How To Calculate Customer Lifetime Value (LTV) And Make More Money

The result of long-term relationships is better and better quality, and lower and lower costs.
—W. Edwards Deming

Having helped to build one of the largest insurance lead generation companies in the country, I’ve heard practically every argument and excuse for why leads don’t work. And they usually come from advisors and agents who don’t understand the basic premise of Customer Lifetime Value (CLV).

In this chapter, I give you a primer in CLV and how to use it to make the SHIFT from penny-pinching advisor to savvy insurance and financial marketer.

How Much Does the Lead Cost?

If you’ve ever purchased leads, I bet your number-one metric was cost per lead. “What’s the cost?” you ask the sales rep. What you may not realize, though, is that this is an outdated metric that just isn’t useful if you really want to play in the big leagues with the rest of us.

If you’re only thinking of cost per lead, you’re limiting the way you grow your business. Also, more often than not, most lead opportunities look like failures. You’ll never pursue them. You’ll never take risks. And you’ll stay small.

But there is a better way!

It’s called “cost per acquisition.” It’s much more strategic to SHIFT your view away from CPL and toward CPA—the cost of acquiring a customer. Once you know that and you combine it with the Customer Lifetime Value (CLV), you’ll really know your numbers. You’ll be unstoppable.

I know one agent who had a breakthrough when he calculated his CLV. He took over his market in under six months, beating out his competitors, who were stuck on CPL Thinking.

Lifetime Customer Value is the long-term revenue your agency gains from one new client.

In other words, LCV is the key to predicting how much revenue a customer will bring you over the life of his business with you. To help you apply this to your own business, I’m going to show you the formula and how to use it.

Then, we’ll review how one benefits agent calculated her LCV for the very first time.

And then, I’ll show you how to do it yourself.

The Formula

Average annual commission per deal X average time a customer stays with you – amount spent to acquire that customer = Lifetime Customer Value

Let’s say your average annual premium for a typical sale is around $20,000.

Your average commission is 15 percent, or $3,000 per year for the average sale.

Then, let’s assume this account buys from you once a year, and you keep the business for around five years.

Multiply the average annual commission by the number of years you’ll hang onto the account. Set that number aside.

Now you need to calculate the cost of acquiring a new customer (CPA).

To keep it simple, let’s just calculate the cost to generate the lead. It could be from radio, the Internet, television, or another media outlet.

For the purposes of this exercise, let’s say you have to call on five leads that cost $100 each to get one new client.

That means you’re spending an average of $500 on new-customer acquisition.

Subtract that number from the earlier number.

So, for a $20,000 account, you paid $500 and got paid $3,000.

If a customer brings in $3,000 a year in commission and you keep him for five years…

That’s a customer value of $15,000, minus your original cost of acquisition of $500…

For a total lifetime customer value of $14,500.

So for a cost of $500, you were able to get a client who brought in $15,000.

Putting This Formula to Use in Your Marketing Strategy

The best part about this formula is that you can play around with the different factors.

If you want to see the customer’s value if he only sticks around for two years, you can change that part of the formula, and you’ll get a lifetime customer value of $5,500.

This highlights the importance of hanging onto that customer for as long as possible.

Knowing the LCV number shows you exactly how much it costs to acquire a customer and exactly how much they will earn you over the course of a year.

Once you know the value of your investment, you can market much more strategically.

You can create your own threshold.

A smart advisor who has made the SHIFT can say, “I’m going to make $7,000 over the course of this customer’s time with me, so based on my other expenses, I’m comfortable spending $1,000 to acquire his business.”

And if you double that investment, you can be confident that your earnings will respond accordingly.

In short, knowing your Lifetime Customer Value makes your budgeting decisions much more clear. Your goals will be grounded in reality.

Put another way, imagine there was a slot machine in your office and every time you put in a dime, a quarter came out. Guaranteed! How many dimes would you put into that machine?

As many as you could, right?

That’s the same kind of thinking that smart marketers adopt. They don’t get hung up on cost per lead because that’s limited thinking. They think in broader, more expansive terms.

A Sad—But True—Story

I once coached a very nice woman who wanted to “generate a TON of high-net-worth prospects immediately and cheaply” (her words, not mine).

When we sat down to take a look at the current postcard campaigns she was running, she was paying roughly $500 to run the campaign and she was earning an average of $5000 every month. Even when her monthly mailing wasn’t successful, the law of averages remained intact and she still had that incredible ROI.

It was a fantastic return on investment! 10 X ROI!

But that 10 to 1 return on investment wasn’t good enough for her, and she continued to search for the next “magic shiny object” that would bring her “faster and cheaper leads.”

Shame on her. And shame on us if we don’t SHIFT our thinking TODAY and begin to look at our marketing world in a more profitable light.

Summary

If you want to think more strategically and play a bigger game, you need to think in terms of the long-term value of a client. If you understand that, you can outmaneuver would-be competitors who get stuck on small-time metrics such as cost per lead.
If you can SHIFT to this type of reasoning as you move through this book, you’ll open up doors of opportunity for yourself. Windfalls of profits are sure to follow.

The Takeaway

  • Calculate your Lifetime Customer Value using the formula above.
  • Play with the numbers: What if you held onto a client for a longer (or shorter) time? What if you spent more (or less) on marketing?
  • Now calculate how much it would cost you to acquire a new client.
  • Make all your future marketing decisions based on that metric and ruthlessly stick to it. Make more powerful decisions using that metric.

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