ESYB2 047 - Pricing and Customer Lifetime Value LTV
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[00:00:00] In this video, let's begin talking about your product pricing versus your LTV, Lifetime Customer Value. This is something that you should begin thinking about during the business planning stages of your business, because if you keep this in mind, it's going to help you plan for better revenue sources and stronger revenue sources, because a lot of people focus on price and price is very apparent and vivid, but it can be a vanity metric.

For many businesses, a more important metric is LTV, lifetime customer value, or lifetime value of a customer. Essentially, how much you make from that client long term. The goal for most businesses is to turn people into long term customers for years, not just to sell to them something now and forget about it.

And clients become long term customers for years when they buy and love the value they get. If they love the value they get, they're going to come back. If they don't [00:01:00] love, they're not going to come back. And for you, you can think of it like if a person buys once, it's still pretty nice. But if they buy for new monthly, that's a 1200 percent increase annually.

And if they buy something next year and next year monthly, that's a tremendous increase in revenue from the very same client. And most first time entrepreneurs, they focus on making more and more sales from new customers. Often, it's easier to sell to existing customers and maximize the revenue you get from them long term than to keep finding new customers.

So during the planning, you really want to understand how can I make the initial engagement easy and what can I upsell long term and can I upsell long term. Not every business is a fit for this. So let's talk about how to think about maximizing your lifetime value. Ideally, you can combine a situation where a potential client can have an easy entry [00:02:00] into your business.

Some people call that onboarding. Plus, for that client, what can they consume or buy long term? Those are your backhand sales. That easy entry, the onboarding, that can be In form of something free or some kind of a very cheap product online. You see this commonly with the freemium business model where people give away a lot of free things.

Often, digital products, because digital products have no cost to reproduce, and if the client likes the digital product, they might also buy more expensive products. So when you're thinking about, hmm, what can I sell to these people long term? Think about the possibility and likelihood of long term purchases.

It may be that this is not possible. For some businesses, you just sell to clients once, and that's it. In that case, you want to maximize the price. If you can sell long term, you want to think about, okay, I can decrease the initial price by a certain amount, but what [00:03:00] is the likelihood of people buying my second item, my third item for some businesses, it's likely for some businesses, it's less likely.

And every situation is different. If you have historic data. Like you've been in business for a while. You can take a look at your historic data and see how many people actually go on to buy a second and third purchase from you so that you can calculate an actual percentage of people who actually go on to buy your second and third product.

But if you're just starting out, you can estimate this and track it long term and anyway always try to improve it. Whatever the historic data is, it doesn't mean that that's gonna be what it's gonna be in the future. In the future you always want to improve your upsells. Additional things to consider are benefits.

For example, even if you sell something for a cheaper price, which might cut your profit in the short term, it might even make you unprofitable. You might, you might lose money in the short term, but if it gives you better branding, because people are actually engaging with your product, if you are not losing customers to your [00:04:00] competitors, those are all benefits that You can consider, because even if you lose money with the first purchase, you might make money with the third, fourth, and fifth sale to those clients.

Additionally, this is how a lot of ads are run. A lot of ads, they are not necessarily profitable in the first sale. But if the company who's advertising can keep the clients long term and has historic data on How many clients on average they keep long term and how much clients spend long term Then they know how much money they can spend on ads even if they lose money on ads in the beginning And of course, there's another side benefit.

If you sell on platforms like Amazon, even like Udemy, like Etsy, sometimes having a lot of sales and a lot of activity boosts your ranking on those platforms. And that's something to consider when you're pricing your product, because if you boost your ranking on those platforms, you get more organic sales, which make up for [00:05:00] the.

Smaller profit margins. If you keep your prices low, and this is something you want to really keep in mind during the planning because you want to think through, well, what kind of offerings can I create to upsell? Is it possible? So sometimes it. It's apparent and sometimes you have to think outside the box and always think about, well, at the end of the day, how does this work out financially?

Because at some point you can no longer keep reducing price and you can't neglect profitability too long. So there's all these considerations. And in the coming videos, we're going to discuss further how to maximize the lifetime value you get from each customer and all the techniques with it.

