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Today, I want to introduce you to 3 metrics that can help you acquire new customers in a predictable and stress-free way.
The goal with these 3 metrics is to create a customer acquisition model that then informs every decision we make when marketing your business.
The 3 metrics are:
- Conversion Rate (CR)
- Average Order Value (AOV)
- Lifetime Customer Value (LTV)
The conversion rate is a metric we use to describe the percentage of people taking a certain action. For e.g. let’s say I’m selling a car from a website like Tesla does. If I send 100 people to my website, and 2 people buy a car, then my conversion rate is 2%.
That would be an example of a purchase-based conversion rate. But we can also apply conversion rates to other goals, like getting leads, appointments, and other conversion events.
The second metric – average order value, is the average dollar amount spent by each customer. And that’s determined by how much your products or services cost, and also how many items the customer buys.
And this is of course why McDonald’s staff are trained to upsell and cross-sell you – because when you add fries, drink, and a muffin to your order – it increases that average order value for the business. The reason why this is so important is due to the fact that it’s usually ridiculously expensive to acquire a new customer. So a business should always be trying to close the gap between the cost of acquiring a new customer and the AOV on the front end.
Now, it’s not always possible to have a massive AOV. It depends on your industry, your business model, and many other factors.
For e.g. Netflix charges about $10 for a monthly subscription. It would be incredibly difficult to get a customer to fork out $1000 initially instead of $10.
Therefore, the last metric solves that problem. It’s lifetime customer value, which tells us, on average, how much the customer will spend with the business over the course of a lifetime, or the natural relationship with that business.
For e.g. if the average customer spends $25,272 at Starbucks over their lifetime, this becomes a vital piece of information for Starbucks, because it helps them make a decision on how much they can realistically spend to acquire a new customer on the front end.
In an ideal world, obviously, you want all 3 of these metrics to be sky-high. You want a massive conversion rate, a huge average order value, and a monumental lifetime customer value. But of course, in reality – that’s not always easy.
These 3 metrics can be applied to any business. It doesn’t matter what you do or sell.
Whether you’re a lawyer, accountant, builder, e-commerce brand, restaurant, or any other business – you need to understand these 3 metrics.
Now let’s run through 3 realistic scenarios to make this a little more concrete.
The first scenario is an accountant, the second will be an e-commerce or hybrid retail brand (I say hybrid retail because most retail brands should have an e-commerce channel), and the third example is a restaurant.
Let’s say we buy 1000 clicks from Google or Facebook ads for our client who’s an accountant.
From those 1000 clicks, 100 of them sign up for a consultation with our accountant, and 10 get onboarded as a new client. In this scenario, we have 2 conversion rates to report.
The first is the rate from website views to consultations which is 10%. And the second is from consultations to clients which is also 10%.
Now, after chatting to our accountant, we find out the average order value of their client is $2000, which is the amount the customer spends on their first invoice.
The slightly harder metric to get is the lifetime customer value. Let’s imagine our accountant hasn’t kept great records about their churn rate, which is the percentage of clients they lose, and how long the average client remains a client.
But let’s say they run a rough calculation and they tell us the average client stays for 13 years and pays an average of $10,000 per year for the service.
That would be an LTV of $130,000.
Much higher than the LTV of Starbucks. But before you think you’ve chosen the wrong business to be in, always remember that typically, the higher the LTV of a business, the smaller their total addressable market (TAM), and also typically there’s a higher service level for the customer.
The target market for Starbucks is perhaps anyone with a pulse and a few dollars in change.
Meaning it’s a mass-market product. But the target market for our accountant is perhaps local business owners who generate over $1,000,000 in revenue and require monthly bookkeeping services, as well as tax consulting. Which obviously is a much smaller group to target.
So it’s always a trade-off.
Our second scenario today is an e-commerce or hybrid retail business.
Again, we drive 1000 clicks from online ads, and 10 people make a purchase, but in addition, 100 people sign up to the brand’s email newsletter.
So again, we have 2 conversion rates to report. The brand achieved a 1% conversion rate for the purchase event. But 10% on the email newsletter sign-up event.
Now some of those customers who bought added multiple items to their cart, and in the end – once everything was averaged out – the average order value was $85.
Now, if the product is one where the customer orders over and over again – we can also calculate, or at least estimate the LTV. In this case, let’s say it’s a supplement brand, and so the customer orders 6 times per year and stays with the brand for 2 years on average. That would be a lifetime value of $1020.
And let’s do 1 more example, which is our restaurant.
We send 1000 clicks to a special offer on the restaurant’s website – and 50 people redeem the offer.
The average bill comes out to $60, and the average customer continues to visit the restaurant on average 8 times per year for 5 years. That would be an LTV of $2400.
Now the purpose of doing all these calculations is because after understanding these numbers, we can make better decisions when it comes to acquiring new customers.
After realizing the value of your customer over the first month, year, or a lifetime – you are now armed with some data to help decide how much you are willing to spend to get a customer. Of course, you also have to know the margins in your business and your unit economics.
If your LTV is $1000, it makes no sense to spend $1000 to acquire a customer. You would need to wait a lifetime or to the end of the natural client relationship to recoup your marketing investment, and after you take out your business expenses, you wouldn’t even be breaking even. You would be losing money for the privilege of servicing that customer.
So in that scenario, the only option is to reduce how much it costs to acquire the customer or improve your metrics (CR, AOV, LTV)
Typically, you’ll find that larger businesses or international brands take a very long-term view when it comes to this decision. They’re willing to go in the hole on the front end, because they believe in the strength of their LTV, and many times, they also have investors who see that long-term vision and are willing to fund the growth.
However, if you’re a local service-based business or an e-commerce/hybrid retail brand that generates less than $20M per year in revenue, sometimes you need to be more conservative.
The best-case scenario of course is that you can be profitable on the front end directly. And this is exactly what we help our customers achieve. We want to actually spend the marketing dollars and make a profit immediately within the first month. No waiting, no hoping.
And like you can probably guess from what we’ve discussed today, there are only a few ways to accomplish that. As a marketing company, we don’t have full control over your average order value or lifetime customer value. We can consult with you on those things of course, and we can help you use technology to help with some things, but not everything. But what we can influence is your conversion rate on the front end.
So we specialise in creating conversion pages that take prospects and turn them into customers or high-value leads.
If you can turn $1 into $3 on the front end of your business, how many dollars would you spend?
If you said – “as many as possible”, then you’re on the right track.
And that’s effectively what we help our clients do every day.
Today, I’ve just given you a birds-eye view of how important these 3 metrics are, and how they inform a marketing strategy. But there’s a lot more nuance to it.
So if you’d like us to help set up a high converting customer acquisition machine for you, book a meeting with us today and we’d love to speak with you.
We can’t work with everyone, but we can always provide a ton of value in a discussion which you can use to grow your business. Until next time
