In Step 4 of the book, I detail the power of increasing conversions by using Split Testing and Multivariate Testing. The internet allows this testing down to minute detail. Even if at first, results may look too small to ‘be worth the hassle’, bear with me.
The premise of Lifetime Value is that for each new customer you get, their worth in money terms to your company, is calculated over the lifetime of their relationship with you, and not just on the initial purchase. In addition, they may spend increasingly more money on higher priced items as your relationship develops over time.
Lifetime Value Example:
Let’s say your ecommerce website sells guitars and you decide to sell a ‘Learn Guitar’ book for $10. You pay your web designer to upload a specific page onto your website to promote and sell the Learn Guitar book and it costs $100. You then place an advert in ‘Guitar Monthly’ and it costs you $120. Total spent $220.
From the advert in Guitar Monthly, you then send prospects (potential customers) directly to your Learn Guitar book product page on your site. Fifteen people buy your guitar book, which equals total sales of $150.
$150 Sales – (Learn Guitar product page $100 + Advert $120 = $220) = -$70 Loss
However this initial $70 loss in acquiring new customers equates to 15 new customers who may go on to buy higher priced items such as a guitar and guitar accessories. The concept is like a loss leader in a supermarket where they lose money on the front-end advertised product, to get you to buy more expensive and profit making products when you get deeper into the store.
Back-End Marketing for Profit:
If you now start to email these 15 customers—as detailed in Step 2 &4 of the book—start blogging and releasing product videos, etc, then one or more of these customers will buy again, taking you into profit for this one advertising campaign.
a) Let’s say 7 of these 15 Learn Guitar book customers do become long term customers and buy from you each year over a 3 year period
b) Each customer buys 1 guitar per year during this 3 year period
c) Guitar cost to you = $150 and you sell for $300 to customer. You profit $150 per guitar sale
d) 7 repeat customers from the initial advert cost of $70 (which is the total advert/web page cost of $220 less the sale of $150) this results in each customer costing $10 each to acquire. ($70/7 = $10)
– Formula: (a: 3 years) x (b: 1 guitar each per year) x (c: $150 profit) – (d: $10)
– Lifetime Value per Customer from this one advert campaign = $440
– Group Lifetime Value $440 x 7 = $3080
*Your initial disappointment with a loss of $50 now equates to a net lifetime value of $3080.
Note: In this example there will be costs such as writing the emails and sending them to your customers; however the cost of email delivery is minimal and inconsequential for this example.
Lifetime Value Formula Simplified:
a) Determine the average number of years a customer will buy from you
b) Calculate the average number of sales a customer will make per year
c) Work out the average profit you make per sale
d) Break down the amount of money it costs you on average to acquire a new customer
(a) x (b) x (c) – (d) = Lifetime Value
We can increase this profit further by implementing the Split Testing & Multivariate Testing detailed in Step 4 of this book.