The Secret to Sustainable Growth: Calculating Lifetime Value of A Customer

As a small business owner in the Richmond area, you're constantly faced with big decisions. Should you invest in a stall at a local farmers' market, such as the one in Carytown? Is it time to open a small brick-and-mortar shop in the Fan? What about expanding into wholesale or a dedicated e-commerce site? These choices can feel overwhelming, but there's a powerful metric that can help you make them with confidence: Customer Lifetime Value (LTV).

LTV is a simple but transformative concept. It represents the total revenue you can expect to earn from a single customer over the entire time they do business with you. By understanding your LTV, you can see past the immediate profit of a single sale and make strategic decisions for long-term growth.

Let's look at a fictional case study to see how it works in practice.

The Case of "Berry Good Jams"

Sarah, the owner of Berry Good Jams, started her business at a local Richmond farmers market. Her handcrafted preserves were a hit, and she began to think about her next move. She knew a single jar sold for $8, and her cost of goods was $4, but that didn't tell her the whole story.

Sarah wanted to calculate her LTV. Here's how she did it:

1. Average Purchase Value: She looked at her sales data and found that on average, a customer bought 2 jars per visit, for an average purchase value of $16.

2. Average Purchase Frequency: She estimated that her regular customers visited her stall about 4 times per year.

3. Customer Lifespan: Sarah's customers were very loyal. She estimated that her average customer would buy her jam for about 3 years.

Using this information, she calculated her average customer lifetime value for her farmers market channel:

LTV = Average Purchase Value ($16) x Average Purchase Frequency (4) x Customer Lifespan (3 years)

LTV = $16 x 4 x 3 = $192

This number was a revelation. A single customer was worth nearly $200 over their "lifespan" with her business. Knowing this, she could make smarter decisions.

Using the Lifetime Value of a Customer to Guide Business Strategy

Decision 1: The Farmers' Market Stall

Sarah's first thought was how much she could afford to spend to acquire a new customer. A farmers' market stall in Richmond costs around $50 for the day. If she sold to 20 new customers, her cost to acquire each customer (CAC) would be $2.50 ($50 / 20 customers). Since her LTV of $192 was far greater than her CAC of $2.50, she knew the farmers' market was a highly profitable channel for customer acquisition for her Richmond business.

Decision 2: The E-commerce Website

Next, she considered an e-commerce website. Setting up and running the site had higher upfront costs, but it expanded her business's reach to a broader audience. She decided to run a targeted ad campaign on social media to drive traffic to her site. The campaign cost $500 and brought in 10 new online customers. Her CAC for this channel was $50 per customer ($500 / 10 customers).

While her online CAC was higher than the farmers' market, she also noticed a difference in customer behavior. Online customers often purchased in larger quantities and signed up for a subscription service that delivered a new box every month. This meant her online LTV was even higher. She had successfully used LTV to justify a higher-cost, but ultimately more scalable, marketing channel.

Decision 3: Wholesale

Finally, a local gourmet food store approached her about selling her jams wholesale. They wanted a 25% discount on her $8 retail price. On the surface, this looked less profitable per jar. But Sarah knew to think in terms of LTV. The store's consistent, high-volume orders provided a steady revenue stream and required no customer acquisition costs on her part. While the profit margin per jar was lower, the consistent business from a single wholesale account was extremely valuable.

By examining each business channel—farmers' market, e-commerce, and wholesale—through the lens of LTV, Sarah was able to identify the unique value of each and build a balanced, multi-channel strategy for growth.

Ready to Unlock Your Business's Full Potential?

Understanding Customer Lifetime Value is a game-changer for any small business looking to grow beyond its current stage. It’s the key to making smart, strategic decisions—whether you're considering a new sales channel, a marketing campaign, or a pricing adjustment. By shifting your focus from a single transaction to the long-term value of your customer relationships, you can build a more resilient and profitable business.

If you have further questions or are interested in getting help converting this concept into a business strategy tailored to your specific goals, please feel free to reach out.

You can email Dorian Cunion at dcunion@yourpathexecutivesolutions.com.

#smallbusinessowner #businessstrategy #customerLTV #RichmondVA #businessgrowth #entrepreneurship #businesstips #smallbusinessrichmond

Scaling Your Small Business

This past week, I had the pleasure of doing a recorded coaching session with Rashanda Siska, owner of High-Pressure Designs Apparel, Printing, and Embroidery. She has been in business for two years and was seeking help in filtering through all the best practices and tips she has learned over the last few years, attending boot camps, training sessions, and workshops to develop a plan for scaling her business. You can watch the entire video of the coaching session on our YouTube page. In this blog, I will provide a high-level overview of the three actions a small business owner should take to scale their business.

Create a vision for scaling.

One of the first things you have to do when scaling your business is to define what success looks like. Scaling can mean many things, from acquiring new customers to opening an additional location. The clearer you can be about your revenue, income, and business model goals, the easier it will be for you to attract the right people and build the right systems to achieve your goals.

Take the time to put your vision on paper. Effectively communicating your vision of success to your employees, contractors, and vendors will help you acquire the support you need to shift from where your business is today to how you want it to be in the future. Over time, your vision will evolve. Evolving is part of maturing as a business owner. But periodically declaring what success looks like makes it easier to attain.

Build capacity

Once you have clarified your business vision, it's time to assess your current situation and determine the resources and personnel you need to convert your goal into reality. Whenever I consult with clients, I begin with the Business Model Canvas. The Business Model Canvas is a one-page document that helps you outline the key activities, resources, and partners necessary for success. As you compare your business's current state to its desired future, you will identify gaps. Those gaps need to be filled by improving your current processes, leveraging internal talent, or partnering with external organizations that can help you grow. Defining your business gaps and outlining how you plan to close them will help you prioritize where to allocate your time and resources.

Learn to say no

The most challenging skill for small business owners to learn is how to say no. Everyone around you has an idea of how you can improve your business. While many of these suggestions are good-hearted, you do not have the time, money, or resources to be everything to everyone.

Making the hard decision about where you will spend your time, who you will hire, what products you will sell, and other key activities will determine the success of your business. It is impossible to make the right decision every time. You will pass up opportunities that you should have accepted. You will also make decisions that, in hindsight, you should have passed on. However, over time, if you have systems in place for setting goals and evaluating outcomes, you will build your decision-making competency.

Summary

Scaling a business requires a lot of trial and error. Anyone who tells you it is easy is likely not being honest or is selling you an unsustainable tactic. Your competition can replicate anything that comes to you easily in business. Real value comes from identifying a problem that you are uniquely positioned to solve and solving it better than others in the marketplace. This level of entrepreneurship requires a plan. It requires infrastructure. It requires an ongoing focus on the distinct needs of your customers, along with the efficient operation of your business model.

Watch the video that inspired this post.

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We are here to help you scale your business. To schedule a discovery call with Dorian, email him at dcunion@yourpathexecutivesolutions.com or follow this link to get on his schedule. https://yourpathcoachingandconsulting.hbportal.co/schedule/636a95f2d3519700283b4ab1

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