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Critical metrics for success
Founder of The Sales Method, Consultant, Growth Expert
Lifetime value = how much $ you can charge a customer * how long they will stay * retention rate
Build your business so that lifetime value of a customer far exceeds acquisition costs.
Everyone will start out doing a lot of direct sales, but you must have a scalable solution in mind.
Lesson: Sales Market Fit with Whitney Sales
Step #5 Lifetime Value: Critical metrics for success
Lifetime value of a customer is the monetary amount in which you can charge your customer multiplied by the time period in which she'll stay with you. Then you take that amount and multiply it by the retention rate for that customer. And then if we look at what the cost to acquire a customer, it is the cost it is to sell and market to that customer. You want to develop and devise a strategy when you're building out your company where the value of the customer is going to be substantially greater than the cost it's going to be to market and sell to that customer.
There are various ways you can go about doing this, it just depends on your go-to-market strategy. But when you look at this specifically, it's really important to factor this into how you're building out your costs of your business. If it's going to cost a lot to get to your market, you're going to need to build that into your runway. It may be where you have a hurdle that you need to get over. You're pushing a boulder up a hill when you're building out a startup. That's a really important piece to understand.
So there are costs up front to reach your market, but the receptiveness of your market to the strategy in which you're selling and marketing to them is a really important piece to understand. It's also test, test, and keep testing. You may think you have a way to reach that market, but in reality, there may be a better way. Unless you're testing in those methodologies, you're not going to know the overall lifetime value of that customer. If you're selling a $20 product, doing a direct sell doesn't make sense. If you're selling an enterprise solution, a direct sell makes a lot of sense.
So you need to look at how it's going to be to reach that market. Long-term if it's going to require a direct sell to reach your market and it's a $20 product, it's not going to work. So you need to figure out is it your product that you're building that just doesn't satisfy the need of the market where you can charge the cost for a direct sell, or is it that the way in which you're going about reaching that market just isn't effective and maybe we need to try something new.
So most of the time when you are starting to build out that market, you're going to be doing direct sells of the time because it's part of that product development process. So knowing whether your approach is actually going to work is actually looking at what that sales process looks like.
So if you're touching your customer one, two, three, four times and they’re a $50 value, that's not going to work. But if you're touching your customer one or two times and it's a low-cost product, that will work. If you're selling it to the enterprise space and you're getting in front of a large board and your product is a couple thousand dollars, even if it's a $25,000 a year product, you're going to need to look at long term if that's actually going to make sense for your business if you scale out to 100, 200, 300, 1,000 customers.
You're not just looking at the short-term perspective of making the first sale, you need to be looking at the long-term perspective of how am I going to reach this market long-term because direct selling is not going to be viable long-term unless you're in the enterprise space.
Gradually when you look at how you're scaling out your business overall, you're looking at initially a direct sell, high cost sell. It's how it works a lot of the time. You can do speaking events and things like that to get your product out there. You can do a lot of channel relationships as well which are incredibly effective to get your product out there.
So selling through like an Intuit marketplace or a Salesforce marketplace or a Marketo marketplace or getting your products or code up on GitHub so people can find your market or can find out about your product are great ways to get it out there in a low-cost way. However, if you're having to touch every single customer in order to communicate your message and you're a low price point, it's going to be a big problem.
Now, if we're looking at a higher price point, there's a lot more flexibility in that. When you're going to market, you're going to be looking at, "Where are my direct relationships and are they the best customer for my business long term?" because your initial customer base is going to be who you're building the rest of your market around because your product is really going to go into the direction of satisfying those customers too.