling a 2-year or even lifetime subscription.
We have some customers that paid $XXX to subscribe indefinitely. You can imagine what that did to our Customer Lifetime Value.
4. Creating loyal customers (that will always buy from you)
This ties back to the point I made earlier about value.
When you offer something of value, that leads to a tangible outcome in the lives of your customers, they will stay loyal.
If what you offer has no value, then it’s unlikely people will stay.
It sounds counterintuitive but instead of focusing on how to retain customers for longer, instead, focus on creating as much value in your product/service as possible (that people would be crazy to leave).
Things you should action immediately:
- Go away and calculate your current ACV or CLV if you don’t already know it
- Check your CAC in relation to CLV – can you afford to spend more to acquire customers?
- Out of the three multipliers, take the one which you think will be easiest to increase first and work on that.
If you need help with any of the above feel free to reach out to me at any time.
Hope this helps,
Until next time,
Dan Steinhardt CPA
P.S. Customer Lifetime Value is one of a few key leverage points that can unlock revenue growth in your business.