We spend time, money and effort to attract new sponsors, spectators to come to the game, followers, memberships, among others.
But, have you ever calculated if that investment will be profitable during the entire life of a client? Do you know which kind of clients will generate you more profits in the long run?
It would be easy to measure what revenues can generate a sponsorship and the associated costs to get the signature, in the short term. 5 years from now, are they the revenues you expect and, especially, you need?
Maybe it’s profitable because your numbers are not red along the years, but we could be limiting our potential when not considering the opportunity cost, that is, the alternative decision we end up not making.
I propose the following exercise to:
- Know the monetary value of your clients
- Adapt your strategy, approach and resources to that value
- Know if you are satisfied with that profitability
It’s about calculating the Lifetime Value (LTV), the total monetary value a customer can bring during his or her life as a client, and the acquisition cost (CAC), the aggregate costs of acquiring a client. The formula is the following:
LTV: (profit margin per customer) x (annual purchase recurrence) x (average time as a client)
CAC: (total investment in acquisition) / (total of acquired customers)
Let’s suppose we are a club and each member pays 100€ per season ticket and we provide a merchandising t-shirt to each new one that costs us 30€ per unit. In order to know the profit margin, we will also have to take into account the fixed costs (for instance, stadium maintenance and workers salaries), which will be 40€ per member.
In terms of acquisition, we will consider a monthly investment of 200€ in Facebook Ads and 300€ in street marketing actions. This investment will lead us to get 500 season ticket holders.
- Lifetime Value:
Profit margin per customer = 100€ season ticket – 70€ total costs = 30€ profit
Annual purchase recurrence = 1 season ticket per season (yes, obvious!)
Average time as a client = 5 years
LTV = 30€ x 1 season ticket x 5 years = 150€
- Acquisition cost:
Annual cost in Facebook Ads = 200€ x 12 months = 2.400€
Annual cost in street marketing = 300€ x 12 months = 3.600€
Acquired members = 500
CAC = (2.400€ Facebook + 3.600 € street mkt) / 500 members = 12€
- LTV v CAC
150€ > 12€
In this scenario, the investment would be very profitable as acquiring each season ticket holder would cost us 12€ and would bring us 150€ of profit. We could be also considering retention or referral rate in the formula, but I have preferred to keep it simple.
Now you know this, is your clients profitability worthy?