How do you make decisions in your business?
Taking your best educated guess can can be an OK jumping off point. (And the more experience you have the better, more reliable your instincts will be.)
But the only sure thing to base your critical business decisions on is…
The hard data you get from the results of your actions.
Feedback doesn’t leave any room for wishing or hoping. It’s the unique foundation of direct marketing. The ability to measure what’s working and what’s not.
But growing a business can be a complex issue. There are tons of numbers to take into consideration. And tracking and measuring those numbers can make you feel like you’re lost at sea.
So today I thought I’d simplify that a little. Today I want to break the idea of metrics down to a high-level, strategic perspective.
A level that anyone can understand. A level that will help clarify the alphabet soup of metric acronyms that confuse and frustrate so many. So that you can find the numbers that are key for YOU in your business. And then effectively use them to explode your business growth.
So Let’s Dive In…
In the sea of metrics that can be taken to measure your results, there are two main areas that you have to concern yourself with. They are:
- Customer Acquisition Costs or “CAC” (What it costs you to get a customer) and
- Lifetime Customer Value or “LTV” (How much that customer will be worth to you)
These two form the bottom line. Because when you get really clear on these numbers, you actually can turn your business into the proverbial “money making machine”.
If you think of all other metrics as indicators or segments of these two areas, then the fog that surrounds this topic will start to lift. You’ll start to get clarity on the things that are specifically important to you.
So let’s start by talking about customer acquisition in a little more depth…
But Before We Do
Let’s get crystal clear on one thing. I’m not talking about LEADS. Leads are the people you populate your list with who are interested in you. They’re a much larger and deeper category. In terms of the customer buying process, a lead is all the way at the beginning. They’re at the “recognition” stage. They’re potential future value. And they’re a completely different set of metrics.
Leads will opt in to your list and may never pay you a dime. What we’re talking about here is your cost to acquire a PAYING customer.
The what and how about customer acquisition
The math where this metric goes is very simple.
It’s the amount you spend in a given campaign divided by the number of paying customers you get. So if I spend $1000 on a media blast and get 50 paying customers from it my cost of acquisition is:
$1000 / 50 = $20 per customer.
So what’s strategically important to know here?
The number of paying customers you get, and your cost to acquire them is directly related to the offer you make. And the offer you make will need to be framed inside one of three models.
The Ascension Model: This is the most commonly recognized model. In this model you attract buyers with a relatively low priced “front end” offer. Usually under $50 and can go as low as $7 or even $5. (“Free plus shipping” is another version of this offer.) It can be easier to get a customer in the door using this model. But once you do, your future success depends on how quickly and effectively you increase their value.
The Descension Model: Here you’re starting with a significantly higher price point. Usually $1,000 and up. It requires a lot more work and education up front to make the sale. Which is not to say it can’t have explosive results. It’s the model I used when I launched Strategic Profits. I used a single free report (my Internet Business Manifesto) that led to a largely content-based webinar.
The “Somewhere in Between” Model: Here your initial offer would be higher than what an ascension model would prescribe, but significantly lower than a descension model. Say $197 to $297. You get a bigger bang up front, but of course you’ll have to work that much harder to make the sale. And your funnel will need to accommodate upsells and downsells to boost the value of the sale.
And that’s the bottom line of customer acquisition. Now let’s talk about…
Your Customer’s Real Value
The amount you realize from every CUSTOMER you bring in, will determine how much you’re able to pay for traffic. But there’s a catch…
A lot of rookies focus on the initial sale. How much profit they can make on the initial sale.
Really savvy marketers don’t worry about their initial profit margin that much. Some will take a loss on the initial sale. Because they’re focused on a much more important number… the LIFETIME VALUE of a client.
Bill Glazer (Dan Kennedy’s former partner in GKIC) used to say:
“We don’t get customers to make a sale… We make sales to get customers.”
Once you have a paying customer on your list, all the hard work is done. Now you’ve got a monetizable asset in your bank. Because someone who has paid you once (and is happy with what they bought), is much more likely to pay you again.
So lifetime value is about what gets marketed to a customer after they make their first purchase. And that “after” can be a matter of seconds (as in a one time offer upsell) or more ideally for years.
Lifetime Value is a simple calculation too. It’s simply the average of the total of what every customer has bought from you.
For example, Customer A spends $49 then $199 then $29 a month for 6 months in your continuity program. So his lifetime value would be:
$49 + $199 + ($29*6) = $422
Customer B spends $29, then $297 and then $199. Her lifetime value would be:
$29 + $297 + $199 = $525
So your average lifetime customer value would be $473.50
And the best way to boost lifetime value is by treating your loyal customers right. Make them special offers. Give them discounts. Things the general public never sees.
You keep them happy and they’ll keep you happy!
Being clear on this number is what will allow you to plan your customer acquisition costs.
A Final Note On These Numbers
Now if your cost to get a customer is $20 and the average lifetime value of that customer is $473.50, you’re a rock star.
But remember, while these numbers are critical to know, they’ll also change over time. And tracking them in such broad terms won’t let you optimize your results.
It’ll keep you from getting lost in that sea of numbers. But it won’t let you maximize your profits.
If you want to squeeze the biggest bang out of your marketing buck, you still have to drill down.
You have to have multiple campaigns running. And you have to run them through multiple channels.
And that’s where confusion often sets in.