What Should You Pay To Get A Customer?

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What is a cynic? A man who knows the price of everything, and the value of nothing. Lord Darlington in Oscar Wilde’s Lady Windermere’s Fan

How hard is to get new business?

Quite hard, I’m sure you agree.

It takes time and money to do research, send out cold emails, make cold calls and nurture relationships.

All those costs add up to quite a lot.

Many of us just see that as a fact of doing business.

Perhaps we hire salespeople and put marketing programs in place. Sometimes that works and sometimes it doesn’t – and we’re not entirely sure why.

Marketing can often feel like a bit of a punt – not a science or anything remotely predictable – despite what the experts say.

So it was interesting to learn about the idea of Customer Lifetime Value and follow the thread to see where it led.

In a nutshell Customer Lifetime Value (CLV) has to do with the profit you make from a customer over all the time they’re with you – and thinking this way means you might make different decisions about how you price and sell your product.

An early mention of CLV was in the book Database Marketing and the author, Professor Robert Shaw, castigates marketers for failing to learn key insights and, just not use maths very well.

Now, one of the things is that the maths is probably harder than it needs to be.

For example, A 1998 paper by Paul Berger and Nada Nasr shows you how to calculate CLV in a number of cases.

The definition of CLV is the discounted net profit you get per customer.

That should turn most people off at this point.

If it doesn’t the series formula that follows will.

But it’s not that hard actually.

Let’s say a customer spends $100 with you and is probably going to sign every year for the next three years you’re going to make $300 over those three years.

Now if you’re focused on just the first sale you make then you’ll see the customer as worth $100.

You’ll grudgingly give your salesperson a commission of 20%, pocketing $80.

And after you’ve paid salaries you probably won’t have much left.

If, on the other hand, you knew you were going to make three sales you could give your salesperson the entire profit on the first sale and still make money.

Even better, you could probably get better salespeople who will work just for commission because what they make is larger.

The CLV calculation changes the way you look at things – instead of having a single shot you realise that you can spend a lot more to get a customer as long as you keep them for long enough.

And really – that’s entirely in your control.

Getting them in the first place is hard and painful – they don’t know you, trust you or think they need you.

But if, once you’ve shown them what you do, they still leave then you need to get better at delivery.

But that’s something you can sort out.

There are two things here…

First, understanding CLV properly gives you new ways in which to buy customers because the prize is bigger.

And second, the price you pay will be repaid based on the value you give.

As the saying goes, price is what you pay and value is what you get.

Cheers,

Karthik Suresh

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