The secret to more profit: part 3
In the last email I shared how to flank your competition through upvalue.
In this email you’ll learn how to see your true customer LTV and how this can transform your entire sales and marketing strategy.
The key driver of LTV
Run a business long enough you’ll know this well: referrals are your best source of new customers.
Referrals are not just great leads; referrals are buyers who already trust you. Referrals don’t send you an RFP; referrals buy lunch and tell you how to sell to them.
If you run a business, or manage your sales funnel, you know this well. What you may not know: referrals increase LTV.
How can a referral to a new customer increase the lifetime value of the referring customer?
Imagine you could choose one of three customers to support for the next five years.
Customer A buys $10k per year from you.
Customer B buys $10k per year from you, and every year refers you to a new customer.
Customer C buys $10k per year from you, and every year refers you to a new customer, who also makes one referral per year.
Which one do you invest in?
Over five years, customer A generates $50k. Customer B generates $150k.
Customer C generates $250k.
These are not just academic figures: these numbers can change your entire selling model.
In SaaS, the target comp for sales is 25 percent. So at $50k, your target cost of sales is $12k; you can barely afford an SDR to make calls, and every demo needs to be uniform. You have to automate everything, and hope you can spam your way to success.
At $150k, you can spend $37,500 to acquire the first customer; at this level, you can afford to hire professional closers. Every demo can be tailored to each buyer.
At $250k, you can spend $62,500 to acquire and keep that first customer.
These customers are buying the same product, but you can spend 5x more to acquire Customer C, if you can accurately predict they will bring 5x more in referrals.
That isn’t simply 5x more budget; that’s 5x more freedom than your competition.
Your competitors, oblivious to the LTV tree, will only be able to sell with a generic, junior sales team; meanwhile, you can afford to provide a white glove service that looks to outsiders like economic suicide.
Acquire ten customers like customer C, and you have an additional $500k to invest in a superior product and experience.
If you could invest $500k into your product to upvalue for your customers, what could you create?
For $40k you can hire a ghostwriter to produce a book that defines your category and empowers your customers, then send them free copies to share with their network.
For $60k you can produce an annual event where you celebrate customers, employees, and partners, introducing them to each other and solidifying the community.
For $100k you can build a web app that complements your product, and give it away for free, increasing the budget your customers have for your core product. (What Joel Spolsky calls “commoditize your complement.”)
For $250k you can hire an industry celebrity, on retainer, as an evangelist for your company.
Should you write a great book? Produce an epic event for your community? Build a free version of an adjacent product? Hire a celebrity evangelist?
If you can track your best referring customers, and acquire ten like Customer C, you’ll have budget to do all of these.
How to see the tree
Sure Steven, this sounds great in theory, but I can’t throw away money on the promise of more referrals.
I agree. If you sell a $10k ACV product, you should not start running an enterprise sales strategy tomorrow.
But you can start by measuring the LTV tree.
The LTV Tree reports on the actual revenue attributable to each customer or influencer. With an LTV Tree report, you can begin to see the value of referrals in general, and specific centers of influence overall.
How this report is actually implemented will vary in different companies. Some might try to get a granular weighting for soft influence like a published case study; some might apply this to partner marketing, where the actual value of these referrals leads to significant investment decisions.
No matter how you do it, you need to see past the current contract size, and understand the total value of your best customers. You need an intuition for which customers have the potential to be like customer C, and which customers can never surpass customer A, who is great for renewals but doesn’t help you grow.
If you opened this email thinking a referral is worth $100, or your average cost per lead, and you leave understanding that a referral can actually be worth $50k, this alone should change how you approach customers, both to upvalue and generate referrals.
Businesses who estimate the value of a referral at $100 run social media contests; businesses who know their referral is worth $50k in future business produce entirely new products and experiences for their market.