I have a motto: The best kind of client pays you every month, forever…
In the world of digital marketing and online business, there are a lot of “hypesters and hucksters.”
Unfortunately, many of them talk about making “easy money” and squeezing as much money as possible out of customers for an initial sale.
This is NOT the way, my friends.
This thinking is shallow, short-sighted, and out of step with virtually everything we know about buying psychology and the skill of creating clients for life.
As you begin to dive deeper into your new subscription-based web design business, you will find that there is one number that rules them all: Lifetime Value.
With Lifetime Value, or LTV, you can begin to cultivate a realistic picture of what your business could look like in 10 days, 100 days, or even 1,000 days!
So, what is LTV?
Simply put, LTV is a calculation of how much money a customer is worth to you over the lifetime of their relationship with your business.
It takes into account the initial purchase, as well as all subsequent purchases (and any associated upgrades or add-ons) that customer might make.
Once you know your LTV, you can start to make some important decisions about your business:
-How much should you spend acquiring a new customer?
-What kind of customer should you be targeting?
-How can you increase the LTV of each customer?
LTV is a powerful metric because it allows you to quantify the long-term value of a customer, rather than simply looking at the initial sale.
Can you see how much more powerful that is?!
Plus, it is a more accurate reflection of the true profitability of your business and can help you make more informed strategic decisions about where to allocate your resources.
How do you calculate LTV?
There are a few different formulas out there, but the most common one takes into account the following factors:
-Average Revenue Per User (ARPU)
-Churn Rate
-Customer Lifetime
Let’s break down each of these factors in a little more detail.
Average Revenue Per User (ARPU): This is the average amount of money you make from a single customer over the lifetime of their relationship with you.
You can calculate this by dividing your total revenue by the number of active customers you have.
Churn Rate: This is the percentage of customers who cancel their subscription or stop doing business with you within a given time period.
You can calculate this by dividing the number of cancellations by the total number of active customers.
Customer Lifetime: This is the average length of time a customer spends doing business with you.
You can calculate this by dividing the total number of active customers by the number of cancellations.
Now that you know what each of these factors is, let’s walk through an example calculation.
Suppose you have a subscription-based business that generates $1,000 in revenue per month, with a churn rate of 5%, and a customer lifetime of 24 months.
Your LTV would be calculated as follows:
LTV = (ARPU)x(1-Churn Rate)x(Customer Lifetime)
LTV = ($1,000)x(1-.05)x(24)
LTV = $960
As you can see, the LTV of this business is $960.
This means that, on average, each customer is worth $960 to you over the lifetime of their relationship with your business.
Now that you know your LTV, you can start making important decisions about your business. This also allows you to build something that almost no web design business has: stability.
When I left my job to go full-time, I did so knowing exactly how much money was going to come in for the next few months. I did not have to guess.
In fact, it was even better than that, because I did have some one-off hourly work come in as icing on the cake!
(Yes, I still accept hourly work sometimes. More on that another time.)
Don’t worry; this is about as much math as I can do, but this is the fun kind of math!
Start crunching some numbers and scenarios to see what is possible.
Do you think you could sell website services for $99/month? What about $197/month? Or more?
To be sure, though, this is not just about money.
Money is nice, but I mean it when I say “the best kind of client…” The reality is, you’ll get to work with people who get the value of having a “web person” by their side.
Once they get used to you being around, they won’t want to leave!
This kind of business model builds tremendous loyalty. (After all, there’s a reason virtually every kind of business is getting into the subscription game. Why not you?)
All in all, the subscription business model changed everything for me. I think it could change everything for you, too.