Calculating LTV and CAC to Formulate Incentive Plans
Howdy chatbots fans and welcome back in this lecture, we're going to continue talking about promoting your products and services through asking for referrals and asking your previous customers or your current customers to promote your brand on facebook. But we need to think about how to structure incentive offers for them to do that and to build incentives without losing your shirt when incentivizing customers. Okay keep in mind a couple important things. One, your customers aren't idiots, they're not losers. The incentives that you offer them to promote your brand have to be significant and real enough to sufficiently motivate them to go ahead and promote your brand. They want to earn that incentive offer at the same time. And this might be sometimes a difficult dichotomy to handle. You don't want to ignore your own roo I your own profit margins and you don't want you want to make sure that you don't erase profits generated by the original customer and the customer that the new that t...
hat the original customer is referring. So you have to really keep in mind these two things. So in that spirit, let's go ahead and learn a couple of formulas. These will be easy formulas and I know that this has literally nothing to do with building a chatbot per se. But hey, it's uh two for the price of one. These are these might be some cool formulas for you to learn if you know these formulas go ahead and skip it, but lifetime value. Okay. Lifetime value is the first L. T. V. Is the first formula that we need to understand. Lifetime value is very simple. It's the amount of value or marginal profit a customer generates over their lifetime and a lot of brands. And I've had this discussion with clients almost every day where they say, okay what's your profit margin? Um And then I say they say this and what's your average revenue per client? Okay. And I say well how much do how many more times will that customer buy from you or how many months will that person stay with the subscription? And the clients will clients will either tell me one of two things a they don't know and I'll be like okay well let's figure this out together because it's really well worth our time to figure this out. Because lifetime value is an important metric. And you shouldn't just account for the first purchase a customer makes or a client will tell me no, we should just try to be profitable for the first purchase. And I'll say why. And I'll usually here like silence on the other end of the line because there's no good reason for that. If a customer is likely to buy a second or third time and you don't need to pay a second or third time to acquire that second or third purchase, then that's a very important metric to have because that will allow you to get more aggressive and spend more on your marketing campaigns still being sure that at some point in time you're going to earn that money back. And this is a complicated, I'm oversimplifying the process of spending on marketing for lifetime value. It also depends on in how long will that revenue be generated over the course of their lifetime and how much money you have in the bank. And we'll all different sorts of of metrics. But just the basic concept is important, understand. So the formula is just the average profit per customer. The average marginal profit per customer multiplied by repeat purchase rate or repeat purchases. That equals your lifetime value. Okay, so that's a very simple straightforward formula. The next formula you want to understand is C. A. C customer acquisition cost, which is very simply the total cost associated with acquiring a new customer. How much money do you need to spend to get a customer into your door? And the typical formula for this is the product costs like all the costs that go into the product plus the marketing costs divided by the number of new customers in that same time period. Right, let's say you're looking at seven days and 30 days or whatever it may be. And this formula is also a little bit of an oversimplification because the question, is do you also include your overhead, like your rent and your lighting and your and salaries? And the answer is yes and no. It really depends on what you're trying to figure out. Um In our example, we're gonna just basically look at what it costs us to produce the product to ship the product to service the customer um Divided by a plus plus the marketing costs. Like how much we're advertising over a certain period of time. Divided by the number of new customers. That's your most simple and I guess most reliable way of figuring out your basic customer acquisition cost. So let's take a look at an example of you scenario and I'm not using real numbers but I'm using similar or close enough numbers for this to be a real example from our and my own real life experience with my client. So las Vegas I. V. Hydration therapy company. We were talking about um quite a bit and I guess it's just on my mind because I've been doing a ton of work and my team has been doing a ton of work for this client. It's it's been really really exciting especially when we get to get get the I. V. S. Awesome. Anyway um Okay so let's just say for example $54,000 in product costs over the last 30 days. So that means how much it costs us for the materials, how much it costs us to pay the nurses to administer the materials, How much it costs us in gas and driving and tolls getting to the customers pay $54, Plus $12,500. Let's say in marketing spend over the course of a 30 day period, Divided by 750 new customers generated in those 30 days. And you do that math and that equals $88.60 is your customer acquisition cost? Okay, now we're trying to figure out the lifetime value of a client. And in our business we don't need to market anymore to get repeat purchases. That's not necessarily the case in every business. So in our case, Um when we want to calculate a referral incentive program where we want to start just benchmarking what a good referral incentive program could be without losing our shirt because that's the whole point of this lecture. We might want to remove the marketing spend part of the equation. So let's go ahead and do that now. So we're gonna remove that 12,500, We're gonna divide the $54,000 of product costs by 7:50. And that gives us a $72 customer acquisition cost. Right? So if we take away the actual marketing costs to generate those 750 leads. And again, I know that this is not the most mathematically accurately to do this because in truth, you would want to have the the marketing costs for the first purchase and then remove it for the future purchases. But for the sake of simplification, we could do it this way. If you want to just make sure you're not being too conservative adding another few dollars into the calculation, and you can also ballpark this because we're not we're not reporting to investors, were just trying to figure out a basic structure for an incentive system and you don't need to be perfectly scientifically accurate to do this, but here's a good approach. So you have $54,000 divided by 7 50 we have a $ customer, customer acquisition cost. Now let's calculate lifetime value using the same numbers. In our example, let's say our average revenue per sale is $299. Every time, you know, let's say we sell a few different packages. We have, we have a 199 package, we have a $400 package. We have a $300 package. But over the course of 30 days, our average customer generated $299 in top line revenue. We know that our customer acquisition cost, remember was $72. And if we take 72 divided by 2009, multiply that by 100 we get a percentage of, we get a percentage, which is our profit margin. So 24 is our profit margin there. So there are a couple of different ways we can get to what our marginal profit per customer is. You could multiply the remaining percent by 2 99 so which will be 2 times 76. That would give you your marginal profit. Um If you want to do it mathematically it's 2 99 minus 2 99. Multiplied by 24%. Which comes out to $227. is your marginal profit per customer. Another way to do it simply is just taking $299 minus eur $ customer acquisition costs which gives you $227. That's your marginal profit per customer. So if you remember the lifetime value Formula, you take the $227. The marginal profit per customer. You multiply by that, your average repeat purchases. So let's say over the course of the same time period. We're measuring, we see that our average customer buys 2.5 times right? That would give us a $567.50 lifetime value of a customer. So now that we've calculated our lifetime value of a customer. And by the way you. These are valuable formulas and valuable techniques for all different sorts of marketing channels. These are good numbers for you just to know, separate from building facebook chatbots. So your lifetime value in our scenario with our example is $567.50 taking into account acquisition cost, taking into account, repeat purchase rate. Um It's pretty sophisticated once you really get down and dirty with it and as a potential incentive structure, maybe we offer $100 cash for each new customer referred Plus a 25% coupon for the new customer. So this checks both of the boxes that we spoke about earlier on in this lecture. Where is it real enough to incentivize the person who were asking to promote our brand? And are we making sure that it's not too much money out of our own pocket to lose our shirt to wipe away profits generated by the customers? And the answer is in this scenario, yes. I think $100 for somebody to just I mean this is an extreme example. You're gonna be able to get away with a lot, lot less than this. But let's just say in this example we offer $100 cash and I'm gonna talk to also how this actually happens. How are you gonna get the $100 cash to, to the person promoting your brand and we're going to discuss that. So um I know that might sound a little weird but we would offer $100 cash two for every new customer. Not just for sharing the link with, but if you're if you're if you're sharing efforts, if your promotional efforts actually generate new customers for us, we'll give you $100 cash for each new customer generated and we're also going to send your friends your facebook network at 2025% coupon on the service for coming through your special link that you're gonna share. Um And that's an example of an extremely powerful and effective um incentive program which has ripple effects. You get each one let's say you have 500 even and that's a small number if you have 500 customers or even 100 customers or 50 customers that each share that with another 500 people like your. And you do this effectively. Your business could go through the roof and it's all done through Facebook messenger without leaving Facebook messenger. It's wild right? So now that you have a good understanding of customer acquisition, cost, lifetime value, how to think about it in your incentive structures. In the next lecture, we're gonna briefly finish up this topic by talking about a few different types of incentive structures. And I'm also gonna walk you through and explain to you how exactly you could use software to make all this stuff work seamlessly in the background because I really want to encourage you to not just use chatbots to build your pipeline and to generate new leads, but to also use chatbots to to get your current customers to milk more out of your efforts by getting your customers, your customers to promote your brand. And the reason why I'm so excited and so encouraging of you to do this is because there is no better place in the world for this to happen than on facebook in facebook messenger using mobile monkey chatbots. Looking forward to seeing you guys soon in the very next lecture