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Issue #8 • August 2017

How to Calculate the Lifetime Value of a Customer for Your Blog

Conversions Metrics Strategic Planning Strategy & Operations

Trying to attract new clients and customers as a blogger, freelancer, or business owner can make you feel like you’re in “hustle” mode all the time.

I was deep in the hustle just a year ago, working non-stop as I churned out loads of content. It felt exciting for a while but quickly led to creative burnout.

Being in a constant state of hustle isn’t sustainable. I’m willing to bet we can agree that working from a place of rest and freedom is much better.

So how do we attract our ideal clients and customers without the pains of constant acquisition?

Acquiring customers is important, but do you know what’s even more of a priority?

Keeping them.

It may seem like having the biggest number of digital product sales or names on your client roster determines the success of your business, but there’s more to it.

If you have good sales but only concentrate on a single offering, you’ll have to do even more work to convince the next round of customers or clients that your product is worth it.

So let’s talk about how to beat the hustle so you can get back to doing the work you love while keeping the audience members who want to buy.

Understanding the customer’s lifetime journey

Before we get into calculations, it’s important to understand the full picture of a buyer’s lifetime journey. Here are the five key stages:

Reach

This stage is all about getting you on the potential customer’s radar, which is also known as building brand awareness and visibility. You’ll want to introduce yourself as the expert in your topic while explaining what you do and why you do it. Think of it as a soft pitch.

Acquisition

Now it’s time for the hard pitch. This is where you’ll invest (with time, money, or both) in teaching your potential customer all about your product. This includes what it is, what it offers, how they’ll benefit from it, and why they need it.

Conversion

Eureka! You’ve successfully earned your first sale from this new customer. Pat yourself on the back. The marketing efforts you used to convert this customer can be optimized and used again for future customers.

Retention

In this stage, the customer is here to stay. You’ve built enough trust over time to retain them as they continue to purchase your products or services. You’ve successfully attracted buyers who would consider themselves “customers for life” – great job!

Advocate

You’ve hit the peak! This is the stage where your customer becomes a brand advocate. This means they’ll give your new products or services a shout out on social media, link to your blog posts on their website, or spread their love for your brand by word-of-mouth marketing. They want their personal or professional network to know just how deep their admiration for your brand is.

After reading through those explanations, it’s probably intuitive why we want buyers to get to the last stage of advocacy. If we focus more on the customer acquisition cost than the customer lifetime value, we’ll stay at the third stage and constantly spin our wheels in a seemingly endless cycle.

Do you get tired just thinking about it? I do too.

“But, Kayla, there has to be a better way!”

You’re right, my friend. There is, but first let’s cover the difference between the customer acquisition cost (CAC) and the lifetime value (LTV) so we’re on the same page.

The difference between customer acquisition cost vs. customer lifetime value

CAC refers to the total cost it takes to acquire a new customer. This includes any money that’s going from your wallet into marketing efforts, sales reps, software or tools, and promotions (including discounts).  

The problem with constantly acquiring new customers is that when the customer leaves, they take your CAC investment with them.

If you sell a digital product at $10 but don’t produce another offering for a few years, not only could you lose your buyer’s interest and trust, all the work you put into marketing and selling to them goes out the door. Sure, you received $10 from their purchase, but does that really outweigh the money you put into launching the product?

This is why building your business to prioritize your customer lifetime value (LTV) is important. Customer lifetime value refers to the projected revenue that a single customer will generate during their lifetime.

Knowing your customer lifetime value is important because it will influence:

  • Your marketing: How much should I spent in order to acquire a new customer? (Pro tip: consider time and money resources)
  • Your offerings: What product(s) should I create in order to appeal to the new customer? What problem are they trying to solve and how can my product(s) solve it?
  • Your sales: What sales tactics should I use in order to make the sale?
  • Your support: What level of customer support should I invest in so I can retain the new customer? How much of my budget does this take?

For a business to be sustainable and profitable, the customer lifetime value must exceed the customer lifetime cost. I love when math is simple, don’t you?

Calculating customer lifetime value: an example

Speaking of math, let’s do some simple calculations for your own business. I’ll use an example to guide us through the exercise.

Let’s say the average order for your business is $100. You have a few eBooks and high-priced courses so it averages to around this number.

When you launch a new product, you’ve discovered there’s a 10% chance that your previous customers will make a repeat purchase. If it takes $10 to acquire a new customer (due to Facebook ads, email service provider costs, etc.), here’s how you’d calculate it: How to calculate customer lifetime value

Again, this is just an estimate, but it shows what happens when you don’t prioritize LTV. This example’s LTV is $101.11, which is awfully close to the average order of $100 you receive from the customer. Yikes!

You’re barely breaking even in this example so here are the first things you would want to do:

  • Focus on increasing the customer retention rate (that 10%) to a higher number
  • Try to cut down on customer acquisition costs where possible (get rid of methods that aren’t working)

So what numbers ARE good for LTV vs. CAC?

Here’s what Klipfolio has to say about customer lifetime value vs. customer acquisition cost:

“An ideal LTV:CAC ratio should be 3:1. The value of a customer should be three times more than the cost of acquiring them. If the ratio is close (1:1), you are spending too much. If it’s 5:1, you are spending too little. In fact, you are probably missing out on business.”

Now that makes sense.

Want to go in even more depth? KissMetrics has a great infographic including more variables in its equation to get you even closer to your most accurate LTV.

Building products based on your customer’s life cycle

Now that you understand your CAC, LTV, and the stages in your customer’s journey, let’s fuse them together to determine what products you want to offer your audience.

Taking your niche into account, choose a topic that your audience is interested in learning more about. We have a step-by-step guide on finding the problem worth solving for your next product that may help.

Once you’ve researched and tested your product topic, it’s time to assess what level of understanding your audience members have on your topic. For our example today, let’s use these three levels: Beginning, Intermediate, and Advanced.

If your niche is course development, you might want to create some passive income products on how to DIY your own course for audiences of different levels. I think you can see where I’m going with this.

You’d first create a $10 eBook on “How to Set Up an Online Course” for someone who is at the beginning of their journey. They’re not sure if online courses are right for them and want to do some studying up on the subject before they take the plunge. An affordable product like this is perfect.

But what happens next? Well, you want to keep this beginner excited about the possibility of building online courses into her business model so you’ll offer an “Advanced Marketing for Course Creators” for $299. It’s more of an investment, but hopefully now they are primed to DIY their own course.  

Why stop there? If the customer is still interested in taking their online courses to the next level but really needs some one-on-one help, they could graduate to a six month coaching package worth $5,000.

Example of how to calculate the LTV of a customer

In this example, you turned a $10 eBook sale into a buyer with an LTV of $5309. WOW.

How does this change your overall digital marketing strategy?

For starters, it’ll help you place an extra emphasis on customer retention rather than customer acquisition. It’s just easier (and more cost effective) to retain an existing customer.

It’s not just about making your larger audience happy– it’s about investing the most amount of energy into customers who have already converted. As you’ve seen through our examples today, the total number of customers you attract doesn’t tell you as much about the success of your business as the customer lifetime value does.

I challenge you to rethink your product strategy today and start planning your products with your customer lifetime value in mind. It could be exactly what you need to kickstart your business!

What are some products you have now that you could expand on to create a larger LTV?

Kayla Hollatz

Kayla Hollatz is a copywriter and content creator for creative entrepreneurs who want their words to connect and convert. Few things make her happier than ghostwriting for clients in her studio, aka her four-season porch with a lake view. She can frequently be found fighting Minnesota winters with a mug of hot chocolate in hand.

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