Client Acquisition Costs vs Client Lifetime Value: The Importance of LTV In Your Sales Cycle

When it comes to marketing there are key metrics:

Client Acquisition Costs vs Client Lifetime Value

Which do you focus on in your sales cycle?

Both. 

It’s essential to continue your lead generation efforts in order to expand your client base, as well as make efforts to keep that client base on as long as possible.

It begs the questions… 

How do you know where to allocate your resources? 
How do you know what client acquisition costs are acceptable? 
What marketing and sales decisions will lead to greater profitability?

Because unless lady luck is on your side, clients don’t just happen upon your business and beg to work with you. There is always a cost to client acquisition, fulfillment, and retention.

And it’s more in-depth than you might think… you’ve got the cost of a website to costs of building up a referral network, to ad campaigns, maintaining an online presence, and if you really want to get into the weeds, you could even count the overhead - you’ve got a fulfillment team, a sales team, a marketing team. You’ve got the cost of creating a lead generation machine, one where you develop a system, where your target audience, your message, your lead generation campaigns, your follow-up, and every moving part is continually optimized and on-point. That also has a cost.

Everyone in the company moves the gears to get the clients and keep them on as long as possible. Although, you might actually call those costs investments, because when set up the right way, it will pay you back over time in the form of revenue.

More about that later on.

The point is, when it comes to growth, how do you know where to allocate your resources and which will lead to the greatest return on investment?

There is one metric that answers that question for you and that every company needs to be aware of that drives operations and growth in a healthy, sustainable way:

Your lifetime value of a client (LTV)

Basically, it’s knowing how much is each client worth to your company over the long term. In this blog post, you’ll learn how you can use the LTV to:

• Make profitable decisions that will contribute to your company’s growth
• Dial in on who you should target, where, and how
• Understand how well as how well you resonate with those prospects, 
• Understand how valuable your products and services are to them, 
• As well as pinpoint areas where improvement will lead to increased profitability.

Failing to properly calculate and use this information can put you behind your competition. 

Let’s start at the beginning...

What is LTV?

It’s really a basic ROI formula. The average lifetime value of your clients is a measurement of how valuable a customer is to your company, not just on a purchase-by-purchase basis but across the whole relationship. 

Calculating the average amount of money your customers will spend on your business over the entire life of your relationship.

Here’s another way to put it, from Harvard Business Review,

Why is LTV an important metric?

To explain the implications of knowing LTV, let me give you a basic example for B2B, high value transactions…

Say I can get 10 qualified appointments and I close 1, and that one client is worth $30k.

I can then determine how much money it makes sense for me to spend to acquire that one client. So say the 10 appointments it took me to close the one client cost me $10,000. Not bad.  3-to-1 return. That’s ok. 

But now if I spent $3K and I got a 10-to-1 return, that’s obviously better. The exact return depends on every business, of course, but the point is...

It’s a simple ROI calculation.

There’s a caveat though…

What you need to understand is that more important than what you can pay per appointment is what you can pay for a client.

To add to that, it’s critical that you have a realistic expectation of closing percentages. 

Here’s another example, let's say that you can pay $10k per client. Now you have to ask yourself, “What do I need to manufacture to get the one client?”

If you know your closing percentage is 10%, you know you need to get 10 appointments to get the one client. So you can pay $10k per every one client, but I can also pay $1K for 10 qualified sales appointments.

Now let’s take it back a step…

To get those 10 sales appointments, you’ll need to work a sheet of 100 prospects.

In order to work a sheet of 100 prospects, you can pay $10K for that because working the sheet will get me those 10 appointments, which will get me one client.

This is high value B2B sales, this is how this stuff goes. You need to be careful that you don’t have the expectation to pick up appts for $5 a piece. 

Where did these numbers come from? 

They came from optimizing “the machine”. When you set out to build a lead generation machine, you have a lot of moving parts, depending on your target audience, your industry, and your budget. That also has a cost that needs to be taken into account. The good thing is, that cost contributes to lower and lower client acquisition costs over time. 

The important piece about knowing the LTV of a client is figuring out that equation of how much you can spend to generate leads.

So again, if the average LTV is $10k per client and you can pay $5k to acquire a client and you close a client every 10 leads, then you need to generate those 10 leads for $5k, or $500 a lead. This is where the ROI calculation becomes really important to businesses.

However, you can easily fall into a trap here… a lot of businesses look at the obvious “cost per lead”, not at the total “cost it takes.”

Remember, as I mentioned above, when you hire people and you train them, it’ll cost you just to get them ready. You have salaries, tech, training, overhead, and more.

All of that is a contributing factor to balancing your ROI vs your LTV.

>> If you want to learn more about whether it's more valuable for you to build an "in-house" team or outsource your sales development process, you can do that here. <<

Having said all that, here are some other ways in which LTV is valuable:

• It’s an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.
• Knowing the average LTV helps businesses develop profitable strategies to acquire new customers and retain existing ones while maintaining profit margins. This enables a focus on more long-term, profitable objectives rather than short term revenue boosts.
• It tells you whether your client acquisition and retention costs is aligned with your current and projected profit margin
• It allows you to make predictions and smart forecasts about how long a client is likely to last and what their value to the company will be, empowering wise decisions about ROI, including measuring ad campaign performance, planning a yearly budget, etc.
• This will help executives and business leaders build sustainable business models and create realistic growth trajectories for their company.
• Important for Marketing because they will be able to market to a more profitable audience (increasing marketing ROI). For example, you’ll be able to see whether you have a greater average LTV with smaller businesses that make regular purchases or larger businesses that make more significant purchases, but do so less regularly).
• It also helps you make decisions on lead generation and sales development.
• It tells you how the cost of servicing your clients compares to and affects your total profit margin in the long term.
• It also helps you identify  weak points to strengthen and pinpoints ways you can prevent churn and thus improve client retention and help you acquire higher value clients.

How to measure Lifetime Value of a Client/Customer

There are many ways to calculate the average lifetime value of your clients. Before we get into the formulas, there are a few things to keep in mind.

Finding the average LTV of your clients (or customers) requires you to think, not just about the sale, but about the full buyer journey, including when, where, why, for how much, and how often your clients make a purchase. Answering these questions will bring valuable insights, and help you spot issues you may not have noticed before.

So in its simplest form, if you have a very straight-forward subscription (or retainer) business model, for example, it’s easy to look at the average lifetime value of a client as:

Client Revenue Per Year x Length of Contract = LTV

But as you can imagine, in bigger companies with more complex products and business models, LTV gets more complicated to calculate.

You also need to take in lead generation costs, cost of servicing the client, any upsells, or crossells, and more. 

So it looks more like this:

However, remember that changes in market, competition, technology and more will likely affect your LTV. Some businesses aim for business relationships of 10 or more years with clients, so take these changes into account when calculating your LTV. For most, it’s probably better to focus your LTV on the next 3-5 years.

So let’s play this out...

What commonly happens is that people say “Hey, I can pick up a client and it’s $2000/month so I can only spend $100 on acquiring that client.” (Let’s use very simple numbers for the sake of speed and ease.)

Now let’s take a look at that $100 spent on lead generation. The truth is, especially in the B2B space, that’s not a lot and it will drastically limit both your lead quality and volume. However, if that’s really all you can afford to spend and still make a profit, then you can work with what you’ve got, right?

Well, yes and no. Are you sure you can only justify spending $100? 

Try this:

Think about how many months that $2000/month client stays on for. If your average client stays on for 24 months, and they pay $2k a month, then that’s an average lifetime value of $48k. Minus expenses of servicing them and lead acquisition (that $100) and you’ll see how much ROI you’re really making. In most cases like these, it’s easy to recognize that hey… if it’s possible to get $48K from the duration of this client relationship, I can probably spend more than $100 for that prospect. 

Where companies go wrong with LTV

The biggest LTV trap, as mentioned earlier, is that it’s important to look at the total cost it takes to get a quality lead to book an appointment with your team, not just the immediate ad spend, or immediate “cost per lead” cost.

Another major source of friction when calculating the LTV is ensuring that the numbers are current and correct.

 Companies with several large departments often silo their data, making it difficult to get the big picture. What companies in this case need to do is to gather the data from all the departments (so that includes marketing costs, servicing costs, sales costs, and more) and weighing each piece in order to calculate LTV. This allows you to find actionable insights and make more confident decisions going forward.

Something else to remember is that it may be best to segment your client base when calculating LTV.

Some clients will only purchase one type of service and you most likely have several different prospect profiles you’re marketing to, especially if you offer several different levels of service. When this is the case, it’s helpful to segment so that you don’t skew your results when calculating the LTV. You can’t group the $1000 per month clients with the $10k per month clients.

Also, different ways of segmenting your client base can offer different insight into where you should allocate your resources. For example, you can  create segments based on product or service line, purchase behavior, demographics, or even acquisition channel.

How to Increase LTV

Of course, we see clients who are able to get initial clients through the door, then they upsell them, cross-sell them, and soon the client has had their finger in every offer you can provide.

Which is what we want, right?

You want clients who will stay for the long term and who will become advocates and make referrals.  This of course, makes your marketing spend even more valuable.

So you need to think about what it will take to keep clients on for the long haul… if that’s what your LTV tells you is the most profitable way to go forward of course. I’d wager that in most cases it is. 

The goal for every business is to create a predictable formula. Have a playbook where you know that if you (or your teams) work 100 prospects, it’ll get you 10 appointments. 

And you know your conversion rate, so you know that 10 appointments gets you 1 sale. 

When you do this, what we begin to see is the ability to anticipate. This is how you can make forecasts, plan budgets, and see real growth. Ask yourself, “If I want to hit $XX amount of revenue, how many new sales do I need to get, how many appointments do I need to get those sales, how big of a list of prospects do I need to work?”

Then you can begin to really manufacture the outcome you are looking for in a strategic way. A lot of businesses say, well, we’re gonna go from $2MM to $4MM this year.

Until they go through this process, they really don’t have a plan to actually do anything to get there.

>> If you want to learn more about whether it's more valuable for you to build an "in-house" team or outsource your sales development process, you can do that here. <<

You can’t afford to start from scratch every month with your lead generation and sales development. That’s too costly and you’d be flushing resources down the drain. Instead, you need a systematic approach that over time gets increasingly accurate, lowering your acquisitions costs per client. 

This enables you to spend even more on lead generation because it stretches farther and offers even better results over time.

Just remember that in your calculations, it starts with building the machine. That also has a cost you need to factor in, but once it’s built and it’s continually optimized, you’ll get better results and at a lower cost.

In Conclusion:

Calculating your LTV is crucial because it allows you to make real time decisions with confident when it comes to how to allocate your resources. Diving into this will give you better insight than assuming you can only pay $100 at the outset, for example. There’s much more to lead generation than that. That’s why we argue that calculating your LTV is a more accurate way of balancing your budget. 

It helps you look at the whole picture; you can look at the “cost it takes” not just the “cost per lead. Besides the obvious client acquisition costs, it also includes things like overhead, salaries, training and building out a well oiled lead generation and sales development machine you can count on to continually fill your pipeline - and that just gets more accurate over time. Optimizing that machine will over time actually decrease your client acquisition costs and increase your LTV! 

I hope this article has been helpful in explaining one aspect of what we base our marketing, lead generation, and sales development recommendations for our clients. The machine we talk about is necessary for every single business that’s on a growth trajectory. In most cases, it makes more sense to partner with a team of experienced experts at building it out than bringing it inhouse and figuring it out yourself. If you have any questions about how to decide if it’d be a good fit to build out a machine with you or for you, including what our “machine” looks like and the costs involved (both short and long term), let’s talk.

Just click below and you’ll be directed to make an appointment with our team where you’ll get a better picture of how that machine will work for you.