How to calculate Customer LifeTime Value and increase amazingly revenue

How many times did you come up with an idea and you think that can be very profitable and decide to develop that idea? We know that today world move fastest that ever, you don’t stop to calculate nothing or make a boring Business Plan(remember this ones), just PUM! do it as fast you can. But after you develop the product and launch it, six month later you fail, and the only reason was because you are not making enough money.

Why i’m saying this? Because there is a couple of things that you should investigate and calculate before start, that is if your gold idea can be profitable or not, calculating our Customer Lifetime Value in one of my post I talked about Minimum Viable Product, there I wrote about  creating a MVP based in a Landing Page and ads is a good way to know if there is people that is going to purchase or not your product. But we can also know how much money spend in awesome apps like Unbounce, KissMetrics,Appsumo, etc… This formulas can told us not only the monetization campaign that we should use, also the PPC strategies, how much we can invest in content marketing, etc. You don’t have to be a math expert to calculate your customer LifeTime Value

First of all, if the “why” of your idea is based in make money, maybe you should go to Wall Street, the objective of your idea have to be a real “why”…. BUT it is true, one of the reasons to be an entrepreneur and of your product is make money,  I’m not saying that we don’t have to care about make money, I am saying that this don’t have to be the main objective of your idea, there are Micro and Macro Conversion.

It happened to me, some time ago I developed an amazing idea and when I realised that it wasn’t generating money, I decided to calculate the Customer LifeTime Value and Customer acquisition cost, after that I saw what was wrong… there wasn’t any way that the marketing strategy that I was using could generate some money.

One rule that you should follow do is to have a Customer Lifetime Value > your Customer Acquisition cost, I think that this is one of the problems that kill most startups. They spend so much money and don’t know if they will earn the sufficient.

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Customer Lifetime Value

Why calculate the Customer Lifetime value is so important? Because is a fast way to analyze our acquisition strategy and estimate our marketing cost, after this we are going to have a clear image of how much we should spent to acquire a user and how profitable they are.  There are different ways to calculate the customer Lifetime Value, but let’s use the traditional equation.

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“m” is the average gross margin per customer.

“r” is the customer retention rate, how much customer will repurchase over a period of time.

“i” is the rate of discount in others words is the interest rate used in discounted cash flow analysis to determinate the present value of future cash flow.

Let’s calculate an example, let’s suppose that we have an idea, a website that sells infographics “Info-J”, and we want to know how much profitable are going to be our users, after calculating our Customer Lifetime Value we know that each customer will going to give use a average of $500.

Customer Acquisition Cost

Cool, we know how much money are going to give us customers around their life, now is time to know how much money we should spend to acquisite customers. To compute the Customer Acquisition cost we should divide the entire cost of sales and marketing in a given period of time by the number of customers that we acquired in that period. Marketing Cost/Number of customers

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Let’s look to the spreadsheet, Info-J Stores spends $500 in ads and have 1000 visits, this is $2 per visit, let’s suppose that a 10% of those visits is converted into users, this is $20(2/10%) is the cost to have a user registration. And only a 12% of those users purchase, $166 is the cost to acquired a new user, this is a 41.5% of what users will spend in us, greats numbers. We only attract users via internet, we don’t have any direct marketing cost or any employee… let’s suppose that the startup is managed by a designer and a programmer. But if you have employees or any other cost you should include it.

In one amazing post of David Skok, he say that the Customer Acquisition Cost should be recover in 12 month, so if we spend $166 in one user, we should be sure that in one year that user will give to us that amount of money.

Optimizing

That have to be the “rule”, if your Lifetime Value is < that your Cost Acquisition Customer don’t start or continue, figure out how you can optimise your numbers, maybe you don’t have to spend money in some tools and you can start with free, like Google Analytics.

One cool thing that you can do is segment your public to know in what users you should spend more money. I like to segment in three “Normal” and “Fans”…  to calculate look the number of purchase in a period of time, and I know in what users I should invest money and in what no, there you are going to have “Average” users that will spend $1800 but there are others are going to spend $2200.

Growth Hacking

We all know that Growth Hacking measure the results of the strategy that are focus on get customers in a short period of time, with low capital, to do this Growth Hackers measure all, in my previous blog post I talked about  why is so important to every entrepreneur know about analytics: “How to make amazing decisions and rock with analytics” and is because with analytics, in most of cases, you will be able to measure if your PPC campaigns are giving good results, what social network is working best for you, and then if you want to be a ninja start segmenting and others things.

But measuring your results is good to know what things gives to you more revenue and what not, in what things you should spend money to acquire new users and in what no. After the measure you should focus in those things that gives to you new users.

Example

So let’s suppose that I made three differents strategies to acquire new users into Info-J, one is via Google Ads(the one that we saw before), the second with Facebook Ads and the third one via a Blog post with a free e-book. I launched the strategies at the same time and one month later I measure the results.

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I realise that the Google Ads campaign is the winner, it is not only the strategy that most people get to my webpage it is also the strategy that more purchase gave to me. So what I will decide to do? I will focus in my google ads and optimize the campaign, segment my users better, maybe add a retargeting campaign to those users that came once to engage them.

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After that I will analyze my E-Book, my E-Book give me a lot of people that was engaged in my website but at final a low number only were converted. I should understand why only a few number of users were finally converted and why a lot after read my e-book come to my website and make an account but not were converted. So? what I do now? Easy… be just have a macro conversion, this is very positive but, why we don’t try to make a micro conversion adding a special offer to those users that sign up via the e-book.

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But what happened with the Facebook Ads campaign? Below you can see the horrible results that we had, only a few number of users where converted… should be optimise the campaign? Maybe the images of the ads where bad… mmmm no, we make some A/B testing and any of the images gave to us good results… maybe we made a bad segmentation of users…. mmmm no, we created different campaign based in differents type of users.

Comparing this facebook ads campaign with previously Campaigns we realise that Facebook Ads never gave to us good results, in fact most of the time are a waste of money and time. Here is where we connect all the Growth Hacking with our LifeTime Value and Customer Acquisition Cost.

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After the changes in our campaign we can look again our new spreadsheet and observe how our revenue goes up… notice that we invest the money of the Facebook ads in our Google Ads and the E-book offers and we get better results. This is why know all this is very important… startups that are in beginning steps have one mission and it is “Survive”, investing the money that they have in things that give the better results is very important.

Just think that the Facebook Campaigns give to us green numbers, we have conversions but they were very low in comparison of the E-Book and Google ADS, don’t comfortable if you have the chance of stop with one campaign because gives to you low conversion and optimize another that will give you a bigger conversion, do it.

If our Customer Lifetime Value is of $500 per customer, our Google Ads campaigns is giving to us a 88% return inversion and the E-Book a 75%. This sound very great, unfortunately this are not real numbers.

We can conclude that know our Customer Lifetime Value and Customer Acquisition cost is very important, it can help with our monetization strategy and in what things we should focus on. You saw at the example, we can continue with our Facebook ads campaign, but we only where getting $50 of revenue for each customer that came from that campaign. Instead, we invest the Facebook Ads campaign in the optimise of our E-Book and Google Ads campaign and we get best results.