Life Time Value
Watch any sports event on TV and sooner or later you’ll hear the stats start to roll:
- Average at-bats in a spring training game – per team, per player, per home or away game
- The field goal kick distance record – for regular season and post season play
- Number of free throw shots at the buzzer – how many wins/losses those shots generated, how that player’s stats compared to his college career and shoe size
- The last year a major golf tournament played out in the rain on a West Coast course when the leader was ahead by more than 5 strokes on the 18th hole
Can you wonder why I sometimes question their value?
I’ve always avoided stats as a freelance business owner. I’m about relationships and I don’t like reducing clients to nothing more than numbers.
I particularly didn’t care for stats like Life Time Value (LTV) numbers that further reduced people to money.
For me, LTV was a vanity metric and nothing more, like using Facebook “likes” to measure whether a pic with my family at the beach was meaningful or not.
Stats can’t quantify the intangibles. Think of hockey “enforcers” or some NBA defensive specialists.
But (and you know there had to be one coming) then I learned something from looking at my business track record.
The first few years I was in business, my average LTV for clients was $4,757.97.
Now my LTV is $47,745.43. That’s a 10X increase!
What am I doing differently?
I made a few changes from those early years.
- I focused more on stable clients and nurturing those relationships even when we weren’t working together. Repeat customers will drive up your customer LTV.
- I focused on profitable clients. It’s not helpful to be in longer relationships with clients that can’t pay their bills. Or that don’t provide enough income to cover mine.
- I stopped working with startups. (See #1 and #2 above for why.)
- I focused on clients with a budget in mind. This helps me make sure we both receive value from our work together – no surprises.
- I targeted bigger projects with multiple deliverables. More steps, more stages, more interconnected pieces, more value to us both.
But as exciting as it was to see those changes in action, you should never go out with the primary goal of trying to maximize customer LTV.
Jamie L. responded to my “What’s your average customer LTV?” email pointing out the flaws of using it as a metric:
The downsides are primarily
a) lack of income redundancy b) lack of an active lead funnel (one big client means constantly turning away leads to the point where it dries up) c) over time I’ve used up my “big wins” and the value I can bring each week/month drops from “big strategic wins” to “implementation”
Hell, full-time employment has an amazing LTV!
And I agree with Jamie 100%.
There’s a sweet spot.
And you’ve got to experiment with your business to find yours.
Kai Davis of the Make Money Online podcast has an Average CLTV that ranges from ~$10k-30k but also has one-off projects that range between $500 and $5k.
Personally I try to take on at least two clients a year: a new engagement with a previous customer that will drive up my CLTV and a new client to serve as backup income. Then I take on a couple small engagements here and there to provide “bonus” spending money.
This is the key point: a handful of repeat customers have covered roughly 80% of my income.
With this in mind, CLTV can also help you plan your strategic spending.
If your average LTV for clients is 5 figures, how much would you spend to acquire these same kinds of clients?
What can Life Time Value show you? Are you seeing growth? What can you do to improve that number?