Question: How do you calculate how much to pay for a customer if you don’t know their lifetime value?

I’ve got a relatively new business so I don’t have enough data to accurately calculate the lifetime value of my customer. So I’m having a hard time knowing how much I should pay for each customer… How would you go about calculating how much to pay for a customer if you don’t know their lifetime value?

Question Featured on Episode 5 - #AskRussellAnything



Answer:

Lifetime value is one of those dream metrics people want to know and want to talk about. I’m not a big fan of a lifetime value of a customer. Obviously I want to make that number bigger, but I don’t want to base my advertising decisions on lifetime value because that might be 10 years from now. If I make my decisions based on that it’s hard to be profitable.

Lifetime value is a good metric if you are working with venture capitalists who want to give you a whole bunch of money and a whole bunch of debt. Hopefully you can pay them off in 5 years from now, but that’s not what we’re about. We’re about making money today.

What I do, I’m not looking for lifetime value. Initially when I do paid ads, I’m looking at what my average cart value is. How much money do I make on average for every single person that buys one of my front end products?

For example, when someone buys the Expert Secrets book, I know my cost to acquire a customer is $12, to get someone to buy the book. But in the funnel, in that point of sale, the break even funnel, we’re making about $32 for every single book we sell. So that’s the metric I’m looking at because now I know I can spend up to $32 and still break even in the cart.

Average cart value is the metric you need to focus on and think about while you are building your company and your advertising around it. I want to break even immediately at point of sale from my advertising. If I don’t that means my funnel is not very good. Some people like to go 7 days or 14 days or 30 days, or even 60 days before they break even. That stresses me out. If my funnel doesn’t break even immediately I stop all ads and try to make the funnel better and that is my recommendation.



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