The secret to more profit: part 1
Most successful businesses have a secret method to generate more profit than their competitors. In the age of the Internet, when everything you see can and will be copied, these secrets separate the businesses thriving from the businesses working twice as hard and still falling behind.
One such secret is the lifetime value (LTV) of a customer. Many people understand LTV in theory, but they never apply it to grow their business.
LTV can be calculated in many ways, but generally speaking its the average revenue per customer over their lifespan.
While it is important to know your LTV, the real gains occur when you know how to increase it.
For example, you might subsidize FedEx, Netflix, and Spotify for your customers:
According to this research from Motley Fool, Amazon averages 2.5x more value from a customer subscribed to Prime than one who is not.
Now, most of you aren’t Jeff Bezos. Unfortunately, neither is the CEO of Target, who still charges $5.99 for shipping.
When Amazon pays for shipping, starts a movie production company, and helps digital nomads start lifestyle businesses, they do it knowing with the LTV in mind.
You can too.
Let’s consider an example from before the internet.
It’s 1915; you sell milk door to door. You know that most customers will continue buying for four years, at $50 per person per year.
Today you can choose between selling to a friendly couple who can’t have children, or to a pregnant couple who look like they’ll achieve the American Dream.
In Year 1, they buy the same amount of milk, but by Year 4 they are profoundly different customers:
While either couple could be expected to spend $800, the couple with 2.5 children will spend $1,350, nearly double the amount.
You sell milk; it doesn’t matter too much who buys it. All other things being equal, you’d be better off selling to the pregnant couple.
So the first step is to simply identify customers who will buy more, and focus your energy on those relationships.
Actually, most milk salesmen would avoid both customers in the chart above; instead they would focus on selling to the households who already have 2.5 children, rather than seeking out the pregnant couple who will soon join them.
This is the transactional approach to LTV: selling to the customer who can buy the most now, rather than selling to the customer who can buy more later.
When you focus on the value at the moment of transaction, you end up with the most competition, because every other milk salesman is wooing the same whale.
When you focus on the relationships, and begin with the LTV in mind, you actually end up selling to better customers, with less competition.
So the first thing you can do with LTV is find clusters of high LTV that your competition won’t see.
In ten years of building lead scoring models for clients, I’ve never had anyone even suggest clustering around LTV. This is a major blindspot in B2B marketing right now, and a massive opportunity for the companies who see the whole value of a relationship rather than the transactional value of a contract.
Although buyer personas sometimes scratch the surface, they usually favor pop psychology over data modeling.
You can approach LTV like Amazon, and break out hard numbers; or, you can approach it conceptually, like a savvy 1915 milk salesman, and understand the trends that will change the market dynamics.
Either way, you will become more profitable than the copycats who mimic your website design but not your business model.