Teacheting with Proffy T: Rockin' Customer Lifetime Value
Customer Lifetime Value and Customer Acquisition Cost are key concepts and metrics for marketers because they can affect so many things including strategy, execution, revenue, and profit among other things. This video explains key concepts and uses a familiar iconic brand to illustrate those concepts.
Welcome to Teacheting where I hope to teach you rather than just market to you.
All of us are concerned about getting and keeping customers. So, how can guitars demonstrate growth and value creation as it relates to customers? Let's find out.
It's important to know how much value a customer is bringing to the organization
and how much we should spend on acquiring a new customer. In this Teacheting lesson, we’ll cover three sticky points that will help you ascertain the value of your customers - customer lifetime value
and how much you should spend on new customers - customer acquisition cost.
By way of example, let's use Fender, an iconic manufacturer of musical instruments. If I take up the guitar or bass for instance, that's an opportunity for Fender to sell me a first “product,”
but Fender knows if I stay with the instrument and become a lifelong player,
I'll be worth multiple instruments over my lifetime.
Now, as a matter of fact, I read an article that said on average a lifelong player is worth $10,000 and will purchase five to seven guitars, multiple amplifiers, and numerous accessories. That's customer lifetime value, often referred to as CLV or LTV.
Customer lifetime value is a really important metric because it quantifies how much a customer is worth over their lifetime to the organization, but CLV as a concept reinforces the importance of customer retention as well. Now, there are various types of CLV calculations,
but the most basic is profit per customer times the number of years that they
remain a customer minus the customer acquisition cost,
which is what we spend to acquire a new customer through sales and marketing efforts.
Now, we don't know what Fender’s acquisition costs are,
but for our example, let's just assume Fender is willing to spend up to two hundred dollars to
acquire a new customer. Acceptable CLV numbers vary widely by industry
and company, but this is just to illustrate the concept.
And by the way, there is a simple CLV calculator and more CLV info on http://www.strategicglue.com. Just type in “customer” in the search bar.
Customer acquisition cost is a significant piece in
the customer lifetime value puzzle. Many companies are shocked to find out how much
those new customers are actually costing them.
Now, typically CAC is calculated like this: if Fender spent a
million dollars to acquire 5,000 customers in a
specified time period, their CAC would be $200. The time period is really important
because if you spend $200
for a customer and it takes beyond a year to make a profitable return that
probably doesn't make a lot of sense. On the other hand,
if you could make back say three times that amount within a year
or that customer makes purchases worth “X” every
year for a number of years that makes much more financial sense.
But, the big point here is what if Fender didn't know their numbers?
What if they assumed a customer was worth $20,000 instead of $10k?
Or, if they didn't have a defined CAC number at all?
They could be spending too much to acquire a new customer
or perhaps too little, which would likely affect marketing strategy, growth,
and profitability, among other things.
So, if we know what a customer is worth then we know how much we should spend on acquiring a new one. But, by knowing these numbers you can develop strategies that help you get to where you need to go.
The third sticky point is probably the most salient: CLV and CAC also inform us on
strategy. A huge problem in musical instruments is attrition.
It's reported that 90% quit guitar in the first year. Strategically,
how can Fender sell multiple instruments to someone if they quit in the first year?
It doesn't matter how great the product is if people aren't
using it. They need to help people learn fast
and as easily as possible,
so they stick with it. Fender developed a learning platform called “Play”
to help players learn, build brand affinity,
and hopefully a lifetime of playing enjoyment leading to
multiple instrument purchases along the way.
Customer lifetime value and customer acquisition cost
are like mini road maps that tell us where to go.
It pays to know your numbers. If you need help with strategy
for your business, check out http://www.strategicglue.com.
If you like this video, please leave a comment and share with others.
And, if you have suggestions for future Teacheting episodes, please leave your suggestions in the comments as well.
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