Do you know the true value of your customers?
Customer numbers, revenues and retentions are in many ways the rocket fuels of business success. Certainly if you wish to impress bankers, investors and the market in general with corporate growth under your leadership and management you had better understand and pay homage to this important trilogy.
Do you know the true value of your customers?
What is the key metric you use to measure and drive your business?
When asking this question I find that most answer with “EBIT”, “margins”, “revenues”, ROI or some other fairly common KPI, however, I believe “Customer Lifetime Value” (LTCV) is perhaps the most significant measure to indicate the general health, sustainability and true value of a business. It is one of the most overlooked and least understood KPI’s or metrics in business, and yet it is one of the easiest to quantify.
Why is this particular metric so important? Because truly understanding it will deliver rewards, it will give you an accurate indication of how much repeat business you can expect from a particular customer, which in turn enables you to accurately forecast, cost and develop your business.
The value of LTCV in determining marketing spend and direction is immeasurable as it will not only help you to decide how much you can afford to spend to “buy” each new customer for your business, it will also motivate you to grow your business by showing you when and when to spend.
Once you understand how frequently a customer buys, how much they spend and for how long you retain them you will better understand how to allocate your resources to optimize customer growth and retention programs.
An easy calculation to estimate CLTV is to insert actual or estimated (if you’re in the planning stages or just starting out) numbers into the following equation:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
A simple example would be the calculation of a service subscriber who spends $20 every month on a 3 year average retention. The CLTV would be:
$20 X 12 months X 3 years = $720 LTCV
We can see from this hypothetical example why so many successful businesses offer a free or discounted service to attract new customers and grow their business. Savvy entrepreneurs know that as long as they spend less than (say) one year’s revenue of $240 to acquire a new customer, the customer will quickly prove profitable and add a further CLTV to the business.
Further refinements can be made by calculating the margin value of each customer and the cost/benefit of a stronger customer service and or retention program.
Once you can demonstrate the multiples of CLTV you place your business in a very strong position should you later require additional funds for expansion from banks and financiers or equity from investors
Growing your CLTV
Once you have some idea of the lifetime value of your customer, you have two Targeted Marketing options in deciding how much to spend to acquiring each new customer:
Allowable acquisition cost: This is the maximum amount you’re willing to spend per customer per Targeted Marketing campaign – In this instance ensure the cost expended is less than the profit made on the first sale. This is an excellent short-term strategy for an emerging business or one in which cash flow is a concern.
Calculated Investment acquisition cost: This is the calculated cost you expend per customer in Targeted Marketing where you know that you will take a loss on initial and occasionally subsequent sales as you have pre-determined that you have the available cash resources to fund your marketing investment. This is a longer-term strategy ideal for mid-life to mature businesses looking to consolidate growth patterns and market share.
Marketing: Expense or Investment?
This is an interesting question which all entrepreneurs should resolve very early in their careers. In my assessment marketing must always be an investment with a measurable ROI. Understanding the LTCV of your customers provides you with such an ROI, a metric easy to establish and measure.
You will struggle to develop an optimal marketing budget unless you know what the return on your investment needs to be. This knowledge is essential as it will lead you to make sound marketing decisions based on the reality of sound and supported metrics rather than the ethereal promises of a new media promotion or program.
Understanding your LTCV’s provides you with specific knowledge as to how, or if, you can discount or offer incentives to attract new business. It will help you avoid the potentially disastrous effects of discounting when your business needs cash flow to survive. In addition, you will find innovative ways to build value upfront and create offers that drive enough volume to support and eventually increase your overall LTCV.
Think this through and take some time to calculate the LTCV equation as it applies to your business no matter if you are established, growing or just starting out. This is the metric for everyone.
In summary, the LTCV will determine the planning and frequency of your marketing spend, the ultimate success and thus the ultimate value of your business.
The Barking Mad Blog
Business Advice with Bite
Seven steps to getting rich
The accumulation of wealth is easier than most realise. Once your antenna is raised to embrace wealth potential and you commence the journey riches will follow. In recent times wealth and its creation have been seen as less than desirable perhaps even a little dirty, not quite the done thing.
I find this attitude strange as throughout nature creatures nest and those capable of building a better nest live longer, breed more successfully and generally enhance their bloodlines and community. Surely that’s a good outcome for all?
Wealth and its creation should not be considered ‘dirty words’, but remember the discrete and careful enjoyment of its benefits are attributes to be admired. True wealth is a state of mind and an ongoing way of living which embraces so much more than your bank balance.
As with so much in life a steady, incremental plan, will deliver a surer chance of success in the creation of wealth. Yes it is slower than “doing the great deal” but it is also more certain in outcome and you will have more chance of holding onto and enjoying the wealth you create.
It doesn’t matter how much you earn, whether you are a Gen Y first time investor or a seasoned baby boomer with multiple assets, there are seven key strategic behaviours that set apart the wealthy from the rest of us.
Spend less than you earn – this sounds obvious but many of us live from pay cheque to pay cheque, which indicates it’s a lesson that is quickly forgotten. Save and invest because the law of compound interest will help ensure your nest egg grows quickly. Start as soon as possible because time is your best friend.
Invest as much as you can in assets whose underlying capital value will grow – remembering income is usually taxed at a higher rate than capital growth.
Reinvest any capital growth – as this adds to the amazing power of compound growth.
Do not be afraid of debt – leverage accelerates your net worth but keep a suitable buffer for the unexpected.
Invest in yourself – it pays to broaden your fundamental investment knowledge.
Have a mentor – a coach will help drive you and keep you focused on your long-term goals.
Have a team of experts – remember you don’t have to be the smartest person in your team.
Above all, generating wealth is about having a purpose and focused determination. We are all living longer and will need more wealth to look after ourselves when we are older. State pensions are no longer the safety net they once were and advances in medical research keep us healthier for longer, but at a cost.
Start today by determining how much wealth you want to hold and by which dates. Write a game plan detailing how you are going to achieve wealth, refer to it daily and update it regularly as change occurs. The sooner you start the easier it is!
The Barking Mad Blog
Business Advice with Bite
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Creating an Entrepreneur!
Is it possible….you better believe it!
Entrepreneurs are often the rocket fuel which drives new ideas, creates new businesses and indeed new industries. In common with such inflammable fuels entrepreneurs can often end with a bang but overall they have driven commerce and commercial ideas for millennia.
Most entrepreneurs tend to be highly individual, difficult and unpredictable and lacking in reputation when it comes to team work and the subtleties of the office culture. This is changing as most business schools and universities are turning out graduates with qualifications in entrepreneurship.
Having tame yet empowered entrepreneurs within a company is the dream for most business owners. These are employees who will undertake something new, without being asked to do so. They are innovative and creative – they are people who can transform an idea into a profitable venture for your business. They strike the perfect balance – act like entrepreneurs, but they work for you.
But as any business manager will know, such individual entrepreneurs are a rarity, however, this needn’t be the case. Every employee can become more creative and entrepreneurial if their company adopts a different approach to their development and cultivates a culture where innovation and creative thinking is encouraged and supported.
One of the main problems facing many Australian businesses is that they have lost sight of the importance of fostering creative thinking and innovation. In doing so, they are placing their business at risk and giving the competition a serious advantage.
We can’t lose sight of the fact that the economic crisis has turned many offices into high pressured working environments, where employee engagement and confidence has been eroded. In such businesses energy, creativity and innovative thinking has been lost.
However, what has also emerged is a (it’s not us) blame culture where business people are blaming their current poor business performance solely on the recession and external factors. But this is a bit like complaining that you are wet because it’s raining. How about wearing a raincoat? Businesses have a duty to prepare for the future upturn and ramp up their competitiveness.
The actual ‘raincoat’ for business is not to cut costs and act in defence; it is to build resources and attack. Sun Tzu in the sixth century said that you may survive though defence but you can only win by attacking. One of the oddest paradoxes of the business world is how many business owners never even see themselves in a competitive situation. Absurd! Competition in so many forms is ever present and can never be ignored.
So what can businesses do to be more competitive? It is in times of adversity that some of the greatest innovations have appeared and in today’s straightened times there is a healthy pressure to differentiate, become more competitive and establish more intrinsic value in the organisation. Does this come about by exhortations by the CEO or by establishing a culture of freedom to think and innovate? It may be the former but it must be the latter.
It is down to business managers and the HR department to establish a culture where intellectual power within the company is harnessed to the betterment of innovation and in so doing equals motivation, productivity and profits. An energised workforce is an effective and content one.
Most people in an organisation have enough insight of what is going on to be able to contribute to innovation. However, we are not talking just about suggestion boxes. I am referring to special projects and cross functional work groups to establish innovation in products, service and operations.
Managers need to make it clear that this is not a one off; to create sustained motivation, people must feel valued. Leadership has to be consistent and authentic in the way that it empowers teams to be create
Here are some ways of encouraging creativity and innovation:
1. Understand and know what the market wants, but know more about what your competitors are offering and how they behave.
Competitors of all kinds are the minimum benchmark for which to aim. Equalling the value of competitive offerings is rarely going to suffice – always ensure you are moving to stay ahead. Look at every weakness in competitor offerings and operations and use advanced brain storming tools such as ‘meta planning’ to develop and refine the winning concepts. To win you must find that point of difference and it’s usually a combination of ingredients which becomes – your winning recipe
2. Empower people to implement their innovations.
3. Make it clear that a business must always rethink, reposition, invest and develop its products and services.
NEVER stand still. Even those lucky enough to have patent or intellectual property protection must seek to acquire more advantages. If in any doubt about this then compare the car manufacturers on the road today with those of thirty years ago. GM laughed at the Japanese cars with their floral carpets and tiny engines. England was the undeniably solid centre of motorcycle production.
4. The customer is always a good start point for innovative thinking and should be a central focus for the whole business.
The customer and their relationship is central to business success. Do not rush to copy some competitors’ ways of caring for customers (e.g. automated telephone services!). Develop new ways to engage with customers in a way that customers want. They will repay you over and over. This is how Virgin took so much business away from the likes of Qantas
5. Treat internal employees as customers and friends.
The best innovation can come from co-operation between employees – this is an effective way of bringing out entrepreneurs. Identify and appoint innovation ‘champions’ around the business. These people will be the leaders on innovation development and manage the process. They must drive the culture.
6. Any function has scope for innovation – always.
HR, finance, customers service, manufacturing, legal, they all must innovate and an innovation culture that embraces all the functions will be a better joined up organisation.
7. Lead people to look externally for inspiration and don’t be afraid to steal other people’s ideas.
Some of the best ideas and simplest innovations are from businesses that already have had such a drive or survived times of stress. Don’t reinvent the wheel copy the world’s best practice then improve it.. Sometimes copying is the best route. However, copy it, and then improve it. Look at how the Japanese destroyed the UK motorcycle industry, they initially copied the UK and then made the products better.
8. Managers should promote external focus from all departments.
Many businesses suffer from internalism and parochialism. They stunt growth, innovation and sap energy. Assume that your business could be killed off by new entrants to the market or new innovations – people or technology based. Get people to think the un thinkable, develop thinking around scenarios that may seem unrealistic. In the 1960’s Black & Decker was the world’s largest and most trusted power tool maker. Which of the analysts and business commentators wrote or though in 2007 the major global banks would fail, that the system was unsupportable and a crash inevitable.
9. Lastly, companies must look forward, and by looking forward I mean 360 degree vision and a strategy to see through it. Most look back when setting budgets and design parameters.
Create a ‘can and will do’ rather than ‘can’t do’ culture. There are ‘no but’s’; only ‘yes and’
In the end, innovation is an state of mind. Train your key people to think and see differently, search every day for the new, the better, form, function, value and service. This is where Steve Jobs was masterful in transforming not only an industry which he had helped create but in transforming the culture of a major global enterprise.
The value of leadership and empowering your management is enormous and in truth no one has a choice in the matter. Everyone must adapt, change and innovate and we can all with training, help and enthusiasm become entrepreneurs.
Empowering employees to be innovative and creative, and encouraging a ‘can do’ attitude can reap rewards for everyone – whether monetary or reward based – and companies that do this are more likely to survive the recession.
A new show on the ABC called Redesign My Brain, hosted by Todd Samson, shows just how adaptable to new ideas, concepts and skills our brains are.
It’s been said so many times but the answer is to look out of the box or in more 21st century terms constantly look beyond the horizon and use 360 degree vision and thinking.
The Barking Mad Blog
SME Advice with bite!
13 October 2003
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