Day 22 — How to Calculate Lifetime Value (LTV)
This is a LIVE case study where I am documenting my journey to becoming a highly paid marketing consultant by blogging everyday for 50 consecutive days. It’s called “50 Days to Freedom: My Journey to 5 Figures in 50 Days“. At the end of the post, you will find links to all the previous posts.
Today’s post is going to be a bit different.
Typically, I share a lesson before getting into the case study, however today, it makes sense to have the lesson tied in with the case study.
It is about one of the most important metrics in business — Lifetime Value (LTV).
When you calculate how much a customer is worth, you can then determine how much money you can spend to acquire a customer.
This post is about how to calculate the LTV, and why it is important. I will not discuss how to improve it, but every busienss owner should be striving to constantly be increasing the LTV, and this post should prove why.
Day #22 Breakdown
Today, I had 2 sales calls scheduled. One had a family emergency, and had to re-schedule. The other, was a gym owner out of Chicago is doing very well with him gym.
In fact, he has a company doing his Facebook advertising quite successfully. They run a campaign once every 3 months, and he’d like to run ads between these campaigns.
During our conversation, we uncovered some areas in his business that can be improved & optimized. He has a database of 600+ leads who have expressed interest, but have not become members. We are going to execute an email campaign to convert a portion of those leads into new members.
When talking with these gym owners, it is extremely important to determine the LTV of each member.
This is a crucial number to calculate in business when it comes to advertising (online or offline). I find small business owners have no clue what their LTV is, or how to calculate it.
Below is a simple calculation for determining LTV…
(Average Transaction Amount) X (Number of Yearly Transactions) X (Average Retention Rate in Years)
This gym’s monthly membership is priced between $157 — $207 per month depending on the package they choose. On average, his members stick around for 12 months.
So using the formula above, we have…
$157 x 12 months x 1 Year = $1,884
$207 x 12 months x 1 Year = $2,484.
A range, depending on the package they choose, between $1,884 — $2,484.
For this example, we’ll use the average of the above numbers, which is: $2,184.
If I can help convert 6 (1% — which is pretty low) new members per month from his current database, that equates to an additional $13,104 to this gym owner. This is optimizing his current assets, without spending a penny on advertising.
This is one of the areas most business owners neglect, and an area I love helping as it’s like finding money in their business.
Calculating the LTV is an important number to know as a consultant/service provider, as it helps price your services. If you can explain the above to a business owners, and prove you can drive results, you’re basically selling them money at a discount.
If I can prove to this gym owner that the above numbers are achievable, would my fee of $1,500 be worth it?
In a sense, he pays me $1,500 and I return him $13,104 — a 773.6% Return On Investment.
Not too bad, huh?
There is no sane business owner who would turn that down, however, it’s how you explain & position it, that determines if you can close the deal.
Day #22 Numbers
Emails Sent: 100
Sales Calls: 1
Facebook Posts: 2
Leads Generated: 0
Committed Trial Offers: 1
Action Plans/Proposals Sent Out: 0
Revenue Generated: $0
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Last, but certainly not least: Thank you so much for reading, it means more than you know!