You must by now be aware of my overriding business philosophy: continually innovate your product or service--plus your entire business operation. And, market continuously and relentlessly with powerful direct-response strategies.

These are the two driving forces that will turn your business into an outstanding success, keep it at the top of your field, and make it almost totally immune from recession.

Additionally, if you have a product or service that genuinely benefits your customers or clients in some way--if you offer a better service, or a better product, or something new, or if you've found a way to improve in some way whatever it is you sell--I believe you have a 'duty' to make it available to as many people who could benefit from it as possible.

If you don't, aren't you to a greater or lesser degree denying them the opportunity to make their lives better, easier, healthier, wealthier, more fun, more fulfilling?

The Lifetime Value concept provides you with an opportunity to reach the far larger number of customers or clients that could benefit from what you sell.

And enable you to skyrocket your business growth and bottom line profit revenues too.

Here are six reasons why:

1. It allows you to faster and more effectively attract high volumes of new customers or clients to your business or practice.

2. It gives you the marketing and financial scope to figuratively take your
prospects by the hand, introduce them to the benefits and advantages of what you sell, and help them make a wise buying decision.

3. It gives prospects an opportunity to make their first purchase from you considerably more easily than they would be able to under a 'normal' buyer/seller environment.

4. It is the foundation of building long-term relationships with your customers or clients--the secret to optimising your success in any business or practice.

5. It provides you with the leverage to generate up to ten times the amount of profit for every marketing pound you invest.

6. It gives you the selling power to dominate your market and position your business as the leader in your field.

Let's look at why your business is indeed capable of achieving these greater
heights.

What Is The Lifetime Value Of Your Business?

The correct way to calculate your business's profit and growth potential is to take the selling price of what you sell, subtract the cost price, deduct a percentage for overheads, allow a percentage for marketing, and you've got the profit figure, right?

Plus the amount you can afford to market with, right?

Wrong!

This is the biggest mistake you can make when it comes to recognizing and releasing your business's true potential. The five questions you should ask to discover what your business is really capable of--the five I'll ask you to calculate now--are (without VAT):

What does it cost you to acquire a new customer or client? (In other words, if  you run adverts that cost £1,000 each, and you acquired four new customers every time you ran the ad, it costs you £250 to acquire each new customer.)

Answer:

What is the value of your average sale?

Answer:

What is the gross margin of that sale?

Answer:

How long does your average customer or client keep buying from you--the 'lifetime' relationship?

Answer:

Therefore, what is the 'lifetime value' of your average customer or client (the gross margin of your average sale x the length of your average business relationship).

Answer:

These are questions I find 95% of business owners never ask. Because they don't understand or have never looked at their business this way, they never recognize the gargantuan additional marketing leverage they possess.

Let's go through the calculation for two different types of business. First, let's say your average sale value is £200, and your gross margin from that sale is £70, and the average customer keeps buying from you for three years.

Your lifetime value is therefore £210 (£70 x 3 = £210).

Now let's take a business with a higher transaction value--a service business maybe.

Let's say your average sale value is £2,000, you make a gross margin from that sale  of £1,200, and the average client keeps purchasing from you for three years.

Your lifetime value is £3,600 (£1,200 x 3 = £3,600).

How do these figures reveal the larger potential of either of these businesses?

If you recognize that continuous and relentless marketing is the key to optimising your growth, then you are always looking to justify more marketing pounds to grow your business.

If you calculate your available marketing budget on either a fixed amount per year, or a percentage of sales, say 10%, you severely stunt your growth potential.

Here's why.

The first example company we looked at has an average sale value of £200, with a gross margin of £70.

Let's say they therefore set a marketing allowance within that £70, of £10. So '£10' per customer is what they are working with to grow their business, with the remaining £60 paying for overheads, staff, and utilities.

What's left is net profit.

On the surface it seems sensible.

Every accountant I know (bar a handful) works on this basis. Every bank manager I know (bar none, as yet) values your business on these calculations.

But you have to look a little deeper to fully understand the true potential of any business.

If company #1 set a fixed yearly marketing budget--say £6,000, £500 a month--and they used advertising as their primary method of acquiring new business, and every ad they ran at a cost of £250 produced 6 new customers, they would limit themselves to acquiring 12 new customers a month (2 x £250 ad = £500 budget).

Those twelve customers are each worth £210 over three years = £2,520 minus £500 advertising cost (or £41.66 per customer) = £2,020 gross lifetime profit.

If they alternatively set a marketing budget as a percentage of sales, let's say 10%, again they severely stunt their growth, but now in the reverse way.

When their sales are higher--let's say, for them, a sales result of £20,000 a month is good--they will inject £2,000 into marketing.

That's eight £250 ads, or 48 new customers a month.

Not bad.

They're making 48 x £210 minus £2,000 ad cost (£41.66 per customer) = £8,080 over three years from every one month's marketing, or £96,960 from every year (£8,080 x 12 months = £96,960).

But when their sales stumble--when they fail to innovate their product, service, or marketing sufficiently to retain the interest of customers, or they hit a recession, or for any other reason--to, let's say, an average of £10,000 a month, their marketing budget falls to £1,000--four £250 ads, or 24 new customers.

They halve their marketing effort and results just at the time they need it most, to boost a fall-off in business.

The flawed strategy of either fixed, or percent-of-sales budgeting apply to any business.

They apply to yours.

Now look what happens when you explore the possibilities of Lifetime Value marketing.

If you were the owner of company #1, and you calculated the lifetime value
of your average customer was £210 over three years, would you still set a fixed budget for marketing, or a percent-of-sales budget, and therefore limit the number of £210 customers you can acquire?

No!

Here are the larger possibilities company #1 has:

If every customer is worth £210 then, in theory, you can spend £200 on acquisition marketing per customer and still make a £10 profit.

In reality, I wouldn't normally ever suggest you spend that much (except in a few isolated cases), but you get the idea. Your actual budget for acquiring new customers is far larger than makes sense, or that you thought possible, when you only take into consideration the value of one sale at a time.

Your true worth as a business should always be calculated on the lifetime value basis if want to reach anywhere close to your full growth and profit-earning potential.

What if--instead of paying £42 to acquire each new customer--you allocated £60, or £80, or even £100? How much more effective do you think your marketing could be with the additional available pounds?

How many additional new customers would you be able to acquire with your bigger marketing efforts?

How much more rapidly would you be able to acquire them?

I'll explain the almost limitless additional marketing and profit possibilities you have as you invest more pounds into acquiring lifetime customers or clients, in a later article in this feature.

But for now, consider this.

If company #1 were to nearly double the amount they allocated to acquiring each new customer to £80, and--by using more effective direct-response marketing--they trebled the number of new customers they acquired each month (a realistic scenario), their lifetime value increases substantially over the same three-year period.

If, as we saw earlier, they were attracting 48 new customers each month by allocating £41.66 to each, then in a year they'd attract 576 new customers (48 x 12 months = 576).

Over a three-year period those 576 are worth £96,768 additional profit (576 x £168 net lifetime value = £96,768).

But now their increased marketing efforts treble their customer acquisition to 1,728 new customers in a year, at a cost of £80 each.

So their net lifetime value per customer is reduced to £130 (£210 minus £80 = £130). Over the same three-year period they now generate a more exciting £224,640 additional net worth--a 232% increase in profits.

Which would you rather have?

Amazing New Profit-Earning Potential!

A client in the window display business--The Display Team--consulted with me a few years ago. They wanted to know how best to grow their business.

They felt they offered the most comprehensive, original, and detailed displays for their specialized market--estate agents, and employment agencies. But they worried that less talented competitors were threatening their business with bigger and glossier ads in the trade press.

How could they combat this?

Within 30-minutes of calculating their margins and introducing them to the concept of lifetime value, it was clear what they could do: apply the powerful dynamics of Lifetime Value marketing to their client acquisition strategy.

Their average transaction value is £2,500, of which they make 40% margin--£1,000.

The length of their relationship with the average original client is 10 years (nearly every client they started with ten years ago still uses their display services today, a fitting tribute to their insistence on quality and innovation).

Their lifetime value with these clients is therefore £10,000.

With new clients however, their average business relationship is three years.

Why?

Mainly because their original clients--all large companies--are stable, financially strong, and happy to continue using the service they know and are happy with.

But smaller companies who might be less financially stable, or more willing to sacrifice high quality for a competitor's lower fees, are proving to have a much reduced lifetime period.

So, to eliminate the risk of unrealistic profit predictions, I suggested they calculate all their new client business on three years lifetime period.

Their new lifetime value is therefore £3,000.

They have been running an ad that costs £300 and produces an average of 3 new clients.

So each new client costs £100 to acquire.

Their net lifetime value is therefore £2,900 (£3,000 minus £100).

They ran the ad every other month, acquiring 18 new clients in a year. Their current average net lifetime worth is therefore £52,200 (£2,900 x 18 = £52,000).

I suggested instead of spending £100 to acquire a client they should consider spending £500. Their lifetime value is reduced to £2,500--still a healthy amount--but their marketing leverage will be five times higher.

I gave them three strategies that would multiply their response up to tenfold, and that could be financed from the new £500 budget.

Here they are:

1. Improve their advertising. Incorporate a compelling headline, interesting and informative body copy, and a reason to act now. Include a freephone number and a freepost address.
2.  Use direct mail to approach targeted prospective companies.
3. Write a report on how and why an effective window display increases high street inquiries and sales. Demonstrate the importance of attractive and compelling windows. Make the report available free to prospects via the advertising and direct mail.

Again, to err on the side of conservatism, I suggested they calculate a five times increase in customer acquisition, not ten times.

Here's what their business looks like now:

If they run 12 ads a year, plus a powerful direct mail campaign, and they use the report as I suggested, let's say instead of 18 new clients a year, they now acquire 90 (18 x 5 = 90). 90 x £2,500 lifetime value = £225,000 additional profit--a 433% increase in new profits.

What About Your Business?

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