Breaking down the path to profitability

When running a business or an agency that helps clients reach their growth goals and ultimately increase their revenue, we always hear the same thing: generate more profits.

That seems to be the common denominator for every business no matter the context, the market, the industry, or the economy.

No matter if you’re an established company trying to go from six to eight figures or a new startup trying to generate your first sales, more profit means a brighter future…right?

The catch is, just like every company is different, the definition of profit and the path to it should also be different. For different businesses, profit can translate as a specific number of sales or new clients, cash flow, could be short or long-term, etc.

For different goals, we must have different approaches. Here’s a breakdown of what profit could look like for your company in a very simple and linear way:

Profit = more sales

More sales = more products sold

More products sold = new clients + new orders from recurrent clients

As of now, it looks pretty simple but this is where most companies stop when in fact, this is just the beginning.

New clients = CPNC + AOV

Recurrent Clients = CLV (customer lifetime value)

CLV = Average Sale x Number of Repeat Sales x Expected Retention Time x Profit Margin

Ok, now it’s where it gets interesting. If we can focus our marketing efforts on defining the cost per new client (CPNC), average repeat sales, and retention time, you can work on your customer journey and experience to increase the average order value (AOV) then this is a direct strategy towards long-term, measurable, and scalable profitability.

But this is not it. After that first order, NC (new client) is on the journey to becoming an RC (recurrent client). Companies that understand that and live by it understand that the first sale is the hardest one but is only the beginning of the lifetime value of a customer (LV). And, this my friends, is the key to success.

Shopify explains LV perfectly here: “One of the most important metrics you’ll want to pay particular attention to relates to your customer’s lifetime value. This metric tells you what you can expect from an average customer over the course of your business relationship.”

There are certain truths that we all know in marketing:

Getting a new client is harder than retaining an existing one.

Cost per Sale (CPS) and Customer Acquisition Cost (CAC) decrease over time.

High-Value Customers are worth investing in. Selling to a current customer is easier (and cheaper) than selling to a new customer.

When accepting this, it is much easier to not seek instant profits on the first sales and build a long-term relationship with your clients instead. You can offer early benefits that may reduce your short-term profit on a $100 sale but will lock clients for the future with an LTV of $1500.

Let’s say a Starbucks coffee is $7 but they’re willing to give you the first one for $5 and a free coffee for your birthday if you sign up for their Royalty Program. Yes, you may think they just lost $2 when you probably were going to buy that coffee anyway. Yes, they did, but in exchange, they got: your full name, DOB, email, and cell phone number. What does this mean? Starbucks is not focusing on that one coffee but on all the coffees you may drink in the future. Think about all the coffee, tea, and pastries you are going to buy from Starbucks over the years. $100 worth? $1,000? $2,000? How about $14,000?? Yes, Starbucks calculated that the average lifetime value of their customer is $14,099.

Identifying your valuable customers and knowing their LTV will shape your marketing.

Growing a list of this type of customer is more important than generating many first sales through a promotion or discount (even though this action, if planned and executed correctly Could lead to nurturing that email list).

Of course, not every customer will be a High-Value Customer (HVC). It takes time to identify information and nurtures them. The Pareto Principle (80/20) makes perfect sense here.

The truth is, not knowing your HVC is going to cost you. And this is another marketing truth every company should live by it. This is what being customer-centric means.

In case you were wondering, this applies to DTC and B2B — I’m pretty sure you already figure that out, though.

The value of knowing your CLV

For a business to succeed, understanding the value of its customers is crucial. This is where CLV comes into play. By calculating CLV for each of your customers, you can make informed decisions that will benefit your business in several ways.

• Knowing your CLV allows you to determine the amount you can spend to acquire similar customers while still maintaining a profitable relationship. This knowledge can help you develop a more effective marketing strategy and allocate your budget wisely.
• Calculating your average customer’s expected purchase over time helps identify the kinds of products your high CLV customers want. It also identifies the products with the highest profitability, allowing you to adjust your product mix to increase sales and revenue.
• CLV provides insights into which customer relationships are driving the bulk of your sales and which types of clients are most profitable. This knowledge helps to develop a targeted approach to customer retention and acquisition, which can lead to increased revenue and customer satisfaction.
• Using CLV as a baseline enables you to better understand your most loyal customers. This information helps you tailor your products and services to their preferences, building deeper relationships with them and creating brand advocates.

Understanding your CLV is essential for making informed business decisions that lead to increased profitability. By focusing on ways to improve the lifetime value of your customers, you can create sustainable growth and achieve long-term success.

How to Improve Your Customers’ Lifetime Value

If LTV is the cornerstone for a successful business, then AOV is the cement that connects every stone on the wall. Asking, how can I improve my average order value should be present at every founder’s mind, board, and marketing meeting.

At SOFIA, we believe this is not about just selling more to one client, is about providing them with the best experience: If they like this they may also like this, if they purchase X they will need Y and Z in the future. Bundles, complementary products, variety packs, and gift cards, are so good for this.

For many, the epitome of LTV and AOV is subscriptions. That’s why a lot of companies are going in that direction. It has its pros and cons and churning could backfire on you big time but being able to measure and forecast your profit month by month is an amazing thing. For length’s sake, we’ll do a subscription strategy breakdown another time.

Here are the keys to improving customer lifetime value

• Focus on retention, not acquisition > Reward your loyal customers with special offers and gifts, letting them know first about product launches and back-in-stock, etc. Every detail will make a difference.
• Post-Purchase notifications: Klaviyo for emails and Recart for SMS marketing are out go-to partners.
• Complementary products/Product Variety
• Personalization
• Reminders
• Subscriptions
• A Kind and Amazing Customer Service > never take human interaction for granted. Answering emails, DMs, and phone calls on time and manner will show how much you really care about your customers.

We’ll do an in-depth LV strategy post soon and dive into these tactics and more. What else would you like to hear from us? What ideas come to your mind on how to boost your customer lifetime value? Let us know!