How much do you value your customers? It's a timely question that requires a specific answer. Why? The education industry is being turned "topsy-turvy" by the shift in the buyer-seller relationship. For the last couple hundred years, school administrators have bought stuff and paid for it. We've gladly sold them stuff and collected for it.
Now, it's a new ball game. Decision makers who run our schools are being asked to subscribe to cloud-based services and the deals you make are never really closed. In fact, if you move on after you get that first order, you will likely lose your customers and never get them back. The real selling in this new subscription-centric world begins when you get a purchase order.
This isn't a completely new scenario. Many K-12 sales professionals have relied on repeat business or account expansion strategies for years. Field sales reps have schmoozed and a few savvy marketing managers used database marketing techniques to help be more focused on their most loyal customers. Most companies that sell a high-ticket solution have paid attention to what is often called "implementation services." But what we are experiencing now with the digitization of content and delivery via applications "in the cloud" is different. Helping educators implement something new by giving them a couple of days of training (like we've done in the past) won't cut it. We are talking about driving loyalty and investing in deep customer relationships that will maximize the customer's "lifetime value" or LTV.
So, what exactly is LTV, and why should you care about it now? LTV has been a standard metric used in marketing consumer services for things like magazines and also for some B2B contract sales. Veterans of transactional B2E marketing, like me, have relied on ratios of gross revenue to calculate the marketing budget. CFOs and senior executives who run K-12 focused operations use a variety of metrics and many still use the tried and true "dart throw" method. The discussion and debate continues in the K-12 industry about what is appropriate to budget for education marketing and sales compensation.
Time out. If your company relies on sales of digital products and services to schools, make no mistake – LTV is the most important metric. Even so, conversations I've had with managers in K-12 focused companies suggest that LTV is an alien concept, or is misunderstood, overlooked, or ignored, as though selling subscription based services is the same as selling something in a box.
How to develop the optimal marketing budget for your company really depends on what the return on your investment needs to be and that's the beauty of LTV. When you know this, even if it is an estimate, the marketing decisions you make can be based on your own ROI requirements rather than the promises of someone who wants to sell you advertising, conference exhibit space, some type of lead generation program or a webinar sponsorship.
Simply put, LTV is the revenue you can expect from a particular customer after the initial purchase order. It is the number you should use (along with your profitability target) to decide how much you can afford to spend to “buy” a customer. That's a blunt version of "customer acquisition cost." In some cases, that may suggest losing money on the initial sale in order to ultimately make a tidy profit because of renewals and referrals predicted by LTV. Further, when you have a handle on LTV, and related to it, the frequency of your customer purchases (and the size of the orders), you have a much better understanding how to allocate resources for customer loyalty, retention, and referrals.
Looking back on many years I was involved in sales and marketing to schools, as a rep or a sales manager, getting new business was always the top priority. It made sense because suppliers and buyers were on the same page. The budget and our sales activities were always about getting new customers and pushing to reach those quarterly revenue targets. Today, you still have to have a solid plan for acquiring new customers, but importantly, you have to make a shift. You must recognize and appreciate that recurring subscription revenue combined with referrals from loyal customers drives revenue and profit in the LTV world.
When I ask managers to tell me the LTV of their customers, the most common response is, "I don't know. Can you tell me how to calculate it?" If you are a manager for an established company with a few years of financial data, the starting point is analysis of the data. For start-ups, it is a forecasting exercise. In either situation, a decent estimate is better than not knowing!
Here's an easy formula for estimating LTV: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer). In the consumer world, an example is the LTV of a health club member who has agreed to pay $30 every month for 3 years. The value of that customer would be: $30 X 12 months X 3 years = $1080 in total revenue. With this scenario, you can see why health clubs offer free trials and are willing to spend a lot of money promoting memberships. As long as they invest less than $360 to acquire a single new member, the sale generates a gross profit in a short amount of time.
How do you action LTV into your K-12 promotional plans? There are a couple of options. The first one is likely the most common scenario - when cash flow is a concern. In this case, you decide on an amount you are willing to spend per customer that is less than the amount you will make on that first sale. The other option is taking the longer-term view, being prepared to take a loss on the initial purchase, knowing that the LTV is the pay off.
The important thing to consider is how you measure return on investment. Companies in the K-12 industry are notoriously cash short and are looking for quick sales. The business model for subscription based services, however, is about driving long term sustainable business that leads to declining cost of sales and marketing and increasing profitability. This is where there is an argument for venture capital and an aggressive promotional strategy designed to build a strong customer base and brand loyalty.
How LTV plays out depends on many factors - there is no set of rules. However, it is clear that the basic rules of the game in the K-12 industry are changing rapidly, and that the old transactional mindset associated with selling products is not going to work for many companies that have built businesses that way. Newcomers don't carry the baggage or the strong paradigms about how to do business, so they have an advantage over established players in this aspect. Regardless, the idea of "sales planning" as we've done it for many years is out the window. Instead, you need to be working on a plan for LTV Optimization and a branding strategy that is appropriate for companies selling services instead of products. (See related article on this topic).
In the end, it’s the lifetime value numbers that will determine the ultimate success of your company as the digital age finally takes hold in our schools and shifts related purchasing policies and plans. And it is for that reason that you need to think strategically now about your plans to increase LTV in the future.