After spending so much $ on Facebook ads over the past 2 years, I wish I had known this 1 thing much earlier.
But with little experience and guidance in business, plus managing countless other tasks, you don’t have 100% of the knowledge all the time. It really takes a lot of learning and experimentation.
The 1 thing I’m talking about… is actually knowing the lifetime value (LTV) of a customer.
If you do a quick search on google, there are various ways to calculate a customer LTV.
Basically, it’s taking average order value (AOV) of your customer divided by 1 minus the percentage of them buying again.
For example, if your AOV is $100, and your customer repeats purchase 10% of the time, your customer LTV is $100/(1-0.1) is $111.11. (To find your AOV, if you run a Shopify platform they’ll give you the stats on the dashboard. Otherwise, you can simply take the revenue over a period of time divide by the number of customer purchases)
The way of calculation is a good method but at this stage of my business, to avoid calculations being too technical or complex, I follow this simple definition where:
LTV of a customer is the dollar amount you can expect to sell to a customer throughout your relationship with them.
When I first experimented with using Facebook ads to test the demand of our Ukulele lessons for the public, I did not foresee the huge demand coming.
Prior to opening our music workshops to public, our business focused on running our music team building programmes for corporate organisations. Till today it still remains as our core business.
When the first Facebook ad campaign was successful (back in Apr 2017), we had close to 20 sign ups paying close to a $100 for the workshop.
We had a great workshop, everybody was happy and had fun learning music.
But.. that was it. Full stop.
There was no continuation for them, we did not upsell to higher levels of learning because we did not plan ahead.
I wouldn’t say it was a huge mistake, but looking back, I should have planned way ahead for best case scenario and continue to bring these students to high levels through more intentional offering.
Today, our Ukulele Passport Workshop remains to be one of the most sought programme when people search for Ukulele lessons in Singapore.
At this point of writing, more than 80 batches of people have went through our 2 hour programme where they can learn how to play and sing on the Ukulele even if they have zero prior experience. And we have all our systems in place to increase the LTV of our customers through higher level courses.
Before I digress, let’s come back to why knowing your LTV is crucial before you run paid ads. In fact, it’s not just important for running ads. It is of paramount importance when building your business for the long term.
Here’s why it’s important:
1. You will know how much you should spend to acquire a customer
Cost per acquisition or cost per purchase -is basically how much you spend to acquire a customer. Knowing your true LTV will let you know whether your campaign is “worth it” or not.
Cost per acquisition can be derived by simply taking your overall ad spent divided by the number of lead/sale you had.
(Of course, it really depends on what industry you are in and what you are selling to know the metric to calculate. If you are in the Interior Design or Insurance/Real estate industry, you probably would want to calculate the cost per lead. And from cost per lead, how many % actually converted to buying something from you – there you can calculate your cost per acquisition.)
For simple illustration, let’s assume you are selling a business selling an ebook for $10. You spent $100 to sell 10 ebooks, your cost per purchase is $10.
So here comes the question… if the price of your ebook is $10, and your cost per purchase is $10… is it worth it?
A marketer/business who doesn’t really know their customer LTV would deem this as a breakeven sale.
But, if after your sale of ebook, you have 5 other related ebooks in the same niche to offer to your customer (assuming they really like your first book and move on to purchase the rest), was the $10 cost per purchase worth it? It definitely was!
Ideally you would get a customer to purchase the first ebook at $10, and then they buy another 5 books at $50 which means your customer LTV is $60.
Spending $10 to acquire 1 customer certainly seems very desirable now.
That being said, you can now calculate what is a desirable amount you can spend or is willing to spend to acquire a customer. (you set your own targets and ideal profit margin)
2. You will have a peace of mind when monitoring your ads.
If you truly know your LTV, you will not worry when your cost per acquisition (CPA) fluctuates or is expensive.
On days where your campaigns give you poor results, you feel confident. Because you know that for every customer that comes in, you have the opportunity to continue to offer them other products you have. (Of course your upsell and cross-sell strategies must be in place and that takes a lot of work, and I will probably cover this topic in future)
3. You build your business for the long run
If you are running your own business or plan to run one, I’m pretty sure you don’t plan to do it for 1 year. You probably want to see it flourish and scale big.
And that’s why knowing your customer LTV is crucial, because it allows you to forecast the growth of your company.
If you have a small LTV now, then you can plan how to increase your average order value. By offering more products… A higher tier membership… A premium mode… etc.
What business are you in and how’s your LTV like? Share with me your thoughts!
