Startup Basics

Startup Basics: What is Customer Lifetime Value (CLV or CLTV)

Customer Lifetime Value (CLV or CLTV) is a metric that represents the total net profit a company makes from any given customer.

In marketing, customer lifetime value (CLV or CLTV) is a metric that represents the total net profit a company makes from any given customer. CLV is a projection to estimate a customer’s monetary worth to a business after factoring in the value of the relationship with a customer over time. CLV is an important metric for determining how much money a company wants to spend on acquiring new customers and how much repeat business a company can expect from certain consumers.

CLV is the value a customer contributes to your business over their entire lifetime at your company.

The main methods of calculating CLV are split between historic and predictive CLV:

Historic CLV (Good indication of CLV)

Simply the sum of the gross profit from all historic purchases for an individual customer.

Predictive CLV (Great indication of CLV)

A predictive analysis of previous transaction history and various behavioural indicators which forecasts the lifetime value of an individual. As long as the equation is accurate, this value will become more accurate with every purchase and interaction.

Why is Customer Lifetime Value (CLV) important?

We all know that it’s more costly to acquire new prospects than to retain existing ones – thus extending your CLV is central to a healthy business model and customer retention strategy.

Here are five reasons why employing CLV as a central metric is vital if you want to increase profitability, retention and overall ecommerce success.

1. Generate real ROI on customer acquisition

CLV helps you focus on the channels that give you the best, most profitable customers. You should be optimising your marketing channels in terms of the lifetime value a customer contributes to your brand, rather than the gross profit on the initial purchase.

You are therefore trying to maximise your customer lifetime value in relation to your cost of customer acquisition (CLV:CAC).

Focusing on CLV will change the economics of your customer acquisition strategy. Suddenly you can pay a lot more to acquire a customer because you are not held back by the profit generated from a single purchase, but from the purchases made over a lifetime with your brand.

Information about your customers with the highest CLV (known as your VIP customers) will also give you insight into exactly who you should be targeting in terms of demographic.

Factoring CLV into your strategy is a recipe for success, and will leave all your less data-driven competitors in the dust while you’re busy ruling and dancing in your ecommerce disco (which you threw because you rule).

2. Enhance your retention marketing strategy

The value of a marketing campaign (for example, one aimed at turning your one-time purchasers into repeat customers) should not just be valued on the instant revenue they drive. It should be valued in terms of what impact it had on the average CLV of the segment of customers you are targeting.

How did it alter the trajectory of CLV over time for an average customer? To calculate this, you’ll need accurate predictive analytics so that you can see how predicted CLV is influenced by different marketing actions.

3. Create more effective messaging, targeting & nurturing

Segment your customer base by CLV so that you can improve the relevance of your marketing with more personalised messaging.

A useful variable to use here would be the types of products you market to your customers from different segments.

4. Improve your behavioural triggers

By organising data into natural groupings (or clusters) you can discover the behavioural triggers that incentivised your best customers to make their first purchase.

Once you’ve taken a look at your beautiful results, you should be trying to replicate this behaviour with your prospective customers in order to turn them into first-time purchasers.

5. Improve output from customer support

Focus your time on giving special attention to your most valuable customers. Never forget Pareto’s handy little principle: 20% of your customers generate 80% of your revenue.

Using CLV to identify your most valuable customers will help you decide where to direct your customer service resources. Paying attention to your most valuable (and profitable) customers will help you push up margins, at the same time as fostering strong relationships through better service with your most important segment.

Customer Lifetime Value calculation

Historic CLV

This is simply the sum of the gross profit from all historic purchases for an individual customer. Sum all gross profit values up to transaction N where transaction N is the last transaction a customer made with your store. If you have access to all your customer transactional data you can calculate this in Excel or, if you want to save time and have this calculated automatically through software, you should try a tool such as Ometria.

Calculating CLV based on net profit ultimately gives you the actual profit a customer is contributing to your store. This takes into account customer service costs, cost of returns, acquisition costs, cost of marketing tools etc. The issue with this is that it can be highly complex to calculate this on an individual basis, especially if you want the figures to constantly be up to date. Gross margin CLV will still give you great insight into the true profitability of your customers to date.

Predictive CLV

Predictive CLV algorithms try to obtain a more accurate value of CLV through predicting the total value a customer will eventually give to your store over their entire lifetime.

Confused? Ecommerce expert, Vladimir Dimitroff, explains:

“CLV is always the NPV (net present value) of the sum of all future revenues from a customer, minus all costs associated with that customer.”

In practice this can be hard to achieve due to the requirement for up to date discount rates. There are numerous ways to calculate a predictive CLV that vary wildly in complexity and accuracy however we will focus on a couple of examples here. Simple and Detailed.

Simple

Let’s call the above equation gross margin contribution per customer lifespan (GML).

Detailed

Be aware that these models will never be exactly right, they are just forecasts. To quote Vladimir again:

“Predictive techniques…are always limited to the horizon of our models’ predictive accuracy and confidence.”

Having said this the more tailored your CLV equation is to your specific industry the more accurate it will likely be. The best models are highly accurate. It is essential to do these calculations to get a real understanding of how valuable your customers actually are, the more accurate you become the more powerful your marketing can be.

One important factor the previous equation misses out on is the ongoing costs to your business for retaining a customer. You would need to calculate this in order to get a net value for CLV.

In addition, the most complex predictive models make increasingly more accurate CLV figures based on how a specific individual continues to interact with your store. Taking into account both interaction and transactional information.

As we know, not every individual is the same – some are a lot more valuable than others; as you gather more data about an individual, you can determine with increasing accuracy what sort of individual they are likely to be: High, Medium, Low value etc.

4 Ways in which you can master startup fundamentals

Understanding the fundamentals of setting up a start-up is a huge task and one needs to comprehend them successfully to proceed with his/her venture.

Like every activity, building a start-up is also a gradual process. To continue with this process successfully, one needs to understand the basics and master them. Understanding the fundamentals of setting up a start-up is a huge task and one needs to comprehend them successfully to proceed with his/her venture.

If one follows these basic fundamentals religiously, a budding entrepreneur can actually make it big.

Here’s a list of fundamentals every entrepreneur should master if he wants to become successful:

1. Have a far-sighted vision and stick to it

It is absolutely necessary to have a vision and a goal from day 1 for your start-up as they’d be the only things supporting you on days when you feel unsure about becoming an entrepreneur. Also, having a goal helps you stay motivated and focused on the journey to achieving it. The goal might seem like its far away but by breaking it down into smaller chunks, tasks you previously thought were unattainable can be accomplished. The best part about having a compelled vision is that you’ll realize the accomplishments when you actually meet tick them off your list.

2. Your business needs to make money

You might have a great idea and a solid vision but all that means nothing if your venture doesn’t sell. Every start-up needs to gather money in the till to keep functioning further. So, to make sure your business is a successful one, try and get the cash to flow inwards as soon as possible. This can be done by devising vigorous marketing techniques combined with an extensive sales distribution plan. As a budding entrepreneur, one can look out for investors and funding schemes to get money.

3. Make what is required

A lot of entrepreneurs make the crucial mistake of getting lost in the insane journey of making stuff that no one actually wants to buy. Instead, an entrepreneur should do a thorough market research regarding his idea. He should be able to identify the market he wants to venture into, the target customers and also make sure that the product/service is really required. Also, if there is no demand for your product and you still have faith in it, learn to create a demand for it.

For instance, a butler service called Jaadu Inc opened up in the NCR region which delivers food at midnight, repairs appliances and books cabs. The makers studied the market and understood the requirements of the people before introducing a new idea which is why it is doing well in the market.

4. Stabilise a cash flow before wanting to make profits

It is crucial to have proper investors and funding for your start-up for its basic functioning. Profits are very important but secondary. As an entrepreneur, make sure you have the required money to run your business and pay people timely working on your team. Once, the initial cash flow is stabilised, you can move on to focusing more on making profits.

Related Post: How to form the right startup team

Image credit: www.foundingfuel.com

Reasons budding entrepreneurs should stop looking for venture capital

Here are seven reasons for budding entrepreneurs to give up the hunt for venture capital and angel investors.

Every year, about millions of new businesses are started, and fewer than one percent successfully raise venture capital (VC).

Whether it’s the feeling of acceptance into this elite club, or the misconception that it’s impossible to start a new business without millions in capital, many startup founders find themselves hypnotized by the pursuit of VCs and angel investors.

Perhaps the adage is true: We want what we can’t have. And yet it can be argued that your chances of success are greater if you stop looking for VC money and focus your energy on bootstrapping your business and attracting customers.

Here are seven reasons for budding entrepreneurs to give up the hunt for venture capital and angel investors:

1. You haven’t proven your market need

Sure, you’ve put together a pitch deck, business plan and financial projections, but those are all just that — projections. You’re basing the future success of your company solely on hypotheticals.

Before looking for VCs, prove that there are customers out there who want what you’re selling. Spend time talking to your users, and focus on giving them what they want. Invest your time in finding a place in the market before trying to convince investors to give you their money.

2. You lose control

Once you secure VCs, you’re at their mercy. Even if you maintain a majority stake, you’re giving up a percentage of equity, profits and control to a board that may have a different vision for your company than you do.

In most cases, your VCs will ask for one or more board seats giving them the right to vote on or veto key decisions that will directly affect the future of your company. These same people also have the right to fire you or members of your team, which means you could be ejected from the company you started.

3. You’re focused on the investor – not on your customer

Giving up control means you have a new responsibility. Your first priority is no longer to your customer, because your investors expect to come first. Among other conditions that are negotiated in a deal, venture capitalists can ask for anti-dilution protection, dividends, liquidation preferences, mandatory redemption and other perks that the founding partners may not even get the rights to.

In some extreme cases, VCs have the right to sue you for everything you own in the case you forget to tell them “bad news,” according to Bloomberg Business.

4. Instead of trying to make money, you’re trying to raise it

The irony of trying to raise venture capital is how much time you waste chasing down investors – when you could be chasing down customers. There are only so many hours in a day and only so much work you and your team members can take on. Every minute you spend chasing down a flippant VC is a minute you’re not working on creating a great business.

That’s all to say you’re putting a lot of your eggs into a basket that the statistics say you’ll never obtain.

5. Your burn rate is higher than if you were to bootstrap

What’s a burn rate? It’s the amount at which a company spends money, especially venture capital, in excess of income.

You may know the now viral story of CEO Maren Kate and the downfall of her company, Zirtual. She abruptly shut down all operations due to a glitch in the books that was overlooked. Basically, the company did not have a handle on its burn rate – and it ran out of money. This also supports the next point that…

6. You lose the hustle required in running a lean business

When playing with someone else’s money, many startup founders admit that it becomes less real. It’s harder to stay lean and savvy with the false impression that you’re rolling in the dough.

Investor and entrepreneur Gary Vaynerchuk writes: “Twenty-five to 50 percent of all the businesses I have ever looked at were more than capable of being a little scrappier.”

7. Your end goal is focused on an exit rather than building a company that will last

If your end game is growth over profit, then you are forever stuck in a cycle of having to raise more money. As soon as you’re no longer able to secure more from VCs, then your company will likely implode.

You’re relying on other people’s belief in you – based on hypothetical projections – rather than relying on a solid business model that turns profits and creates happy customers.

Author: Shannon Whitehead

Shannon Whitehead is the founder of Factory45, an online accelerator program that takes sustainable apparel companies from idea to launch — without raising venture capital. Committed to improving the fashion industry, Whitehead launched what was at the time the most successful fashion project on Kickstarter and now helps other fashion entrepreneurs bring their ideas to market.

Image credit: www.fortunebuilders.com

This article was originally published in Entrepreneur.com

5 Ways for a new entrepreneur to ensure success

How do you ensure success? Who stands out from the crowd? What separates the pros from the amateurs?

There aren’t any definitive answers. And I’m not even going to begin to try and analyze them. What I will say, is that over the years, I’ve been observing. Working with startups and entrepreneurs on a regular basis has provided rare insight into what makes one person get ahead of the rest.

Here are five way to set yourself up for success that go beyond conventional wisdom:

1. Make it easy to help you

Most people are excited and willing to help out new entrepreneurs. But the likelihood of connecting with someone who is more seasoned in the industry is largely dependent on how you make the “ask.”

The first and most obvious way to sabotage yourself is by writing an inquiry email that scrolls on for block paragraph after endless block paragraph. In most cases if you’re looking for advice, the person you’re seeking out is busy.

Keep your email to no more than two to three short paragraphs. Your chances of getting a response are incrementally higher and you’ll come across as more professional – and more effective.

Bonus tip: Ask a specific question. Avoid using phrases like, “Can I pick your brain?” Instead, ask the exact questions you want to know the answers to. Once you have your foot in the door and get a response, you can follow up from there.

2. Write thank you notes

They don’t have to be handwritten and shipped via snail mail, but if someone takes the time to jump on a call on your behalf, follow up with them.

Regardless if the advice was good or not, it’s common courtesy to express gratitude to someone who gave their time to you.

This is especially applicable when a contact goes out on a limb to introduce you to someone. It makes that person and yourself look bad if you don’t take the time to follow up afterwards.

Good things come from gratitude. And the most successful entrepreneurs show how much they value the people who helped them along the way.

3. Start before you’re ready

Should I launch now? Should I get more real world experience first? Should I go back to school? Only you know the answer that’s right for you, but my recommendation to most aspiring entrepreneurs is to start before you’re ready.

Building a business requires a long runway. It’s not only about the amount of hours in the day that you spend on your business, but the months and years that you take building up to it. As I tell my entrepreneurs (on repeat), launching a successful company is a marathon not a sprint.

The sooner you can start fleshing out your ideas, seeking out mentorship, connecting with industry peers and educating yourself, the better off you are in the long run. The old cliche usually holds true: Tomorrow you’ll wish you had started today.

4. Be consistent

The entrepreneurs who get ahead are calm and collected. They’re methodical, they’re strategic and they don’t get easily frazzled.

When you’re first starting out, your attitude and the way you handle challenges are going to dictate how you respond in the months or years of your business to come. The entrepreneurs who get ahead know there is a solution for everything. And sometimes the solution falls under the guise of a better option.

Building a business is not an overnight endeavor. It requires consistency of action, which means not giving up if something doesn’t work the first time.

5. Ask for help

Nobody builds a successful business by doing it on their own. That’s right, nobody.

The entrepreneurs and mentors you see are all getting help, seeking out mentors of their own, building advisory boards and seeking out further education.

Solopreneurship is a farce. If you want to get ahead, then you have to seek out help from others and continue to invest in yourself. That’s what separates the amateurs from the pros.

Author: Shannon Whitehead

Shannon Whitehead is the founder of Factory45, an online accelerator program that takes sustainable apparel companies from idea to launch — without raising venture capital. Committed to improving the fashion industry, Whitehead launched what was at the time the most successful fashion project on Kickstarter and now helps other fashion entrepreneurs bring their ideas to market.

Image credit: www.madresdedesamparados.org

This article was originally published in Entrepreneur.com

How to start a startup without any money?

You’re excited to start a start-up. But there’s one logistical hurdle stopping you: You don’t have much money.

You’re excited to start a start-up. Maybe you have an idea, or you’re just fascinated with the idea of launching and growing your own enterprise. You’re willing to take some risks, like leaving your current job or going without personal revenue for a while. But there’s one logistical hurdle stopping you: You don’t have much money.

On the surface, this seems like a major problem, but a lack of personal capital shouldn’t stop you from pursuing your dreams. In fact, it’s entirely possible to start and grow a business with almost no personal financial investment whatsoever – if you know what you’re doing.

Why a business needs money?

First, let’s take a look at why a business needs money in the first place. There’s no uniform “startup” fee for building a business, so different businesses will have different needs. It’s important to first estimate how much you need before you start finding alternative methods to fund your company.

Consider the following uses:

Licenses and permits. Depending on your region, you may need special paperwork and registry to operate.

Supplies. Are you buying raw materials? Do you need computers and/or other devices?

Equipment. Do you need specialized machinery or software?

Office space. This is a huge expense, and you can’t neglect things like Internet and utilities costs.

Associations, subscriptions, memberships. What publications and affiliations will you subsribe to every month?

Operating expenses. Dig into the nooks and crannies here, and don’t forget about marketing.

Legal fees. Are you consulting a lawyer throughout your business-development process?

Employees and contractors. If you can’t do it alone, you’ll need people on your payroll.

With that said, you have two main paths of starting a business with less money: lowering your costs or increasing your available capital from outside sources. You have three options here:

Option one: Reduce your needs

Your first option is to change your business model to demand fewer needs as listed above. For example, if you were planning on starting a company of personal trainers, you could reduce your “employee” expenses by being the sole employee at the start. Unless you need office space, you can work from home. You can even do your homework to find cheaper sources of supplies, or cut out entire product lines that are too expensive to produce at the outset.

There are a few expenses that you won’t be able to avoid, however. Licensing and legal fees will set you back even if you cut back on everything else. According to the SBA, many microbusinesses get started on less than $3,000, and home-based franchises can be started for as little as $1,000.

Option two: Bootstrap

Your second option invokes the idea of a “warmup” period for your business. Instead of going straight into full-fledged business mode, you’ll start with just the basics. You might launch a blog and one niche service, reducing your scope, your audience and your profit, in order to get a head-start. If you can start as a self-employed individual, you’ll avoid some of the biggest initial costs (and enjoy a simpler tax situation, too).

Once you start realizing some revenue, you can invest in yourself, and build the business you imagined piece by piece, rather than all at once.

Option three: Outsource

Your third option is all about getting funding from outside sources. I’ve covered the world of startup funding in a number of different pieces, so I won’t get into much detail, but know there are dozens of potential ways to raise capital – even if you don’t have much yourself. Here are just a few potential sources for you:

Friends and family. Don’t rule out the possibility of getting help from friends and family, even if you have to piece the capital together from multiple sources.

Angel investors. Angel investors are wealthy individuals who back business ideas early in their generation. They typically invest in exchange for partial ownership of the company, which is a sacrifice worth considering.

Venture capitalists. Venture capitalists are like angel investors, but are typically partnerships or organizations and tend to scout businesses that are already in existence.

Crowdfunding. It’s popular for a reason: with a good idea and enough work, you can attract funding for anything.

Government grants and loans. The Small Business Administration (and a number of state and local government agencies) exist solely to help small businesses grow. Many offer loans and grants to help you get started.

Bank loans. You can always open a line of credit with the bank if your credit is in good standing.

With one or more of these three options, you should be able to reduce your personal financial investment to almost nothing. You may have to make some other sacrifices, such as starting small, accommodating partners or taking on debt, but if you believe in your business idea, none of these losses should stand in your way. Capital is a major hurdle to overcome, but make no mistake – it can be overcome.

This article was originally published in Entrepreneur.com
Image Credit: Benzinga.com