So What? Calculating Customer Lifetime Value (CLTV)

So What? Marketing Analytics and Insights Live

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In this week’s episode of So What? we focus on calculating Customer Lifetime Value (CLTV), what CLTV is, and how to use it in your marketing planning. Catch the replay here:

 

In this episode you’ll learn: 

• What is the CLTV formula
• What are the data sources needed to calculate your CLTV
• How to use CLTV in your marketing planning

Upcoming Episodes:

• Google Tag Manager – TBD
• Will data become obsolete? – TBD
• Community Management – TBD

Have a question or topic you’d like to see us cover? Reach out here: https://www.trustinsights.ai/resources/so-what-the-marketing-analytics-and-insights-show/

AI-Generated Transcript:

Katie Robbert 0:28
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, what is it? What is the general formula? 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 once you have it. And actually, we got a really interesting comment today in our Slack group. From one of our members who said, with all the issues with attribution modeling, which we were talking about in our Slack group yesterday, he said, I think this will be a major focus in the near future. 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? 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?

John Wall 1:49
You know, we use it to kind of figure out if the business models working, but we it doesn’t really get the workout that you get like a B to C Company, you know, if you if you’re selling soft drinks, or whatever, or you have some kind of product where you have 1000s of customers, I mean, it becomes a real solid and interesting thing, if you’re just looking at, okay, how much can we expect from these people, and it’s usually some kind of upfront purchase, and then there’s a period of time you expect them to sit around for in, in a lot of these models, you expect to lose them to like, you’re only going to 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 or not assume they’re going to keep everybody forever once they get the SaaS chains on them. And so you just kind of looked at okay, so what do we get upfront? What are the first two years? And what does that cost? And are we, you know, are we going to go out of business in a couple months? Or do we have at least some runway to survive? So yeah, kind of a long answer. But it’s yeah, I’ve always been in 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 it’s yeah, it’s still critical to figure out what works and what doesn’t work.

Katie Robbert 3:28
Side note, I wish I had any kind of artistic ability, because I would be illustrating some of the phrases that you draw, such as the SaaS 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 we should start to hire a cartoonist to start to illustrate the wacky stuff that we say,

John Wall 3:49
the chains of Yeah, cuz so many companies just assume that, you know, once you get the customer, they’ll just be around forever. And you see this, you know, not every company is a cable company, you know, you do have other choices, and you can bail. So, but yeah, hopefully you’re building those chains.

Katie Robbert 4:06
Chris, you have a big walk in Formula. Where do you want to start with talking about customer lifetime value?

Christopher Penn 4:16
I don’t have a formula. Because customer lifetime value is one of the most difficult and painful things to calculate is probably the most complex computation 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 accompany and unless your company is small, 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 brought in the broadest possible strokes, what does customer lifetime value?

Katie Robbert 4:54
Oh, that’s a question for us, though. Yeah. I don’t know what is its base quickly as John said, it is the how much money someone pays you over the course of their relationship with you. So for example, if we have a client who does one single project with us, their lifetime value is whatever they bought that project for, versus a client whose retainer over multiple years, we start to add up those multiple years, because that’s their lifetime value. And so they’re going to be very different. There’s no, I can sort of say, anecdotally, we don’t have one set, customer lifetime value, like that’s the one number, we would have multiple, but we would start to break it down from retainer to project.

Christopher Penn 5:43
Got it? Okay. So let’s start with earnings, right? We obviously have a sale, when 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, as you pointed out, Katie, sometimes have either recurring revenue, right? Is ongoing contracts, 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?

Katie Robbert 6:17
No, because there’s intangible things there’s referrals, there’s loyalty. There’s testimonials. There’s evangelism

Christopher Penn 6:35
Okay, what else? How else you gonna make money on the customer?

John Wall 6:42
Oh, God, I’d 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,

Christopher Penn 6:50
so what other hard numbers are there for for customer lifetime value for the on the earning side? How else can we make money on a customer? And not just us, but think about soda business? Think about local restaurant, maybe

Katie Robbert 7:08
think about? It’s gonna say probably affiliates and

Christopher Penn 7:12
affiliates. Exactly. affiliates, partnerships. Advertising. We were just talking the other day about how in store advertising on TV networks and 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.

Katie Robbert 7:35
Oh, wow. That is not what I thought you were gonna say.

Christopher Penn 7:39
And it’s all house inventory. So they can say, hey, this is a special today on grapefruit, you know, and wherever they because TV is Instant TV is so compelling. So. So these are all things. The sales side? That’s all the hard dollars, right? That’s all money coming in. You can sell more stuff to customers. You can advertise to customers, you can resell other people’s stuff, you can co brand, then yeah, you have the intangibles with the evangelism, on paid marketing, customer content. Where’s all that data live?

Katie Robbert 8:10
Oh, in a magical single source that you can just this is what one customer profile is

John Wall 8:16
CRM for the win? Yeah.

Katie Robbert 8:20
Just kidding. It’s That’s right.

Christopher Penn 8:21
That’s No, no, no, it’s probably accounting, right?

Katie Robbert 8:25
Um, you know, some of its some of its going to be accounting, some of its going to be the CRM. Some of its going to 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 the advertising is going to 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.

Christopher Penn 8:58
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 money, just money in is also money out. What does the cost of the customer? We have the obvious costs, right? So let’s talk about acquisition costs.

Katie Robbert 9:23
And that’s what you’re talking about, John, in terms of using this metric to understand if the business model is working?

John Wall 9:29
Yeah, but you know, in simpler models is 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 this is where there’s huge power in this model is, you know, you find some way you’d 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 impact at the other end of the funnel.

Christopher Penn 9:57
Yep. So you have advertising market and the hard dollar spend, right, which is all the stuff you have. We’ve got a lump in public relations, and basically anything where you’re paying to get the word out under acquisition, you also have sales cost, right? So that is personnel costs. And personnel and overhead for sales, like salesforce.com is not cheap. Hubspot is not cheap. Those go into the cost of a customer, you have insanely talented people like John working for you there, John doesn’t work for free. So that’s not so on the on those sales sides, you have these costs of what it costs to acquire a customer. But John said something else really important in there. We have surfacing of the customer, right? That is expensive. So you have the basics, like administrative overhead. And that’s where you have things like your accounting system and stuff that your accounting department to manage that your billing department, depending on the relationship, you also have clients or customer service. Yeah, right. Because our customer that costs you an hour a week, you know, for a meeting or whatever, and maybe an hour of work per week. That’s, that’s a good customer. The same client paying the same retainer that cost you 14 hours a week. That’s real money, right? That’s, that’s, you’re, you’re you’re burning money on that, to keep that customer happy. And again, this is B2B, B2C, I have a friend who works at Chase Bank. And her career is literally on the phone saying, Hi, my name is Bob Dale, how can I help you today? And you know, the customer is like, Oh, well, you know, I locked myself out of my debit card. And you know, I’m stranded in South America, whatever. And she’s got to figure out how to help this person. And she costs x dollars per hour. So to service that customer, add all that overhead as part of that. What else costs money on the servicing of a customer?

John Wall 11:59
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?

Christopher Penn 12:08
Exactly. Products Support, warranty, and replacement. Is is part of the cost of the customer. What else do customers cost?

Katie Robbert 12:21
My soul?

Christopher Penn 12:24
Your soul is priceless.

Katie Robbert 12:26
i No. 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? You know, it’s the retention. Oh, you are ready to get good.

Christopher Penn 12:47
Tension is another area where you retain a customer. After new deals and discounts, right? We’ve all done the thing where we said, hey, yeah, cable company, I’m gonna be switching and be like, oh, we’ll give you 25% off the next two years. Okay. That eats into the profits?

Katie Robbert 13:02
No, 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 cost 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 going to 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.

Christopher Penn 13:54
Exactly. And here’s the catch. There’s a we’re not going to draw it on here, because it would take forever. There’s a lot of dotted lines. Oh, yeah, these things. So if your customer service sucks,

Katie Robbert 14:07
looking at your cable companies,

Christopher Penn 14:10
then the marketing side on the earning side for evangelism and customer content isn’t going to happen. Right? If you’re, if the servers at your restaurant are rude, you’re going to have a hard time getting people to give you video testimonials, your Google My Business reviews are going to suck, right? Your Yelp review is going to be all one star. And so there’s a lot of interdependencies between these things that can change your customer lifetime value calculation. So you may think by saying oh, we’re not we’re gonna have three or four people in front of house instead of six. That’s fine. We’ll save money. Yeah, you’ll save money in the short term. It’s going to impact your your your upstream earnings. Okay, where do these data where’s this data live?

Katie Robbert 14:53
Um, let’s see the advertising and hard dollar spent I mean, that again, might come down to an abscessed And depending on how you’re marketing, if you’re doing email marketing, if you’re doing organic search, if you’re doing ads, those are all different systems.

John Wall 15:13
Yeah, all those servicing stats, those are sitting on some weird, homegrown IBM System with a server in somebody’s basement.

Christopher Penn 15:24
It should directly also live in the CRM technically does stand for customer relationship management, very few people use it

John Wall 15:32
for that post sales data in the CRM, right? Yeah,

Christopher Penn 15:35
yep, exactly. So this lives in your CRM, those costs, this lives in your HR systems, anywhere, you’ve got personnel, you’re going to have HR, let’s see administrative overhead, that’s going to be accounting for sure. Product warranties appointments, that’s going to be in a couple different places that you’re, you’re gonna be talking about your CRM, and we talked about accounting, you could be talking depending on your industry about inventory management.

Katie Robbert 16:02
Well, and then you’re probably also talking about any of your dev systems, your bug tracking systems,

Christopher Penn 16:09
exactly.

And your attention stuff that’s 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 is a couple of different ways to approach it. If you want the granularity you got to go in, get all the state Avi systems, right. But if you think about it, each of these brand sets of branches is serving a layer a tear of granularity, something John said early on in the show was, well, we just added, you know, two big numbers together, you have your gross revenues, and you have your expenses and boom, that’s that you divided by the number of customers, that’s your customer lifetime value, that would be taking these two numbers at the broadest numbers, and doing that calculation that’s for that’s the lowest level of precision, but requires the least amount of work.

Katie Robbert 17:20
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. 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 15%, and so on so forth.

Christopher Penn 17:47
Exactly. Now that 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 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 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, in the call center other people like, what’s my password is goodbye. It’s two second call. But you can amortize that out and say, Okay, on average, our customers cost us $26.42 per call, and we feel this many calls. Ultimately, you know, the broadest level sealed 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 break that out. The reason you’d want to is exactly what you and John was starting at the top of the show, which is, what levers can I pull to either improve my earnings or reduce my costs?

Katie Robbert 19:03
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 community member was making about you know, as attribution modeling is getting harder out of the box, than 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 supplement for a lot of companies.

Christopher Penn 20:02
I think and at least in this perspective, it, it’s one of the pieces of the puzzle. So I put here, the key report for advertising hard dollar spent, if you want to tweak that is your either an attribution model or a marketing mix model or media mix model, whatever you want to call it, that would be an appropriate report to look at to say, Okay, I need to control costs in this area, like in client in customer service, your key report is going to be something like a customer hold time, right? How are customer call time? How long? How much time you spending on each account or in like an agency, you go into your timekeeping system and say, Well, how much time are we spending on each of these, these customers, and we can say, Yeah, you know, on a on a on $1 per hour basis for our employees, we’re spending, you know, $26,000 of time on Customer A, and we’re spending 5000 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 trouble than they’re worth.

Katie Robbert 21:07
Well, and that’s assuming that you’re using, you know, one on one, like pick up the phone and call, you know, we haven’t even talked about 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. You know, it has to actually offer usable information. 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. And so then you have the cost of that person plus the cost of, you know, the knowledge base all those things.

Christopher Penn 21:53
Exactly. So, let’s see. Yeah, on the revenue side, we have a couple of things. So on the on the sales side, in particular, you’re looking at earnings per customer, you know, how much money we 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, we know Bob has dental issues, but Bob is a very good customer. That report tells and then 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?

Katie Robbert 22:39
Well, and I realized I was sort of jumping ahead. So when I said that you had, you know, a big wanking 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 $1 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, 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?

Christopher Penn 23:31
Right, exactly. But right now, we’re just trying to figure out a, where does the information live? And then be how do you put it all together? And then see, 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. And 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 and our E commerce system, or the number of people across the front apron of the retail store, or any of those reports will do that. But it has to be a concert than with your sales as well. Right?

Katie Robbert 24:18
So okay, 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?

Christopher Penn 24:36
Exactly. And that’s where you would bundle up and say, the the earnings per sale the sales revenue, 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? So you have your sales and marketing revenue from the customer. Minus your at your your, the cost of the customer, right, it’s the same as costs. Cost of Goods, what is the customer costs? And that gives you your customer lifetime value over the period of of whatever the lifetime is of that customer. Where companies run into trouble is that these things all hat can have very different timeframes. So one of the things that I’ve seen as a best practice is to also do a customer annual value, right? So what can we expect a customer to bring in and costs 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 customer lifetime value of a customer in the realty industry, you’re gonna get a sale once every seven years, on average, if you’re an automotive, it’s a sale once every three years. If you’re selling Gulfstream airplanes, it’s you know, sale, you know, once every five years, give or take. And so there’s, we need that customer, really lifetime value. But for anything where your sales cycle is under a year, you probably want to do a customer annual value.

Katie Robbert 26:02
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 $1 to $10,000, 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 customer 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.

Christopher Penn 26:52
Exactly. And that’s one of the reasons why data governance all the way down your Mar tech stack is so vitally important. Because if you have the data about where you know, what’s converting and Google Analytics, but doesn’t go into Salesforce, then you would look at your Salesforce data and say, Okay, who’s the WHO ARE THE stinkers, right, who were 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 standing like $15 headphones, and 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. John

John Wall 27:34
nosing again,

Christopher Penn 27:35
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, you’ll be the person camping out with a tent in front of the Apple Store, you want to know that and those the people that you’re going to change your marketing towards, you might even spend more money marketing to those people on the retention slide because you know, it’s gonna pay off, you know that it’s worth it. Same for B2B. If you look at your client roster, who do you send the nice holiday gift to? Well, you know, that this customer, you know, was worth X retainer, but also brought five extra projects that year. Let’s give them the $100 box, the old chocolates and not the $10 box chocolates. So all this data, when you build customer lifetime value, you’re going to be building it at a customer level first, and then rolling it up or like you were saying K batching. It he was great customers good customers, and and we wouldn’t be sorry if we saw these folks go. Right.

Katie Robbert 28:40
So going through this, John, has it made you rethink how you would approach customer lifetime value?

John Wall 28:48
Well, no, I’d 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? The answer is the big question. Where is it but it is cool to see that, you know, there’s so much here like this is ultimately is the best way for you just evaluate your whole business and make sure that you’re not missing huge things, because I just look at this. And you see, you totally realize there’s organizations where like, the servicing branches, just how, 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 just puts you way ahead of anybody as far as your odds of improving the profitability and getting to a better place.

Katie Robbert 29:39
Yeah, I would even imagine sort of Azim 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, 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.

Christopher Penn 30:09
Yep, you spend on your marketing your spending on your servicing. And then deciding based on a lot of this is kind of like, 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, and have a place to live. At that point, you have to say, Okay, we need to grant you we need to increase the revenue side. So going through this exercise will tell you, Okay, how much can we cut from, from the cost side without destroying the customer experience? Right? And, you know, could we do more with Chatbots? Right? What is the impact of a chatbot on customer satisfaction and retention, looking at your NPS scores is part of that. But then once you have those numbers, you can start to just play with levers and things. 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 into the cost the lifetime value of a customer, right? They just kind of assumes a separate thing over here. But Katie, you’ve had experiences, if a company’s were like they just turned off marketing,

Katie Robbert 31:18
oh, yeah, marketing and sales. And so I used to work for a company. It was during the 2008. If I’m quoting that correctly, 2008 recession. 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. And so 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

Christopher Penn 32:27
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 else sell to you. So you 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

Katie Robbert 32:43
assuming that your customer support team is responsible for 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 just sticking around, you know, a lot of times sales doubles as customer support so that they can get that firsthand information. You know, we operate that way because of our size. But you know, John is oftentimes our customer support person as well.

Christopher Penn 33:14
Exactly. And so having a map like this horse lifetime value, is a way to help executives make less hasty decisions to 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? Sure this is a good idea? If you if you want to keep that money flowing, and you’ve got to keep the sales and marketing turned on?

Katie Robbert 33:41
Well, and I can imagine, the reason why this exercise isn’t done is because it’s difficult. It’s hard. There is no you know, magic formula, you just plug in a bunch of numbers and say, boom, here’s my customer lifetime, though, 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 we’ll start with it depends, 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.

Christopher Penn 34:28
In fact, there are entire companies designed around that one of them that everyone in enterprise knows pretty well is SAP. SAP has an enterprise resource planning system, ERP system that literally pulls everyone in the company has to use it for everything, but because everything is you know, all the days 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 effort 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, SAP Epic is our three is the name of their, their ERP system. That’s how you make these determinations.

Katie Robbert 35:12
What if you don’t have SAP money that what if you are Trust Insights, and you don’t have an extra million dollars laying around to onboard SAP.

Christopher Penn 35:20
So as soon as we’re like 10 million, but

Katie Robbert 35:24
I mean, regardless, we don’t have, you know, more than six figures laying around. We don’t have SAP

Christopher Penn 35:31
money. But we also don’t have SAP levels complexity, right, where we have millions of customers, you have 1000s of customers, you can recite the number of customers we have, you know, with with all of your digits, you need to use your feet, for some of them. But that also means that building these models is something you could do right in an Excel spreadsheet, right? Because you know, off the top of your head, or in our very basic QuickBooks accounting system, what we’re earning from our customers know what we’re spending on our marketing, right how much money you have prior good sense of the amount of time we spend on marketing, you know how much time in general we spend on our cost on our clients. We don’t really, we’re a B2B agency. So we don’t have product support, like warranties and returns like Amazon does. But we absolutely do spend, you know, development time on things, 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, a set of columns with a customer name, you know, you’re at your initial sale, you have your recurring revenue, you have your costs in each of these departments, and then just do the basic math across and say, Okay, this customer is worth X lifetime value thus far. And then you do that for all 16 1718 customers that we have, you can do that for all the past customers we’ve had as well. And then you can look at them into the three tiers, because one of the things that’s great about earnings and costs when you do it this way, is you then have a ratio of profitability. If a customer brings in $100 of earnings, but costs you $10 That’s that’s a 10x ratio. That’s that’s a you know, and then you could say, okay, are good customers, I have a ratio of five or above right are okay, customers are five to one and a bad customers. Of course, anything below one, I think we’re spending more money than you’re earning on the customer, then you just do averages across the three categories. So then again, this isn’t an Excel spreadsheet, put that together, 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 other three customers, we need to toss overboard, they’re costing us money, these three customers appear, we can afford to spend more time with them, we can afford to invest r&d on our own dime to advance them somehow. Because they’re so lucrative that we we need to spend money on them spend times want to say, hey, we’re going to, we’re going to make a trip to see you, once a quarter, we’re just gonna sit in the bathroom 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.

Katie Robbert 38:13
I just added that to my to do list while you were describing it, I was taking notes. And that’s, that’s absolutely something I’m going to start setting up next week. 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. Basically, the this is a formula, Chris, that you introduced to me when we used to work at the agency together. And so this formula assumes that you have customer lifetime value. And what you can do with this, and there’s no example numbers in here is start to understand the value of a single page on your website or the value of a single event, 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?

Christopher Penn 39:29
Yes, although I would say that I think somewhere we probably have. Because this was made in the days. You also notice why they’re honest. It’s actually kind of redundant, because acquisition costs is is right there. And it’s actually should should be built into your lifetime value. So let’s go ahead and use this version. 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 deals with 100 grand, they have your closed one deal. You’re basically saying, Okay, what percentage of our sales turn this 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 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 how much money you 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 grand, based on all the stuff you just did, you put $90,000 there instead. And so then the calculus of this whole worksheet changes, but you need to have that there. In fact, we should probably change this to call this lifetime value. 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, if I have 200 deals, only half of them tend to close deals and my deal value for an open deal. That’s $500 of 800 opportunities, only 25% Turn in deals. And we slashed 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 form like a requested demo, or a contact or a shopping cart, 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 1000 people to fill out that form, you can predict you’re going to 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.

Katie Robbert 42:17
If you 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 in setup now that I have a better grip on. You know what all these pieces are? John, what kind of calculus is spinning around in your head?

John Wall 42:36
Yeah, these are great numbers. Yeah, I think 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 apiece 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?

Christopher Penn 43:23
Yep. And it’s really tricky, because some of it’s not reproducible. Like when 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 acquisition costs, so the acquisition costs that customer was zero 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.

Katie Robbert 43:53
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 they should bring us on. And so there was still a bit of that upfront. Sales cost, you know, meetings and inputs and sales tax and those kinds of things. So, you know, I would say the number is never zero, but it might lower if it’s a referral,

Christopher Penn 44:20
but that might have no hard dollar costs.

Katie Robbert 44:23
It might have no hard dollar costs, that’s correct. But that would be something that would be good to know is, you know, 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, those are still good metrics to know.

Christopher Penn 44:51
Exactly, and even even things like in retail, for example, placements matter, right. Placements can have a dramatic impact. On, on your upsells on your left hand value, it real simple example if you own a liquor store, and you gotta you got your beer rack, and you put a rack of potato chips right next to that beer, right? What’s going to happen? You’re going to sell a lot of potato chips, right? If you are a company looking at your, say, your convenience store, and you happen to you’re looking at locations and you open up right next to marijuana dispensary. What should you be doing, you should be selling bags of Doritos and tacos, you know, right out front on the apron anytime this dispensaries open, because that’s how this sort of thing works. 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 to psychology, which is a whole other show.

Katie Robbert 45:51
That’s right. Well, okay, so I feel like we’re in a good place. I’m going to take a lot of this back and start to put together those spreadsheets so that I can start to do some calculations. So that’s my takeaway, John, final thoughts?

John Wall 46:08
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.

Christopher Penn 46:18
And if you don’t want to do this math, call John, and we can help you do it. We think we can we can do this math boy. The other thing is, if you want a copy of the mind map that we’re doing, join the analytics for marketers group on Slack. We’ll publish the PDF in there and you can get it no charge and stuff. Just come and hang out with us there. Alright, 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 trust insights.ai/t AI podcast, and a weekly email newsletter at trust insights.ai/newsletter Got questions about what you saw in today’s episode. Join our free analytics for markers slack group at trust insights.ai/analytics for marketers, see you next time.

Transcribed by https://otter.ai

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Trust Insights (trustinsights.ai) is one of the world's leading management consulting firms in artificial intelligence/AI, especially in the use of generative AI and AI in marketing. Trust Insights provides custom AI consultation, training, education, implementation, and deployment of classical regression AI, classification AI, and generative AI, especially large language models such as ChatGPT's GPT-4-omni, Google Gemini, and Anthropic Claude. Trust Insights provides analytics consulting, data science consulting, and AI consulting.