It’s been a while since I’ve posted a blog, but it’s here as a whitepaper that I’ve written about Big Data and how it is helping a lot of organizations gaining from the opportunities that are already hidden within their organization. Hopefully, this is the first one in a series of posts on the subject:
I look forward to seeing your comments and suggestions about the future posts.
When we start talking about an organization, one of my first questions for its executives is:
What is the life time value of a client for your organization?
More often than not, I’m given a blank look in response to this question. I have asked this from many executives of various-sized companies focused in different industries, and most of them have not been able to give me an immediate answer.
You might ask: ‘Why is this question so important?’ There are several reasons why every executive in any organization should know this by heart and every member of the organization should be aware of it. Knowing the answer to this question will help provide the answer to the following questions:
- How much are you willing to spend to acquire a client?
- What are you willing to spend to retain a client?
- What is your level of effort in acquiring a client?
- How much attention/customer service should you give that client after first purchase to increase the LTV for the client?
- What are various customer segments?
- What is your customer retention strategy?
- Should you focus on clients that will not be spending close to the average?
- What strategies should you deploy to increase life time value of an average customer?
Answering such questions will define the client segments, marketing plans, and sales plans for the organization. Let’s use the example of two software organizations to discuss in detail:
Company A is a company focused on SaaS software for consumers looking to store, manage, and share videos online and mobile – in a private folder. Let’s keep the business model simple at $10 per month per customer. If a customer – on average – stays with Company A for two years then the life time value of the customer is $240. We know, from historical data, that 20% of customers drop off after their first three months, and only 15% remain beyond the two years, but average customer (40%) stays around 2 years.
Company B is also a SaaS software company but focuses on a B2B model, providing online and mobile data analytics to major corporations. In this case, their revenue model is to charge $50 per user per month, and an average client-corporation has 40 users (in different divisions globally). The company performs some upfront configuration and customization work on behalf of the client (average $100,000). 50% of organizations have stayed 4 years. Therefore, the average life time value of a client for Company B is $196,000.
Knowing Lifetime Value of a client (LTV) would help define each company’s approach to marketing, sales, customer service, and customer retention/turn-over. On marketing and sales side, if an average client brings Company A $240 in lifetime revenue; would the company be willing to pay $12-$24 (or 5%-10% of LTV) for each new acquisition? Assuming the same ratio, would Company B be willing to pay/spend $21,880 to acquire a new client company? Knowing these numbers, how would each company approach their customer acquisition and retention strategy?
Furthermore, every organization should be focused on continuously increasing the average Lifetime Value of a client by implementing measures and strategies in sales, customer service, account management, customer onboarding, and other areas of the organization. Obviously, LTV increases when each organization maintains the average client longer, and is able to increase the amount of spend per client per year. Account managers in Company A are focused on getting new clients where Company B’s account managers are focused on adding more users per company and extend the average membership period of a client company.
Please note that each organization could and will have multiple products which serve different customer segments. In such case, LTV should be calculated for each customer segment. In some cases, LTV would determine each customer segment.
The last item that I’d like to discuss on this subject is the matter of focusing on clients that do not meet the average LTV. An organization should decide whether to acquire those clients that would not be able to reach the average LTV or not. For example, if Company B is approached by a client that will have a maximum of 10 users (for 2 years) and is only willing to spend $50k on configuration/customization (total LTV = $62,000), should they take this client or walk away? We don’t know the answer to this question (it would depend on a variety of factors including market segment, cost per clients, etc.), but knowing the LTV will allow the company to make a more intelligent decision.
Majid Abai, The Abai Group, Inc. (www.AbaiGroup.com)
In my opinion, every entrepreneur and executive should be able to answer all the following basic questions about their business immediately, consistently, and quickly without hesitation. In addition, every member of the team should be trained, as part of the on-boarding process, to answer questions 1 through 4 consistently as well.
The ability to answer the following questions similarly across the organization would provide the needed consistency across the organization and would assure that each potential client and investor would hear the same message.
The questions are:
1. What are we selling? What’s our product/service?
2. Who is our target customer?
3. Who is our competitor & why should customers buy from us?
4. What’s the price of our Product?
5. What’s the life time value of each customer?
6. How much are we willing to pay to acquire a customer?
1. What is our product/Service?
What are we selling? The answer to this question is your elevator pitch. This is why you are in business. This is the reason your company exists. This answer should be short, precise, and yet empowering. This message should be consistent across marketing documents, websites, investment docs, and of course, every employee of the company. Everyone should provide the same message, every time. The best answers include the message, differentiation factor with competitors, and will make the audience ask a follow up question. For example, if you run a start-up focused on SaaS security apparatus for small to midsized companies, your message could be: “Our software prevents hackers from accessing our client’s secured data without any upfront infrastructure investments.” Your goal, after the pitch, is for the person with whom you are talking to ask: ‘How?’
2. Who is our target customer?
Now that we know the product, we need to know the companies/consumers who’d be interested in paying for the product. You need to have defined the market and know it by heart. In the example of the company above, we defined the market as ‘small to mid-sized companies’. Why? Because a major international organization would have the budget to implement internal security infrastructure and continuous support staff. However, a small to mid-sized organization would probably prefer to focus on their product/service and not spend monies in IT software, hardware, and support staff. One could even define the customer market more granularity: small‐midsized companies in financial markets.
3. Who’s our competition and why are we better?
If you don’t know your competition, you haven’t done your homework. More importantly, if you don’t know why your product is better than the competition, it means that you can’t tell a client of why they should buy your product and not the competitor’s. Every executive and sales team member of the company should be able to recite several reasons of why your product is better.
4. What is the price for our product/service?
The executives of the company would mostly know the price of the product or the service. But how about the rest of the team? Do they know it by heart? Would they know the range? Do they have access to a price sheet, should they need to? In my opinion, everyone in the organization is an ambassador and therefore should be able to answer this question.
5. What is the lifetime value of a client?
For most organizations, this is a confusing question and stumps a lot of executives. I will have a separate blog post about this question (and the next), but in short, I believe that executives of an organization should always know the lifetime value of a client. I certainly do understand and agree that some clients buy once and never come back and some clients buy every month. But we should always know that a good client should spend x amount per year for a certain number of years. In the above example of the SaaS security company, if the company charges $25 per user per month for its service having an average of 75 users per company and each client on average stays for 4 years, then the average lifetime value of a client for this company will be $90,000. Knowing this information will provide a lot of insight into how to attract a client (their infrastructure investment would be more than $90k just in first year alone). In addition, this number will provide an insight into the price of product, customer service, on-boarding, and retention.
6. How much are you willing to spend to acquire a client?
Now that you know the lifetime value of a client, how much are you willing to spend to acquire one? Are you willing to pay 10% or $9,000 for a new client? Would you pay a higher or a lower amount? Would you give this amount as a bounty to a referral agent, partner, or salesperson? Would you spend that much on marketing? Would you measure your total marketing/sales expense against client acquisition?
In conclusion, I would ask any entrepreneur to consider the above information and to keep on top of these answers as business continues to evolve and answers would change. This information should be communicated with the internal teams in order to create a solidified answer across the organization.
Keep in mind: your next client could be talking to one of your employees at a function. You’d want the message to be delivered consistently, so that the potential client is intrigued and interested.
This time, I turned the tables on my friend Jeremy Lurey, PhD who is CEO of Plus Delta Consulting. As you might know, Jeremy and I had a conversation a month ago on utilization of social networks as an enterprise collaboration tool. This time – and still wearing my Pringo CEO hat – i wanted to see how these new collaboration tools (aka corporate social networks or online communities) help enhance performance within the organizations, and bring change effectively and quickly into the organization.
As you can see yourself, as always, Jeremy is straight to the point and full of great information. Our conversation went beyond what you see on the video here, and i hope to really capture it some other time and add it to this blog.
Here is the video. Enjoy.
As always, I am interested to know what you think.
Attached, please find my discussion with Jeremy Lurey of Plus Delta Consulting regarding use of social networking tools in enterprise collaboration. I am wearing my CEO of Pringo (Enterprise Portal & Social Network Platform Provider), and CEO of RedSeeb [Internet Market and Social Network Strategy Provider] hats. Jeremy and his Plus Delta team are experts in Organizational Development and Change Management. In this interview style video, Jeremy and I discuss various ways that an organization could take advantage of social media to embrace their clients, employees, vendors, and partners.
I’d love to hear your comments. See the video here
I saw this video on youtube which i think is really funny and interesting. 25 things i hate about faceook. It gives a pretty good view on the problems associated with Facebook. Enjoy.
I watched the premier episode of Shark Tank on ABC last night. i had followed the British version of it on BBC, and expected it to show up in the US channels anytime. It was very interesting from a business standpoint. You see a variety of entrepreneurs with different backgrounds, ideas, and products looking for investment from 5 rich business people or the ‘sharks’. Sharks have different business backgrounds: technology, real estate, clothing, etc.
To me this is a great show for any entrepreneur out there: It makes you think about your product/service, it’s price, market, and sales; and the idea that how much would it be worth at this stage and in long term. It also shows that charisma and personality go a long way in selling the idea to the right partner.
Another interesting lesson: The sharks are there to make money, and more of it. So, if they like you, and your company, they’ll want a bigger piece. Don’t be intimidated and negotiate! Ask questions. Give counter offers. Take your time: if they like you and your product, they’ll drop everything else to talk to you.
The Abai Group provides business consulting and coaching services in management and technical areas. Our team of business leaders lends their expertise in all areas of entrepreneurship and management: from creation/evolvement of the vision through generation of results.
Our clients utilize our services if they need to start a business or need guidance in maneuvering their business through rough economic or competitive markets. Our consultants support our clients via one-on-one executive coaching, help establish a new strategy for the organization, or perform interim executive or management duties for the company. Our team members have been tapped to establish and become members of board of directors and/or perform board advisory services for several organizations.
For more information, please visit us at www.AbaiGroup.com.