To a great extent, average client lifetime value (LTV) dictates what kinds of marketing and sales activities you can afford. Often, many companies have business model problems that need to be addressed before they can undertake an inbound initiative.
The problem these companies have is if their average client lifetime value is too low, many things that would normally help them scale do not work out.
Here is an example of one extreme: You are selling a product that is fairly inexpensive—about $19, $29, or $49 a month. Many times, the naive entrepreneur hires a sales director, who then tries to build a sales force to sell those products quickly.
The savvy, seasoned, serial entrepreneur goes for venture capital and realizes very quickly at a $19, $29, or $49 price point; there is no way they will be able to afford an outside sales force—probably not even an inside sales force to sell something that inexpensive.
What ends up happening is the business model of whom you are selling to and the price points of what you are selling at, dictates what you can afford to do for scaling sales.
For a relatively low price point, usually, the predominant option in today’s business model with digital marketing and digital revenue generation is self-service e-commerce, which is usually assisted with a live chat or call center. However, the idea of having field salespeople go out to sell something that is $19, $29, or $49 is absurd, and even supporting an inside sales force just does not work.
Sustainable LTV Metrics
Typically, things that are at least a couple hundred dollars a month have an LTV of at least low four-to-five figures. Justifying a field sales force that travels locally or regionally is hard if you are not selling something in the four-to-five figures— it may be difficult to scale.
In today’s world, if you do not have an LTV that is at least in the mid-to-high five figures, it can be truly difficult to scale. What it all comes down to is your LTV and the value a client is worth to you; these will have enormous bearings on what you can afford to do to scale revenue generation.
Calculating the Average Client LTV
The average client lifetime value expresses what a client is worth to your business over the lifetime of their relationship with you. If you have a product that is purchased once, that initial purchase equals the lifetime value.
If your business is geared towards repeat sales and you know how often someone will buy from you (whether they buy quarterly, annually, every three years or 5 years), you have enough data to track what the client is worth to you over their lifetime.
It becomes a lot more straightforward for businesses based on a subscription or recurring revenue model, where there is a certain amount of products or services you sell to them on a monthly, quarterly, or annual basis.
If you want to look at the average total up, open the program you use to track your revenue (Quickbooks, Stitch Labs, etc.) and look at last year's revenue or revenue over the last 12 months. Review the figure and determine how many clients influenced it to see what the average revenue was per client.
There are additional exercises like exporting revenue per client and sorting the revenue per client in descending order to find:
- Where the majority of your revenue comes from
- Which clients have the most contribution to your annual revenue
- Which clients have the least contribution to your annual revenue
The Bottom Line
Getting a handle on the average client lifetime value is an important metric for scaling revenue generation because it dictates what you can and cannot afford to do. It is important for CEOs to pay attention to average client lifetime value and do everything in their power to enhance LTV by delivering value to their clients.
LTV is not only clients; it varies depending on your business model. For example, an educational institution’s buyer persona would be students and parents. The tuition value is the number of years they would attend your school. If you are in a non-profit, you are looking for the average donation a benefactor or donor is worth.
There are all different ways of looking at this, but at the end of the day, it is critical you have a handle on your average client lifetime value (LTV).
How do you track your average client lifetime value (LTV)? Let us know in the Comments below.
To learn more about average client lifetime value and other critical metrics, download our guide “3 Revenue Growth Opportunities You Business May Be Missing.”