One of the most common mistakes entrepreneurs make when starting/running their business is that they HEAVILY focus on cash flow.
Cash flow is no doubt important. In fact, it’s the lifeblood of your business.
However by making it your #1 focus, you are just shooting yourself in the foot.
Because there’s ANOTHER number that matters FAR more to the success and longevity of your business…
… it’s your Lifetime Customer Value.
Almost all entrepreneurs realize the importance and value of ‘Lifetime Customer Value’ and strive to increase it.
But for some reason, it NEVER seems to be their #1 priority.
If you walk up to them and ask them what their business goals for the year are, they’d reply:
– To have XYZ turnover by ABC Date
– To increase market-share by XYZ percent
– And so on.
Like many other entrepreneurs, I made that mistake too.
And I learned my lessons the *HARD* way.
When you’re focused on increasing cash flow to your business, all of your actions will pertain to increasing your interactions with new prospects.
You’ll be marketing your existing products and services – as they are – to newer audiences.
So you’ll continually look at scaling your business through advertising and other media.
Here’s the problem with that…
With any product or service in a market, there ALWAYS comes a saturation point when the cost of acquiring a customer exceeds the revenue/profit generated by the transaction.
When you hit that point, you’re running at a loss… even if you have the best marketing strategy in place.
Your business SIMPLY cannot sustain. You can’t pull back either – because the entire market – has already been warmed to your offer and may no longer be receptive.
You can run conversion tests, hire the best copywriter on the planet, etc… but your results will be dismal.
… which is why your FOCUS should never be on Cash Flow or Profit. These are secondary numbers that indicate the health of your business.
But the true CORE driver of your business is the lifetime customer value.
The customer lifetime value is a prediction of net profit attributed to the entire future relationship with a customer.
Numerous studies have shown that it is FAR easier to sell other products and services to existing customers than to acquire a new customer.
Here’s a quote from one such study:
It costs 6–7 times more to acquire a new customer than retain an existing one – Bain & Company.
Your customers have already interacted with you.
They trust you… and if you have a product (or a JV partnership with a company) that fulfils another problem your customer has, they are FAR more likely to buy from you than anybody else.
Getting a girl to go out with you on Date #1 is probably the hardest.
But once you go out on date #1 and you don’t screw up, it’s a lot easier to take her out on Date #2.
Dates #3, #4 , #5, etc become invariably easier.
The same thing can be said for customers.
So it’s important that you shift your FOCUS from increasing your cash flow to increasing your lifetime customer value.
Instead of setting goals to increase your cash flow or gain X% market share, set goals to increase your lifetime customer value to XYZ amount.
Create a plan for that and start working towards that day after day.
Here’s a quick story on how it helped me make a simple decision…
Recently… I wanted to make a purchase of something fancy (for my business) for about $30.
I wondered whether I should really do it. It was NOT absolutely necessary.
So I did a bit of thinking.
With $30, I could generate 16 new leads to my business. That would lead to 1 sale for my self-liquidating offer.
Though I’d only generate 1 sale of my SLO, I’m confident that the customer would spend $4000+ through the relationship with my brand and I’d net at-least about $1500 in profit (because of the way I am going to structure his purchase process).
… which means with that expenditure of $30, I just created a potential $1500 profit.
That’s a 5000% return.
Even though it is speculative, it is FAR more reliable and dependable than other speculative investments because of 3 things:
1) It’s my business and my money. I am responsible for its success and failure.
2) My understanding of the market and my ideal customer within it is SOLID
3) The brand I’m building is CAPABLE of acquiring such customers
As I thought about buying this cheesy item for $30, I realized what a waste of money that is.
Now that’s just a simple example to illustrate the value of the lifetime customer value.
This number needs to be used and taken into consideration when you make all of your MAJOR business decisions.
… And your aim as an entrepreneur must primarily be to increase the total lifetime customer value of your business continually.
Go as much as you want in that direction.
Take care!
Be Great,
Harry Ramsay