How to Compute the Lifetime Value of a Client

So this is a quick little video taken from a talk I did about the most expensive mistake that I see people making when it comes to Facebook ads, and running Facebook ads for their business.

And this is the thing, people don’t take into account lifetime value of a client. The reason this is so huge is that without knowing this number and without knowing what you can then do with the number, which we’ll get to later in the video, you can’t ever have a long-term profitable strategy with Facebook ads, because you just don’t know where you stand.

So, here’s what happens. Most people go into Facebook ads, they’ll pay for a boost, maybe they’ll boost a 10 pound post here, 20 pound there, maybe they’ll run an advert. Maybe they’ll let it run for, you know, 20 pounds or 50 pounds or 10 pounds a day for a couple of weeks. Maybe there’s some special offer they’re promoting, or something, and you know, they run, they put it out there. Maybe they get some traction, maybe they don’t. Maybe they get some sales, maybe they don’t. But they never really have a plan, they never really know if it’s working, and that’s the key.

We’ve got all this data available. Facebook gives us so much data. And you’ve gotta be able to use that, and the way you use that is by knowing, by having numbers that you can look at, and see if they’re working or not. That’s what knowing your lifetime value and knowing the other numbers I’m gonna cover, that’s what that gives you.

So, here’s how you do it first of all, here’s how you calculate your lifetime value.

This lifetime value, if it’s not clear, is the lifetime value of a client.

So, how much over the course of their time with you, as a client of yours, how much do you get from a client? And this is average, we’re talking about averaging out, the idea being that we have a number that’s workable.

Here’s how you work that out. How much do people spend with you? How often do they spend that? How much per transaction or per sale? How much do they spend? How often do they spend that with you? And how long do they stick around?

Also, how many parts, so if you are a service-based thing, maybe it’s how many months or how many years or how many weeks someone stays with you.

If you offer a product, how, you know do people buy regularly? Do they come back? Do they buy one thing and then another thing a couple of months later, then another thing a year later? Whatever that is.

And let’s use an example. For this example, I’m using a personal trainer. So what we’re saying is this personal trainer who does one on one sessions with clients, only charges 25 pounds for that one hour, okay? That means that’s 25 pounds per session. On average a client has four sessions a month. That’s you know, one session a week, and on average clients stick around for five months.

Now, obviously I’ve worked this to make the numbers nice and easy but in this case that means the lifetime value will be 500 pounds. So, the average client will spend 500 pounds with him, yeah?

Nice and simple.

Next thing you need to know is your overheads and expenses. Of that 500 pounds, what we’re trying to find out is what your average lifetime profit is. What are left with. Whatever your overheads are, maybe if you’re a personal trainer, maybe you’re paying rent to the gym. But what else is there, what other things you having to pay for? And this is gonna change for every business. So it might be the overheads of your facility, might be your own expenses that you require to do your service, whatever it is.

You need to know that for your business, and let’s use the example of this guy again, let’s say from this 500 pounds lifetime value of a client, his overheads and expenses are 200 pounds. That’s 200 pounds per every 500 pounds that someone brings in, that costs him 200 pounds in overheads and expenses.

And the reason we want all that, is that gives us an average lifetime profit. So that average lifetime profit, we’re calling that 300 pounds here. The next question you need to know is how much are you happy to pay to get that profit. So for that 300 pounds, what are you happy to pay, and here’s the thing.

There’s no right answer to this.

So different businesses and different people are gonna have different answers on this, and there’s the old advertising adage which is that he who can spend the most to acquire a new client wins. And that’s where this is so valuable. ‘Cause if you know how much you can pay, that gives you a huge advantage over your competitors, and puts you in a great position in your industry.

So, there is no right answer, but let’s say, for this 300 pounds, this personal trainer is happy to pay 50 pounds. So let’s say 50 pounds to get 300 pounds. Seems fair?

Now how do work that out? Well, it depends. Maybe you’re gonna work it into a sort of hourly rate that you’re happy, so you might say, okay, well this 300 pounds, well actually that’s, you know maybe that’s 10 hours work, and I want to get, I want to make sure that my value is 25 pounds, you know 20 pounds an hour, however it works out for you, maybe your overheads and expenses include staff, and so you’re happy to take a smaller amount of profit because there’s actually no work required from you.

Maybe there’s a ceiling to how much you can earn, and so there’s no point, a ceiling to how many clients you can take on, and so there’s no point paying a huge amount to get another 300 because you can’t scale it, it’s not scalable.

So, however that, whatever that is for you, however that works out, you need to know how much you’re happy to pay. And then the next thing you need to know is your conversion rate. So, this is where we get into the more sort of, online, digital marketing numbers, and this is where, what we mean by conversion rate, this could be online, this could be a sales call, this could be an in-person consult.

So this is going off the back of a Facebook ad, so let’s say you have an offer, let’s say you’re a personal trainer, you run an offer, you say, hey, I’m doing a session, it’s a 10 pound introductory session, I’ve got 10 spots available, click here to book now, and they click on the advert, they get through to a little landing page, and it’s got a form that people fill out to say yes, I’m interested in this.

So they fill out the form, you get in touch with them, and that’s your consult call. So what you’re gonna know is that conversion rate. So of 10, say if 10 people fill out that form, how many of them will actually turn up, will actually become paying clients, yeah?

And this is gonna work differently if you’re an online retailer, so you’ve got an ecommerce store, then your conversion rate is gonna be your website conversion rate, so you know, how many people from the product page to the checkout, how many people go through the checkout and purchase.

Maybe you’re doing sales calls, so maybe you are using, you know, maybe you’re getting numbers, sorry you’re getting, you’re building a list of email addresses and phone numbers and handing them off to your sales team, and then those sales team are calling those people up, so, and trying to sell your full product or your full service.

What’s that conversion rate, how many people are buying, out of 10 or out of a hundred, and what we can do is we can use that conversion rate, let’s call that 30% here.

So, this example, this personal trainer, he has an advert that we said, that goes to a landing page, people give their name, their email their phone number, and he calls them up and says okay, here’s what we do in this 10 pound session, great, let me take payment, and I’ll see you there, I’ll see you on Tuesday or Wednesday or whatever.

Let’s say that his conversion rate is 30%.

That means out of every 10 people that fill out that form, three of them become clients, okay? What that gives us is these numbers. It gives us, so now this is where we are. We know our lifetime value, we know our overheads and expenses, and therefore we know our lifetime profit.

We know what we’re happy to pay and we know our conversion rate. What this gives us is a target cost per lead. This is what’s so valuable, because when it comes to Facebook ads, this gives us something to aim at.

So, for this example, lifetime value is 500 pounds. Lifetime profit is 300 pounds. The guy’s happy to pay 50 pounds, and he’s got 30% conversion rate. You add them all together, that means you can spend 15 pounds per new lead. How did we get to 15 pounds? That is 30% of 50, okay?

So that number’s gonna change depending on who you are and what your business, what these numbers are. When you get to that number, when you know what you can spend per lead, suddenly everything changes. Then you can say, okay, well the ad is getting, you know I’m getting one-pound, two-pound clicks. And then you know, 20% of people are signing up, are actually filling out the form.

So that means I’m spending 12 pounds per lead, or 10 pounds or 20 pounds. If it’s too high, then you work to keep it down. You work to get it lower. And that’s your target to aim for. ‘Cause you know that according to these numbers, if you can spend, if you can get a new lead with 50 pounds or less, then you’re winning.

And obviously this updates over time, so your conversion rate goes up. That means you can spend, more per lead if your lifetime value goes up you can spend more per lead. That’s the way to approach Facebook ads, and if you do it with lifetime value, then you’re fine.

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