Fortune Favors the Bold (and Strategic): With a Focus on Customer Lifetime Value, a Little Courage Can Go a Long Way

“Why does nothing exciting ever happen for me?” lamented the couch potato.

“When will my ship come in?” whined the roustabout.

As a business leader, you fit neither profile. You’re no stranger to working hard and making things happen.

And yet, if you’re like many of the entrepreneurs and executives I meet, you may get cautious. In your quest to grow your business, you may get stuck at a hesitation station.

Why? Often, it’s due to a short-term focus solely on profitability. The idea of losing money while going after prospects might make you nervous.

There’s nothing wrong with proceeding in business with thoughtful discipline. But you can’t commit a mere 2 to 5% of your budget to marketing and then complain about tepid growth.

You must be ready, willing and able to invest aggressively in new opportunities.

Market leaders are unafraid to spend to win.

Examples of companies that get ahead by going for it are everywhere.

Amazon, as you probably know, did not begin as the ubiquitous online retailer of everything to everyone, everywhere. The company started by selling books below cost. Initially, Jeff Bezos had no intention of being profitable.

The focus, instead, was on growing an unsurpassed customer list. It took will and patience, but beating the competition at all cost literally put the competition out of business.

Countless other startups in the Internet age have followed a similar path, losing money in the early years to keep growing. Spotify, for example, took 13 years to make its first profit.

OK, reality check. Your company probably can’t count on the investments of deep-pocketed venture capital firms, the way the hottest tech startups usually do. You don’t have the resources to be as relentless, or the stomach to be as ruthless, as a company like Amazon. You likely can’t afford to get sucked into a war of attrition.

Nevertheless, you’ve got to keep in mind that your competitors may be willing to pursue customers at a loss, simply because they know the lifetime value of those customers may drive profits for years to come.

Are you prepared to take the risks for the rewards?

I’m not talking about throwing millions of dollars away. I’m talking about investing in delivering more value to customers than they may be paying for right now, with an eye toward expanding these relationships and their profitability over time. It starts with actions like:

  • A high-ticket manufacturing company offering service work or repairs at below cost to connect with new customers.
  • A gutter installation company doing $49 gutter cleaning services so they are the first company in line when the gutters need replacing.
  • An online training company offering a high-value product for pennies on the dollar so they can build a relationship and create value for a customer who will later buy a much more expensive training program.
  • Software companies following a freemium model, with a free and basic tier that gives prospects a taste of their product and leaves them wanting more.

These courageous moves are likely to lose money in the short term, while setting the companies up for great return on investment in terms of Customer Lifetime Value.

How to make Customer Lifetime Value count

There are lots of ways to calculate marketing ROI out there. Too many of these methods remove organic sales growth, evaluating based only on initial sales resulting from marketing efforts.

We’ve all heard the warnings: It can cost up to 25 times as much to acquire new customers vs. retaining existing ones. So is it wise to spend so much on prospects that might not pan out?

Well, no, not necessarily. Not without a solid strategy, a clear profile of your ideal customer and a strong competitive position.

But with those key pieces in place, along with a commitment to pleasing customers and growing relationships long after the sale, then the marketing investments you make now may yield much more impressive ROI in Customer Lifetime Value.

That’s why Customer Lifetime Value is a vital aspect of growing a profitable business, especially when evaluating your initial ROI on marketing and advertising. The recommended formulas vary, but in simple terms:

CLTV = annual profitability of customer relationship x average duration

How can you increase Customer Lifetime Value?

When you boost that CLV number, you can confidently spend more resources on acquiring customers. Fortunately, there are a couple of surefire ways to do that.

  1. A clear progression ladder for additional products and services that your customers want.

    Because your existing customers are about 50% more likely to try new offerings, and they’re willing to spend 31% vs. new customers (source: Invesp). Once they get comfortable with who you are and what you do for them, they tend to come back for more. Real fans want your new stuff! So go ahead and cross-sell, upsell, bundle, offer trial upgrades, etc.

    But how do you develop that hot new stuff? To inspire and inform new products and services, you need to stay in touch with customers and understand their needs and desires. Surveys at multiple points in the relationship come in handy, as will …

  2. A clear sales and marketing system to uplevel new customers at the right time.

    Nurturing should not end when a lead becomes a customer. It pays to continue building the relationship through exceptional service; improving retention even just a bit can grow profitability dramatically.

    That’s why it’s crucial for sales, marketing and customer success teams to work well together — at a minimum, sharing as many accurate customer insights as possible via a good CRM. Staying in front of customers with relevant content and offers is another solid practice.

What courageous moves could you make to win customers? that might seem like a risk in the short term, but would drive greater Customer Lifetime Value?

There’s plenty more you can do! If you’d like some help, let’s talk.

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