So What? Calculating Customer Lifetime Value (CLTV)

Well, hey everyone, happy Thursday. Welcome to So What, the Marketing Analytics and Insights Live Show. I'm Katie, joined by Chris and John, who are today. Today we are talking about customer lifetime value. Specifically, uh, what is it?

What is the general formula? Um, what data sources do you need? And then what do you do once you have it? It's one of those terms that gets tossed around a lot. And I have a sneaking suspicion that there's a lot of misunderstanding over how to actually arrive at the numbers and then what to do with it uh once you have it.

And actually, we got a really interesting comment today in our Slack group um from one of our members who said, uh, with all the issues with attribution modeling, which we were talking about in our Slack group yesterday, uh, he said, I think this will be a major focus in the near future. Um, and so we can cover attribution models at another time. But so we want to focus on customer lifetime value. And so, John, I actually want to ask you, because this is typically a number used in sales as a sales metric. And so is this something that I know you've come across it, I know you know what it is, but like, is it a metric that you've used a lot over the course of your career?

You know, we use it to kind of figure out if the business model's working, but we it doesn't really get the workout that you'd get like at a B2C company, you know, if you have if you're selling soft drinks or whatever, or um, you have some kind of product where you have thousands of customers, I mean, it becomes a real solid and interesting thing of you're just looking at, okay, how much can we expect from these people? And it it's usually some kind of upfront purchase, and then there's a period of time you expect them to sit around for. And you know, in a lot of these models, you expect to lose them too. Like you're only gonna get revenue for three or four years or whatever, and they go on. But the idea is that you get to an ironclad number of like, okay, we know that a customer is worth, you know, $12,000 over their lifetime.

And so then you can go back and look and say, okay, well, if we're spending more than $12,000 to get these people, the whole business stinks and doesn't work. And so that's, you know, but again, most of the places where I've done it, it's you're actually like building all the infrastructure and trying to do it for the first time. You know, you only have a year or two worth of data and you don't really know whether people stay or bail. Most software companies, you know, mistakenly are not assume they're gonna keep everybody forever once they get the SaaS chains on them. And so you just kind of look that, okay.

So what do we get up front? What are the first two years and what does that cost? And are we, you know, are we gonna go out of business in a couple months, or do we have at least some runway to survive? Um so yeah, kind of a long answer, but it's yeah, I've always been at places that are trying to get there. Most of the places that I'm at either die or you know, I'm gone before they actually find out what the actual number is.

But um, it's yeah, it's still critical to figure out what works and what doesn't work. Uh side note, I wish I had any kind of artistic ability because I would be illustrating some of the phrases that you drop, such as the SAS chains on the customer. And so I already like in my head I can picture it, but for the life of me, I cannot draw. But I we should start to hire a cartoonist to start to illustrate the wacky stuff that we say. The chains of yeah, because it's so many companies just assume that you know, once you get the customer, they'll just be around forever.

And you and you see this, you know, not every company is a cable company, you know. You you do have other choices that you can bail. So um, but yeah, you know, hopefully you're you're building those chains. Uh Chris, you have a big wonkin formula. Um, where do you want to start with talking about customer lifetime value?

Uh I don't have a formula, uh, because customer lifetime value is one of the most difficult and painful things to calculate. It's probably the most complex computation uh you will ever do in marketing and business. And the reason for it is that it is composed of so many pieces of information that are all over a company. And unless your company's small uh and and you know everybody knows everything, it's so difficult to get a handle on. So let's let's start with this.

What is broad in the broadest possible strokes? What is customer lifetime value? Oh, that's a question for us. That was yeah, that was a little bit. I was like, I don't know, what is it?

No, it's basically as John said, it is the uh how much money someone pays you over the course of their relationship with you. Um, so for example, if we have uh a client who does one single project with us, their lifetime value is whatever they bought that project for versus a client who's a retainer over multiple years. We start to add up those multiple years because that's their lifetime value, and so they're gonna be very different. There's no, I could sort of say anecdotally, we don't have one set customer lifetime value, like that's the one number. We would have multiple, and but we would start to break it down from retainer to project.

Got it. Okay. So let's start with earnings, right? Uh, we obviously have a sale. Um, what we what a customer pays us, and you so you have your original sale, that's gonna be the money you make on the sale.

You will also, um, as you pointed out, Katie, uh, sometimes have either uh recurring revenue, right? You will also probably have upsells at some point, and all that gets bundled together in terms of what you can earn from a customer, is that all? No, because there's intangible things, there's referrals, there's loyalty, um, there's testimonials, there's uh evangelism. Okay. What else?

How else are you gonna make money on a customer? Oh god, I never go into the soft stuff. We don't care. We're just like, how many checks did we get? Okay, that's it.

We got the number. Well, so what other hard numbers are there for for customer lifetime value for the on the earnings side? How else can we make money on a customer? And and not just us, but think about soda business. Think about uh local restaurant, maybe think about I was gonna say probably affiliates and partnerships.

Affiliates, exactly. Affiliates, partnerships, advertising. Right. We were just talking the other day about how in-store advertising on TV networks at retail stores is more profitable than the store itself. Oh yeah.

Yeah, like Walmart's in-store TV network is the sixth largest TV network in the in the world. Oh wow. That is not what I thought you were gonna say. And it's all house inventory, so they can say, hey, there's a special today on grapefruit, you know, and wherever they because TV is in TV is so compelling. So so these are all things.

The sales side, that's all hard dollars, right? That's all money coming in. Uh you can sell more stuff to customers, uh, you can advertise to customers, you can uh resell other people's stuff, you can co-brand, and then yeah, you have the intangibles with the evangelism uh unpaid marketing customer content. Where's a lot of that data live? Oh, in a magical single source that you can just whoop.

This is what one customer profile is. CRM for the win. Yeah. I'm just I'm kidding. It's that's not that's not how it's probably accounting, right?

Um, you would hope so. Some of it's some of it's gonna be accounting, some of it's gonna be the CRM. Uh, some of it's gonna be maybe in another database, especially if you're talking about you know, affiliates and partnerships. You would think it would be in the CRM, but um the advertising is gonna be in that advertising system, and so this is where we it's this is where it starts to fall apart because it's not in one single place. Exactly.

This is this is why customer lifetime value is so hard to understand. And we've only done half of it. We've got another half to do of customer lifetime value. So customer lifetime value is not just money in, it is also money out. What does the cost of the customer?

We have the obvious costs, right? So let's talk about acquisition costs. And that's what you were talking about, John, in terms of using this metric to understand if the business model is working. Yeah, it but you know, in simpler models, it's just you just take all your expenses, you know, there's no magic to it. You just grab the whole thing and divide it out.

This being able to get granular and actually figure out that this is where there's huge power in this model is you know, you find some way you like you don't even have to sell more. You can just be like, well, if we can make it cost 10% less to serve the customer, like that can suddenly have huge um impact at the other end of the funnel. Yep. So you have advertising market and hard dollar spend, right? Which is all the stuff you have.

Uh we're gonna lump in public relations and basically anything where you're paying um to get the word out under acquisition. Um you also have sales cost, right? So that that is personnel costs. Um and you know, personnel and uh overhead for sales, like Salesforce.com is not cheap, right? HubSpot is not cheap.

Uh those go into the cost of a customer. You have uh insanely talented people like John working for you. There, you know John doesn't work for free. Um, so that's sure does not. Um so on the on those sales sides, yeah, you have these costs of what it costs to acquire a customer.

But John said something else really important in there. Um you have the servicing of the customer, right? That is expensive. So you have the basics like administrative overhead. Um and that's where you have things like your accounting system and stuff that you know and your accounting department to manage that your billing department, um, depending on the the relationship.

You also have client or customer service. Yep. Right? Because a customer that costs you an hour a week, you know, for a meeting or whatever, and maybe an hour for of work for a week, that's that's a good customer. Uh the same client paying the same retainer that costs you 14 hours a week, that's real money, right?

That's that's the you're sp you're you're burning money on that um to keep that customer happy. And again, this is Bdb B2C. Uh I have a friend who works at Chase Bank, and her career is literally on the phone saying, Hi, my name is Bob. You know, how can I help you today? And you know, the customer's like, oh well, I you know, I I lock myself out of my debit card and you know, uh I'm I'm stranded in South America, whatever.

And and she's gotta figure out how to to help this person and she costs X dollars per hour. So to service that customer uh and all that overhead is part of that. What else costs money on the servicing of a customer? Product support, you know, all of the if you're having to build new things for them to buy or upgrade the ones they've got. Exactly.

Product support warranty and replacement um is is part of uh the cost of a customer. What else do customers cost? My soul. Your soul is priceless. I know.

Uh no, I mean, so like the cost, you know, you've covered most of it. So you have you know the advertising, you have the sales, but then you have the servicing. Um, it's the retention. Oh, you were writing it. It's good.

Where to retain a customer, have to do deals and discounts, right? We've all done the thing where we said, hey, uh cable company, I'm gonna be switching, but uh, we'll give you 25% off the next two years. Okay, that eats into the profits. Oh, yeah. Well, and you know, I think it's like the number one question in business school is you know, it's almost like a riddle, but there's a very simple answer.

It's like, does it cost more to get a new customer, or does it cost more to retain a customer? And the answer is it costs more if you're doing it right to get a new customer, it should cost less to retain a customer, even if you're doing deals and discounts. Because so let's say in that example, you know, I call up and I say, I'm gonna switch cable companies, you know, if you can't make this work for me. So they give me $25 off my bill every month. Well, that means that they didn't need to involve sales, they didn't need to involve marketing, they didn't need to involve, you know, all these other things.

And so the cost is probably still better than you know, having to get me net new and get me on board again. Exactly. And here's the catch. There's a we're not gonna draw it on here because it would take forever. There's a lot of dotted lines between these things.

So if your customer service sucks, looking at cable companies. Then the marketing side on the earnings side for evangelism and customer content isn't gonna happen, right? If you're if the servers at your restaurant are rude, you're gonna have a hard time getting people to give you video testimonials. Your Google My Business reviews are gonna suck, right? Your Yelp review is gonna be all one star.

And so there's a lot of interdependencies between these things that can change your customer lifetime value calculations. So you may think by saying, Oh, we're not we're gonna have three, you know, four people in front of house instead of six. It's fine, we'll save money. Yeah, you'll save money in the short term. It's gonna impact your your uh upstream uh earnings.

Okay, where do these data where's this data live? Um let's see, the advertising and hard dollar spend. I mean, that again might come down to an ad system. Um, depending on how you're marketing, if you're doing email marketing, if you're doing uh organic search, if you're doing ads, those are all different systems. Um, all those servicing stats, those are sitting on some weird homegrown IBM system with a server in somebody's basement that no one knows how to get to.

It should theoretically also live in, you know, the CRM technically does stand for customer relationship management. Uh, very few people use it for that. Post-sale data in the CRM, right? Yeah. Yep, exactly.

So this lives in your CRM. Uh those costs, this lives in your HR systems, anywhere you've got personnel, um, you're gonna have HR. Uh let's see, administrative overhead, that's gonna be accounting for sure. Product warranty and displaymants, that's gonna be in uh a couple different places that you're you're gonna be talking about your CRM, you're gonna talk about accounting. You're gonna be talking, depending on your industry about inventory management.

Well, and then you're probably also talking about uh any of your dev systems, your above tracking systems. Exactly. And your attention stuff, that's uh deals and discounts, that again is going to live in accounting and potentially your CRM. This is why customer lifetime value is such a hairy mess to try and deconstruct. All this data lives in so many different places that it's impossible to fully discern.

So the way to approach it, there's a couple different ways to approach it. If you want the granularity, you've got to go and get all this data out of these systems. Right. But if you think about it, each of these branch sets of branches is sort of a a layer, a tier of granularity. Something John said early on in the show was well, you know, we just add up a you know two big numbers together.

You have your gross uh revenues and you have your expenses, and boom, that's that you know, you divide by the number of customers, that's your customer lifetime value. That would be taking these two numbers, you know, the broadest numbers, and and doing that calculation. That's for a that's the lowest level of precision, but requires the least amount of work. But it seems like it's a really good place to start to even see art, you know, to John's point. Does it cost you more than you're bringing in?

Like that's a really quick way to tell the health of your business. Um, because ideally you're bringing in more than it's costing you. Like that would be a good business. And then you can start to get into, well, you know, my profit margin is 10%, so my goal for next year is to make it 15% and so on so forth. Exactly.

Now your second level is yeah, can you can you get just the sales data in aggregate out of your system? If you get just your marketing data out of your system, can you get just your overall servicing number? If you have 50 people in the call center, what is that call center cost? And then you amortize that cost, you know, over your customer base, particularly if you're doing B2C, where you just have, you know, yes, some customers are going to be they'll call into the call center, they'll spend an hour and a half and basically get free therapy. The call center.

Other people like, what's my password? Here it is, okay. Bye. Um, you know, it's it's a two-second call. But you can amortize that out and say, okay, our on average our customers cost us $26.42 per call.

We've field this many calls. Ultimately, it you know, the the broadest level CL CLTV number is earnings minus cost. That's that's the broadest formula. But now we start digging deeper and deeper and deeper and get more granular, you will get you can uh break that up. The reason you'd want to is exactly what you and John were starting out at the top of the show, which is what levers can I pull to either improve my earnings or reduce my costs.

Well, and I would you know imagine the more granular you can get, the easier theoretically, the easier it is to start to tweak things to say, you know what, I'm spending an awful lot on advertising, but that's not the thing that's bringing in the customers. I mean, that's, you know, a lot of it, you know, it sounds very similar in nature to what an attribution report is meant to do, is what is working to get people to convert. And so I can see where there's similarities between understanding the customer lifetime value and understanding your attribution modeling. And that was the comment that our um community member was making about, you know, as attribution modeling is getting harder out of the box, and as data privacy is going to make it more challenging to get some of this data, understanding your customer lifetime value is going to be a substitute or a supplement for a lot of companies. How much time are you spending on each account?

Or in like an agency, you know, go into your timekeeping system and say, Oh, how much time are we spending on each of these customers? And we can say, yeah, you know, on a on a on a dollar per hour basis for our employees, we are spending, you know, $26,000 of time on customer A, uh, and we're spending $5,000 on customer B and they have the same retainer. So customer A, we either need to tighten up there or we need to throw that customer overboard because they're they're more troubled than they're worth. Well, and that's assuming that you're using, you know, one on one-on-one, like pick up the phone and call. You know, we haven't even talked about uh companies that use chatbots as their customer support, you know, it's theoretically less expensive, but you also have to maintain the chat bot.

Someone has to program it. Um, you know, it has to actually offer usable information. Um, you know, so there's a lot of different ways to think about customer support, other than you know, your customer support might be purely your social media manager who responds to people who are tweeting at you. Um, and so then you have the cost of that person plus the cost of you know the knowledge base, all those things. Exactly.

So let's see. Yeah, on the revenue side, um we have a couple things. You so on this on the sales side particular, you're looking at earnings per customer. Like, you know, how much money are you making per customer? Whether that is a client at your agency, whether that is, you know, Bob down the street who buys four cases of soda every week.

I mean, Bob has dental issues, but Bob is a very good customer. Um, that report tells and that is the actionable piece of information they have to say, okay, if we want more money, can we do RFM analysis on our customer base and say, okay, how can we get more of our customers to spend more money with us more frequently? Well, and um I realized I was sort of jumping ahead. So when I said that you had, you know, a big wonking formula, the formula I was thinking of assumed you already knew your customer lifetime value. And so this is the precursor.

So for instance, the reason I bring it up is because a lot of times when someone's setting up goals and events in Google Analytics, for example, they want to assign a dollar value. How much is a you know form fill worth? How much is a download worth? In order to truly properly calculate that, you need to understand the customer lifetime value first, and then you can work down the formula to understand what those are. And we can show that formula a little bit later on when we get into what do you do with this information once you know it.

Right, exactly. But right now we're just trying to figure out A, where does the information live? And then B, how do you put it all together? And then C, what are the levers that you can pull to influence each of these things? And so on the marketing side, your marketing generated activity is going to be your key report to influence earnings from marketing.

Say, okay, what in marketing is working there? And you that's again where you can use attribution modeling or marketing mix modeling to say like these are the channels that are the most efficient at bringing us marketing qualified leads or shopping carts in our e-commerce system, or the number of people who cross the front apron of the of the retail store. All any of those reports will do that, but it has to be in concert then with your sales as well. Right. So let's say we have, let's, you know, in a perfect world, let's say we have all of this data, we have access to all of these reports, and these reports exist.

We should then be able to create the customer lifetime value metric, right? Exactly. And that's where you would bundle up and say the the earnings person, you know, the sales revenue on a on a customer basis. And you want to do this on an individual customer basis if you can, and then aggregate it all together because not all customers are equal. Right.

Um, so you have your sales and marketing revenue uh from the customer minus your act your your the cost of the customer, right? It's the same as cost of goods. What is the customer cost? Um, and that gives you your customer lifetime value over the period of um whatever the lifetime is of that customer. Where companies run into trouble is that these things all have can have very different time frames.

Um so one of the things that I've seen as a a best practice is to also do a customer annual value, right? So, what can we expect a customer to bring in and cost on a yearly basis? And that's a little more actionable because some for some industries and transactions, you need multi-year, right? So the a customer lifetime value of a customer in the realty industry, you're gonna get a sale once every seven years on average. Um, if you're in the automotive, it's a sale once every three years.

Uh if you're selling Gulfstream airplanes, it's a you know a sale you know, once every five years, give or take. Uh, and so though there's where you you need that customer, you know, really lifetime value. But for anything where your sales cycle is under a year, you probably want to do a customer annual value. That makes sense. Makes sense, yeah.

Well, and I would imagine, you know, in my I'm already sort of like piecing together as if I had the data, you know, what I would want to look at is I would want to sort of put ranges like customers that are, you know, worth one dollar to ten thousand dollars, for example, customers worth 11,000 to 20,000, and start to understand how much is it costing us to acquire the different tier of customers so that we could then focus the sales team to say it's costing us too much to get you know sales that are less than $10,000. So we need to stop focusing on that. We need to focus solely or prior prioritize getting things that are over $20,000 because that's where the profit margin is the greatest. Exactly. And that's one of the reasons why data governance all the way down your Martex stack is so vitally important.

Because if you have the data about where you know what's converting in Google Analytics, but doesn't go into Salesforce, then you look at your Salesforce data and say, okay, who's the who are the stinkers, right? Who are the low revenue, high cost customers, and you don't know where they came from, you can't make marketing changes that will improve the flow of the leads that go into your sales system, right? It's like you have that one annoying customer who bought headphones from you once, then they were like $15 headphones, they call you every month because they you know they're idiots, they don't know how headphones work. Like if you would plug the headphones into an audio device instead of your nose, you would get a better performance out of them. Johnsing again.

Exactly. On the other hand, if you have a customer who buys, you know, every new device, you know, like an Apple fanboy like me, who if Apple makes it, I probably will buy it the moment it comes out. Um, you know, I'll be that the person camping out with a tent in front of the Apple store. You want to know that you and those are the people that you're gonna change your marketing towards. You might even spend more money marketing to those people on the retention side because you know it's gonna pay off.

You know that it's worth you know, it's same for B2B. If if you look at your client roster, who do you send the nice holiday gift to? Well, you know that this customer, you know, it was worth X retainer, but also brought five extra projects that year. Let's give them the hundred dollar box, you know, uh chocolates and not the ten dollar box of chocolates. So all this data, when you build customer lifetime value, you're gonna be building it at a customer level first and then rolling it up or like you were saying, Katie, batching it, you know, if you're great customers, good customers, and and we wouldn't be sorry if we saw these folks go.

Right. So going through this, John, has it made you rethink how you would approach customer lifetime value? Well, no, you know, it's still I mean, you hit it. The big one is at one point you just have to do this, and you're like, oh my god, we're gonna die. You know, like it answers the big question.

Whereas, but it is cool to see that you know, there's so much here. Like this is ultimately is the best way for you to just evaluate your whole business and make sure that you're not missing huge things. Because I I just look at this and you see you totally realize there's organizations where like the servicing branch is just hell, like they have no idea how much a customer costs after they come on board and the sales are done, you know, and you know that that's you know, either they're having fantastic or terrible years because stuff is going on in that branch that they have nowhere to no understanding of. So to have a map like this, this is this could just puts you way ahead of anybody as far as your odds of improving the profitability and getting to a better place. Yeah, I would even imagine sort of as I'm categorizing, you know, one-time customers versus recurring customers and understanding, you know, the cost to keep someone on board, and you know, is it you know more efficient and a better use of our time just to do projects versus you know recurring customers?

I you know, as an example, um, you know, those are the kinds of things I would want to understand. And then I would want to use this to start to understand the spend on my marketing. Yep. You spend on your marketing, you're spending on your servicing, and then deciding based on a lot of this is kind of like um like personal finance, right? There's only so much you can cut out of your personal budget before like, okay, I'm out of room, you know, if I want to continue to eat uh and have a place to live.

Um at that point, you you have to say, okay, we need to bring you, we need to increase the revenue side. So going through this exercise will tell you, okay, how much can we cut from a from the cost side without destroying the customer experience? Right. And you know, could we do more with chat bots, right? Um, what is the impact of a chat bot on customer satisfaction and retention?

You know, looking at your NPS scores uh is is part of that. But then once you have those numbers, you can start to just play with the levers and things. Um one of the reasons why you know marketing and advertising and PR are often the first to get cut is because companies don't factor it into the cost of the lifetime value of a customer, right? They they just kind of assume it's the separate thing over here. But Katie, you've had experiences at companies where like they just turned off marketing.

Oh, yeah, marketing and sales. And so I used to work for a company, um, it was during the 2008, if I'm quoting that correctly, 2008 recession. Um, you know, in order to save money, they made the hasty decision to cut both the sales and marketing teams because you know, it's top of the funnel, not bottom of the funnel for what the marketing team was doing at least. Um it was more challenging for the marketing team to demonstrate, you know, here's here's what happens because the sales cycle was so long that it became a challenge for the marketing team to almost justify, even though we all knew that they were doing all the work. And so the long story short, the company cut the sales and marketing team, and then three months later I sat in a steering committee meeting with the CEO saying, How come we don't have any you know leads?

How come you know my principals aren't talking to people? How come there's no money coming in? Well, you cut the two teams that did the thing, so that's why. Exactly. And when we look at this map, if you cut sales, you have no original sales coming in, right?

You're not gonna be upselling anything because nobody to upsell to. You so you'd save all this cost in the acquisition section, but all you're left with is recurring revenue. That's it. That's the only money you've got left coming in. But that's assuming that your customer support team is responsible for uh recurring revenue.

You still need your sales and marketing teams to be doing that, to be targeting those folks, to be letting them know, hey, here's what's new, here's the benefits to sticking around. You know, a lot of times sales doubles as customer support so that they can get that firsthand information. Um, you know, we operate that way because of our size, but you know, John is oftentimes our customer support person as well. Exactly. And so having a map like this for lifetime value is a way to help executives make less hasty decisions.

Say, okay, if you cut this, here's what disappears on the income side. You want to boost our profits. Five of the six branches of income go away. Like, are you are you sure this is a good idea? Um if you if you want to keep that money flowing and you've got to keep the sales and marketing turned on.

Well, and I can imagine the reason why this exercise isn't done is because it's difficult. It's hard. There's no, you know, magic formula. You just plug in a bunch of numbers and say, boom, here's my customer lifetime value. There's a lot of research and data gathering, even for the most, you know, strict data governance agencies, there's still a lot of work that goes into calculating this number.

And so my question to you, Chris, and I'm guessing the answer will start with it depends, um, is would there be a way to set up some sort of code or formula that you're constantly just updating this data as it's as you get new information, and then it's constantly updating your customer lifetime value metric? In fact, there are entire companies designed around that. One of them that uh everyone in enterprise knows pretty well is SAP. SAP has an enterprise resource planning system, ERP system that literally pulls, you know, everyone in the company has to use it uh for everything, but because everything is, you know, all the data is going into this hydra of a piece of software, at the end of the day, assuming it's set up correctly after a few million dollars of of uh of effort uh and and bills, you get that number because the system, because the system can see everything, all the inputs and outputs, the system can then draw those conclusions. So, yes, um SAP, I think it's R3 is the name of their ERP system.

That's how you make these determinations. What if you don't have SAP money though? What if you are Trust Insights and you don't have an extra million dollars laying around to onboard SAP? So I think it's more like 10 million, but uh, I mean, regardless, we don't have you know uh more than six figures laying around. We don't have SAP money, but we also don't have SAP levels complexity, right?

Where we don't have millions of customers, we don't have thousands of customers. Um you can recite the number of customers we have, you know, um with with all of your digits. Uh you you need to use your feet um for some of them. Um but that also means that building these models is something you could do right in an Excel spreadsheet, right? Um, because you know off the top of your head, or in our very basic QuickBooks accounting system, what we're earning from our customers.

You know what we're spending on our marketing, right? How much uh money. Um you have probably a good sense of the amount of time we spend on marketing. You know how much time in general we spend on our custom on our clients. Um we don't really uh we're B2B agency, so we don't have product support uh like you know, warranties and returns like Amazon does, but we absolutely do spend you know development time on things.

Uh we don't really do much in the way of deals and discounts, so that's not something you have to take into account. So essentially you could put together a spreadsheet, uh a set of columns with a customer name, you know, your at your initial sale, uh, you have your recurring revenue, you have your costs uh in each of these departments, and then just do the the basic math across and say, okay, this customer is worth X lifetime value thus far. And then you do that for all 16, 17, 18 customers that we have. You can do that for all the past customers we've had as well, and then you can bucket them into the three tiers. Cause one of the things that's great about earnings and cost when you do it this way is you then have a ratio of profitability.

If a customer it brings in a hundred dollars, you know, of earnings but it costs you ten dollars, that's a that's a 10x ratio. That's that's a uh, you know, and then you could say, okay, our good customers are of a ratio of five or above, right? Our our okay customers are you know five to one, and bad customers, of course, anything below one. I think we're spending more money than you're earning on the customer. They then you just do averages across the three categories.

So then again, this is an Excel spreadsheet, you put that together and say that's what our customer lifetime value is. And for a company our size, that's good enough to make a decision on. These are the three customers we need to toss overboard, they're costing us money. These three customers up here, we can afford to spend more time with them. We can afford to invest RD on our own dime to advance them somehow because they're so lucrative that we we you know, we need to in you know spend money on them, spend times money to say, hey, we're gonna we're gonna make uh a trip to see you once a quarter.

We're just gonna sit in the back of the room on our dime and only speak when spoken to. But if you want our advice on something, we're here to give it because you're such a good customer. I just added that to my to-do list while you were describing it. I was taking notes, and that's absolutely something I'm gonna start setting up next week. Um, so with that, so you know, again, sort of let's say in a perfect world we have the customer lifetime value number and or we have some sort of system for calculating it, this is where companies want to start to understand what do I do with that information?

And so if I can just share my screen for a second, um basically the uh this is a formula, Chris, that you introduced to me when we used to work at the agency together. Um, and so this formula assumes that you have customer lifetime value, and what you can do with this, and there's you know, example numbers in here is start to understand uh the value of a single page on your website or the value of a single event, um, basically using a lot of different numbers. So, you know, again, this assumes you have customer lifetime value, but then you also have to start to pull together all of these other numbers. So, Chris, can you just run down what the different acronyms stand for? Uh yes, uh, although I would say that I think somewhere we probably have a nicer looking version of this, because this was made in the days.

Uh you'll also notice by the way on this chart, this it's actually kind of redundant because acquisition cost is is right there, and it's it's actually should should be built into your lifetime value. So let's go ahead and use this version, okay, which is a lot nicer to look at. If you have your revenue, right, and you have your your calculated value of revenue that lives in accounting, and you a deal is worth 100 grand. Then if you're closed one deal, you know, you now you're you're basically saying, okay, what percentage of our uh sales turn into revenue? It's you have your inferred value.

What is a sale worth? Now, at this point, this is looking at trying to calculate what is that that um value going to be on the website. That revenue number here, this is where your customer lifetime value number would get plugged in. Right. So if you have it, because it's not this is not your gross number, this is not you know how much money you're gonna make on this deal.

It is what is the value of that customer. So if a customer brings in $100,000, but they cost you $10,000 based on all the stuff we just did, you put $90,000 there instead. And so then the calculus of this whole worksheet changes. But you need to have uh that there. In fact, we should probably change this to call this uh lifetime value.

Mm-hmm. Customer. So now it accurately reflects the built-in costs of that customer as well. And then, yes, you follow each stage of your sales and marketing funnel. If um, if I have 200 deals, only half of them turn to closed deals, then my deal value for an open deal is $500.

If I have 800 opportunities, only 25% turn into deals, then we slash that $500 down to $125, and so on and so forth, until you get to a number that you can measure in a system like, for example, Google Analytics. If if there's a uh form like a uh request a demo or a contact or a shopping cart, um, or even maybe something like people clicking on driving directions to your store or booking an appointment at your store, that's the number that goes in as your conversion value in your web analytics software to say, okay, when somebody fills out this form, it's worth averaged out $31, which means that if you get uh a thousand people to fill out that form, you can predict you're gonna get $31,000 in revenue later on down the line based on the percentage of people that follow this actions. So this is something you need to do with again, your accounting software, your CRM software, your marketing automation software, your web analytics, but it's a way for marketing to help forecast the financial performance of the company. I feel like John and I both need to have those like calculus numbers swirling around our heads as we're doing this. Like my brain is spinning with a lot of like things that I now need to do and set up now that I have a better grip on you know what all these pieces are.

Uh John, what kind of calculus is spinning around in your head? Yeah, uh, these are great numbers. Yeah, I think the the big takeaway from that one is you can then evaluate at each point in the funnel. You know, you're like, okay, these ads are bringing in webinar leads, like what should we be paying for those? You know, and and the great one is to tag the bargains, you know.

It's like, okay, we figured these are worth about three bucks and we're getting them for 10 cents a piece through whatever this campaign is over here, so you can go crazy. But yeah, for us, you know, we don't have the gargantuan numbers that make that really hum, you know. It's when you're dealing with 50 closed deals a year or whatever, it's a lot squishier, you know, especially when you throw a couple whales in there to really screw things up. But yeah, it's all worthwhile and just trying to get a baseline for like, hey, where should we be as far as what we're spending on the whole marketing and sales cycle? Yep.

And it's really tricky because some of it's not reproducible. Like when I I when I look at our customer roster, one of our largest customers came in as a referral from a friend, right? So how do you factor that into your your acquisition cost? I mean, the acquisition cost of that customer was zero. Um at the moment of acquisition, but it had a 10-year relationship that led up to that point.

And this that's where a lot of these costs can get very, very tricky to manage. Well, I, you know, I would argue though that there was still some acquisition cost because we still, you know, just because it was a friend, we still had to demonstrate why uh they should bring us on. And so there was still a bit of that upfront sales cost of you know, meetings and inputs and sales decks and those kinds of things. So, you know, I would say the number is never zero, but it might be lower uh if it's a referral. But that might have no hard dollar costs.

It might have no hard dollar costs. That's correct. But that would be something that would be good to know is you know, uh, as we're thinking about like our strategy moving into you know the next 12 months or so, like, okay, we need more referrals because those close, you know, those are more likely to close and bring in more money versus you know, cold calling or you know, whatever the other tactics you know we want to chase are. And so those are the those are still good metrics to know. Exactly.

And even things like in retail, for example, placements matter, right? Uh placements can have a a dramatic impact on um on your upsells on your your lifetime value. A real simple example. If you own a liquor store and you got a you've got your beer rack and you put a rack of potato chips right next to that beer, right? What's gonna happen?

You're gonna sell a lot of potato chips, right? If you are a cup of company looking at your say your convenience store, um, and you happen to be, you know, you're looking at locations and you open up right next to uh marijuana dispensary. What should you be doing? You should be selling bags of Doritos and tacos, you know, like right out front on the apron uh anytime the dispensary is open because that's how this sort of thing works. Um, and so even those things, looking at opportunities for cross-sell and upsell are predicated on your understanding of customer lifetime value and how customers behave.

And now you start getting into psychology, which is a whole other show. That's right. Well, okay, so I feel like we're in a good place. Uh, I'm gonna take a lot of this back and start to put together uh those spreadsheets so that I can start to do some calculations. Um, so that's my takeaway.

John, final thoughts. Yeah, do this math. This is gets to the root of how profitable you are, and you know, do you have enough run rate to survive if you're a smaller business, which is critical. And if you don't want to do this math, call John and we can help you do it. We can do this.

Um we can we can do this math for you. Um, the other thing is if you want a copy of the mind map that we're doing, uh join the analytics for marketers group on Slack. Um, we'll publish the PDF in there and you can get it. You know, no charge and stuff. Just come and hang out with us there.

All right, folks, that's it for this week. We will talk to you next time. Thanks for watching today. Be sure to subscribe to our show wherever you're watching it. For more resources and to learn more, check out the Trust Insights Podcast at TrustInsights.ai slash TI podcast.

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