LTV is not a YouTube channel

“Life is long”

-Marty Edelston

One of my favorite authors on the subject of personal finance and money is my friend David Bach.

David’s books have a consistent theme of “finishing rich”…which I just love considering most marketing advice we receive is more about getting rich quick.

Today I want to talk about getting rich slowly…why it’s the preferred philosophy…and to make sure you always have a keen understanding of one metric in your business above all others:

Lifetime Value (or what we affectionately call LTV).

The LTV (of a customer or client) is the one calculation you probably made a long time ago if you are currently running a successful direct response business; and it is the one calculation I urge you to make if you have not done so yet.

I will talk about LTV through a few real life case histories.

 

“I can’t make Facebook ads pay out”

I remember sitting in the audience at a mastermind meeting a few years ago, before everyone had made “funnel” the most important marketing term ever; and before Facebook had figured out how robust their advertising model could be (i.e. it was still super cheap to run Facebook ads).

One of the genius marketers in my group diagrammed on a flip chart how he sold a $10 report/product on Facebook and how he then created a funnel to convert that $10 buyer into a raving fan (and multibuyer) over time–and then making Facebook a key component in his marketing media mix (way ahead of the curve).

My big takeaway at the time was that his biggest competitive advantage was that he understood direct marketing principles while others who were advertising on Facebook at the time did not.

I’m hoping this has changed but just in case it hasn’t, I will give you the rest of the story.

His competitors at the time who offered a $10 “product” (or something similar) would usually receive very few sales; and when the initial revenue from those sales did not equal the total advertising spend for the Facebook ads, they would jump ship.

Time to find even cheaper media I guess.

My guy figured out that with these low ticket (i.e. $10) buyers, the key was to figure out who would buy a second product related to the first (for a little higher price)…and then create a third and a fourth offer in an intelligent ascension model with price increases that made sense.

He tested dozens of subsequent offers and price points, again showing he was a student of direct marketing.

And while he never came close to getting his money back on the first sale through all of his testing (or even after the second sale), he created a series of offers that eventually led to an “average sale” of $78 from a new $10 buyer.

Because he tracked the average lifetime value of the new buyers well past the second order, he was able to pay for the advertising within a reasonable period of time and without making cash flow difficult.

And then he was also able to buy a lot more media from Facebook with confidence that it would be profitable in an acceptable period for him.

But more importantly, he was building a business, not simply a way to make quick cash on a single sale.

While many of his competitors were lamenting that you can’t make Facebook advertising work selling a $10 product, he was buying ad space that could have been theirs for his $10 product…while they looked elsewhere for media that “worked.”

 

“The Bogey Man”

The company I helped build over 35 years, Boardroom Inc., had a flagship consumer newsletter, Bottom Line/Personal, which at its height reached 1 million paid subscribers.

This was quite a feat since the newsletter took no advertising and had to exist (and profit) based solely on subscription revenue and a little bit from list rental income (i.e. we rented the list to other companies doing direct mail).

And getting to 1 million subscribers profitably was even more daunting since the subscription revenue was based on a very low ($30 per year) price point.

Enter Dick Benson, the smartest man who ever lived when it came to direct mail.

By the way, Benson’s 31 “Rules of Thumb” in his classic book, Secrets of Successful Direct Mail apply, at least conceptually, to everything we do online today.

Dick told us that the way to grow Bottom Line/Personal was to establish a “bogey” which he defined by asking us:

“How much are you willing to LOSE on your initial order to make it all back (and more) in subsequent years?”

I can safely say that calculating this “bogey” was the single biggest reason Boardroom became a $100 million company over time.

We calculated, on a list-by-list basis, how much we were willing to lose on the initial subscription…and that calculation took into account the average renewal rates of those initial subscribers, list rental income we could derive from those subscribers (names) for as long as they were on file as “active”…and also what the average new subscriber would buy from us after the first sale (e.g. subscriptions to other newsletters and books that we sold in similar subject areas).

The end result was that we got rich slowly.

That is, our money in the bank steadily increased which over time, made us less concerned about monthly cash flow.

And this slow and steady process started with a “one year bogey” (i.e. making a new subscription profitable a year after we sold it); then we moved to a two year bogey: and dare I admit it, a three year bogey.

Who would have thought when we launched the publication that we would be willing and able to wait until year three to breakeven on a new subscriber.

I recall sitting with Marty Edelston, the Founder of Boardroom (and my mentor in all things business and marketing), looking at the financials of the company one day after we hit $100 million in revenue.

We looked at all the sources of revenue for the company: Subscription income, book sales, list rental.

And it was obvious as we studied it, there was one conclusion:

We were in the business of Bottom Line/Personal renewals.

That one number accounted for the highest margins (it was always cheaper to renew a subscriber than to get a new one), it accounted for the most cash, and probably most importantly, it allowed us to be much more aggressive with our marketing for new subscribers given what we could lose in year one…or two…or three.

Another thing to note, and a very important lesson once we realized that renewals ruled the day:

The emphasis the company made on editorial excellence made sure that by the time someone was a subscriber to one of our newsletters for more than a year, they renewed at 50% to 70%…and it was that number more than any other than enabled us to mail more names (at a loss) for new subscribers…and eventually get to 1 million paid subscribers.

This took a long time…but it was worth it.

It also instilled in me so many principles around the lifetime value of a customer, one of which related to this editorial excellence:

“Marketers sell subscriptions; editors sell renewals”

And if you are thinking this quote only applies to subscription offers, think again.

Here’s another way to phrase it which applies to any kind of direct marketing business:

“Marketers sell the first order; product developers/customer service reps/content providers/coaches/consultants etc. sell renewals”

 

“You can spend more money on your upfront marketing than you think”

One more story to build on the importance of LTV.

I was working with a client who offered a high priced coaching program which cost $20,000 per year.

(Yes, LTV calculations can be made–and must be made–whether your offer is priced at $10… $30…or $20,000)

They weren’t spending much money on acquisition marketing to new, outside lists/universes…and I was wondering why with such a high price point. Even a “one year buyer” was worth a lot to them.

And when I asked what their average renewal rate was for their program I was blown away: They said it was 3 times…that is, their best customers were “$60,000 buyers”…which screamed to me that we could devote a lot more dollars to marketing.

I suggested all kinds of high priced acquisition efforts (i.e. expensive three-dimensional direct mail, radio, TV, live events)—they were doing some of this already—but the kick in the head for all of us was that we could “invest” a lot more in our marketing once we understood the lifetime value of a new customer.

This situation taught me to ask this as my first question when entering a company for a consultation of any kind:

“What is the lifetime value of a new customer worth and are you willing to lose money short term to make a lot more money long term?”

It’s an updated version of the question Dick Benson asked Marty and I when he knew that developing a bogey was critical to our future success.

If the marketer can’t invest like this because of financial limitations, that’s one thing; but if they won’t do it because they don’t want to play a long game, it could be the biggest impediment to their growth.

 

LTV is a topic that deserves a lot more attention than I have given it here…and I have only scratched the surface.

The main thing I want to leave you with today is the notion of “don’t think every dollar you spend on marketing and media needs to be made back immediately.”

I understand that marketing isn’t free but if you intend on sticking around for a long time, and believe in what you are doing at the deepest level, you will embrace this notion of getting rich slowly.

Rich Schrefren, one of the smartest guys I have met in my travels over the years, a marketing genius, says it simply and eloquently:

”You don’t have a real business until you can profitably buy customers consistently from cold sources (not JVs, affiliates, etc,) ”

I will add that if you can “buy customers consistently at a loss initially knowing exactly when they become profitable, you have a real (and BIG) business for the long run.”

 

Dan Sullivan, the world’s top coach for entrepreneurs, says this when he talks about abundance:

“Never spend less when you can spend more”

While he was not talking about spending more on marketing when he said this he could have been…with this adjustment based on understanding LTV:

“Spend as much as you can (on up front marketing) as long as you know exactly when you will make back your investment…because you have calculated lifetime value of every new customer or client”

Now that’s living life abundantly…and for a lifetime.

 

Warmly,

Brian

 

P.S. Quick follow up on last week’s P.S. about the new women’s only group being assembled, comprised of the best women copywriters and marketers, Titanides.

(I receive no compensation for letting you know about this…and in fact, I have donated scholarship money to help more women participate)

Here’s a video and more information from the founder, Marcella Allison (a world class copywriter and mentor to many).

If you want more context about this, read the P.S. in my post from last week.

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