Episode 403

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With the elongated sales cycles we have all seen throughout 2023, knowing your lifetime customer value is more important than ever. It’s essential not only for you as an agency but also to calculate that data for your clients.

Clients are looking for the most value for their money, and everyone is tightening their belts. Gone are the days of patient clients willing to wait around for results. Now, it’s all about data-driven, proven results that your agency can provide ASAP. If you can’t provide everything they need, they expect you to find the people who can partner with you to get it done.

In this episode, we’re discussing how you can adapt to the new era of agency ownership with data-driven metrics and proven results for your clients and their customers. We know it’s hard to adapt to a fast-changing and ever-adapting world of work, but we’re here to help you work through it and find innovative ways to stay ahead of the curve.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

lifetime customer value

What You Will Learn in This Episode:

  • Defining lifetime customer value
  • How an agency can help a client calculate their lifetime customer value
  • The trends and metrics that non-commerce agencies can analyze for their LCV
  • How LCV calculations can help you and your clients get smarter about budgeting
  • Why agencies are struggling to acquire new customers and how to adapt
  • The growing importance of agency syndication
  • The swinging pendulum of agency hiring
  • The 3 pillars of customer value optimization
  • How agencies can troubleshoot for their clients and course-correct their offerings

“This is an extremely important metric because it allows you as a company to know how much you can spend to acquire a customer in order to be profitable — while taking into account the lifespan.” @ValentinRadu Click To Tweet
“There is the lifetime value, how much you are getting, but it's also how much it costs you to acquire that customer, and how much it costs you to serve that customer.” @ValentinRadu Click To Tweet
“I've noticed in the last two years that we see more agencies struggling to acquire new customers and keep their existing customers.” @ValentinRadu Click To Tweet
“Agencies are waking up to a reality where they need to become way more data-driven.” @ValentinRadu Click To Tweet
“We've learned that the most important and impactful thing when an agency wants to differentiate is to know more than their client about their client’s business model.” @ValentinRadu Click To Tweet

Ways to Contact Valentin:

Resources:

Speaker 1:

Running an agency can be a lonely proposition, but it doesn’t have to be. We can learn how to be better faster if we learn together. Welcome to Agency Management Institutes: Build a Better Agency podcast, presented by a white label IQ. Tune in every week for insights on how small to mid-size agencies are surviving and thriving in today’s market. With 25+ years of experience as both an agency owner and agency consultant, please welcome your host, Drew McClellan.

Speaker 2:

Hey, everybody. Drew McClellan here from Agency Management Institute. Welcome back to another episode to build a better agency. We are going to talk about a topic that I think is super important and one we don’t actually talk about as often as I think we should inside agencies. So I’m excited to have the conversation and to bring you along for the ride, but before we do that, I just want to remind you that we have some great things going on at AMI that you may or may not be familiar with. A couple of them are some of our peer groups. So we have a peer group called the Key Exec Group. Think about your right-hand person or people. A lot of times they’re your COO or your director of client services or it might be a mix of those folks. We had agency owners ask us to bring those folks together so that they could meet people who do the same work they do in support of the agency owner’s goals.

And so we do that every October and April. We have peer groups for key execs that come together and talk about all the things they’re dealing with, the operational issues, people issues, whatever they may be, how to improve themselves, how to sharpen their own saw, and of course, how to help their agency owner accomplish the goals of the agency. So if you want to learn more about that, you can read more about that on the website. You get to send up to three people for one membership fee, so you can ask us more about that. We also have a virtual peer group. If you’re an agency owner and you don’t want to travel with one of our live peer groups, we do have peer groups that meet once a month for about 90 minutes, and there’s about 10 agency owners in those peer groups.

This is actually not a COVID creation. We had these before COVID. We have a lot of international folks who listen to the podcast and want to participate and obviously, don’t want to fly to the US twice a year for our live peer groups, so that’s why we created the virtual peer groups. It’s a mix of agencies from all over the world. I would say most of them are in the US or North America, but that’s not always the case. But anyway, they get together for 90 minutes, follow an agenda, talk about the challenges they’re facing, learn from each other. Many of them are connected on Slack or some other way. Throughout the month, they keep talking to each other and sharing resources and supporting each other. So if you want to learn about either of those, the key exec group or the virtual peer groups, you can go over to the Agency Management Institute website and under the memberships tab, you can read more about both of those.

All right, let me tell you a little bit about our guest, Valentin Radu, is a recovering agency owner, still owns an agency, but has started and sold and started and failed and started and succeeded with agencies, and one of the things that kept coming up in his world was the understanding that our world is being much more driven by data than ever before. And particularly, he was fascinated by one piece of data, which is lifetime value of a customer and how do you calculate it, how do you influence it, how do you monetize it if you’re an agency when you help clients improve it. He’s writing a book about it, which will be out in September, but he also has some tools built specifically for agencies to learn more about how to calculate and influence lifetime value of a customer. So really, I’m expecting a great conversation and I’m excited to introduce him to you. Let’s get to it. Valentin, welcome to the podcast. Thanks for joining us.

Speaker 3:

Hi, there, Drew, and hello everyone. I’m really excited to be here with you.

Speaker 2:

Tell everybody a little bit about your background and about your company because I want to dig into what you know and it’ll help them to have some background on your expertise.

Speaker 3:

Of course. As I almost always say, I’m an export kid from Bucharest, Romania. I’ve built four companies so far. Right now, I’m building Omni Convert, which is a company which is focused on data-driven experimentation and improving customer lifetime value for companies all over the world. We have a software, we have a methodology, I’m writing a book about it, and we also have an education platform called the CVO Academy. My mission is to evangelize the concept of TOF customer value optimization and that’s happening because my first company was an eCommerce company here, and I was struggling like crazy to make it profitable until I realized that I was not using the right formula and the right metrics. And that’s when I’ve discovered customer lifetime value. 10 years after that, Omni Convert is serving hundreds of eCommerce and agencies throughout the world to improve this type of metrics.

Speaker 2:

Let’s talk a little bit about lifetime customer value. I think we banty that term around, but give us your definition of it and then we’ll dig into some of the learnings that you have around it.

Speaker 3:

Yeah, of course. Customer lifetime value is the predictive amount of the value that a company is going to get from the customers that they are acquiring throughout the time, relying on the data that they’ve already have about their former customers. In a nutshell, it’s a predictive measure of how much revenue or margin, depending on how it’s being calculated, you are going to get from a new customer. This is a very extremely important metric because it’s allowing you as a company to know how much you can spend to acquire a customer in order to be profitable, taking into account the lifespan. So how much time is going to stay that customer with you, making business with you, and also the amount that they are going to spend. Basically, that’s what customer lifetime value is. It is not a new metric. It’s coming back from the 1950s, to be honest, but it’s an extremely important metric which is not that easy to calculate because it’s not in Google Analytics. You can’t find it in your PNL; however, your entire business existence depends on a healthy customer lifetime value.

Speaker 2:

I want to dig into how we improve customer lifetime value, but as agencies, and we actually teach some of this in some workshops that we do, but I believe this is a topic that we should be having with clients, helping them define the lifetime value of a customer and then increasing the value of that customer and also elongating the relationship. But how does an agency help a client calculate lifetime value of a customer?

Speaker 3:

Yes, that’s a great question. If the client is not knowing what’s their customer lifetime value, agencies should be more data-driven. So basically, they should be assisting them. There are many ways. One way is to get your hands dirty and to dive into their data and to analyze, “Okay, you have this cohort of all the customers from the beginning of time,” let’s say, and then you look at how much they’ve spent. So what’s the total revenue, what’s the total margin? What is the purchase frequencies? So how many orders or transactions or months, subscription months they’ve paid to your client? And then you look at the lifespan, which takes into account the customer retention rate. There is an entire formula about it. I’m not going to get into this too much, but I’m launching a book about it. For whoever is interested, you can find it out there or you can use technology such as ours. We have a technology which is calculating automatically this kind of data for eCommerce companies, B2B and B2C. Mainly that’s how you do it. And what it’s-

Speaker 2:

What if it’s not eCommerce? What if it’s a law firm?

Speaker 3:

If it’s a law firm-

Speaker 2:

Is there a poor man’s way of tracking it?

Speaker 3:

Of course. Basically, in my book, I’ve given a tool, an instrument where you simply upload the entire database, let’s say, all your customers, how much they’ve spent throughout their entire existence, how many orders or how many transactions they’ve got, and this is calculated automatically for them. So there are, let’s say, Excel sheets that you could, of course, use in order to make it happen. The challenge with this type of ad hoc research is that it’s not giving you the trend of the lifetime value. And one important aspect is that any data, any metric, if you look at it, it doesn’t mean too much. So what it’s important is the trend and lifetime value is also on average. The trap of the average is that you don’t have the context. If the lifetime value, let’s say, $800 per customer. Is that good or bad?

How was last year? If it was $600, that’s good. If it was $1,000, that’s not so good. How was it one month ago? So the trend of the lifetime value is important and also, the segmentation. If you break down, let’s say, for that law firm, for your example, Drew, but if you segment your customers, among the ones that are, let’s say, paying the law firm for services related to divorce or whatever, any kind of topics, what’s the lifetime value of a customer which is coming with the problem related to the workforce or related to a divorce or related to accidents or related to injuries? So that’s important because that’s guiding you towards where to focus your marketing, advertising efforts and what kind of customers are the most lucrative for you because there is the lifetime value, how much you are getting, but it’s also how much it costs you to acquire that customer and how much it costs you to serve that customer. Maybe the lawyers for the, let’s say, workforce related issues are way more expensive in your firm.

Speaker 2:

Yeah, so to your point, I think you’re right. I think we as agencies can help clients calculate three things. Number one, what is the average lifetime value of a client? So on average, we have a client and they’re worth $10,000 or $5,000 or $1, what does it cost to service that client? So [inaudible 00:11:30] say it’s $10,000, but it costs us $5,000 to service the client, which means profit-wise there’s $5,000. So I don’t really want to spend more than $5,000 to get that customer. I’m surprised, actually, at how often agencies don’t talk about those three numbers with their clients when they’re helping their clients set budget. It would be a great way to help a client be smarter about budgeting and measuring success against that budget, right?

Speaker 3:

Exactly. And Drew, if you think about it, it’s so strange how many companies, and not only small companies, even mid-size and large companies are shooting in the dark when they’re doing their budget exercise because they are not customer-centric, even though they claim they are. Their CFO is doing this budget and they look at, “How much sales we’ve got last year? What is the year-over-year growth rate? Let’s do it like this. Let’s forecast the 25% growth,” and then there’s no data driven there. So they are not focusing on who’s actually generating that revenue and that margin, which is the customer. That’s the unit economic. The customer behavior is the one which is causing the profit and the revenue to happen, and we must transition to a model which takes into account who are our best customers and how much they’re spending with us.

Speaker 2:

I’m curious. As you are looking over the landscape of agencies, and I want to get back to this lifetime value, and not only how do we calculate it, which we’ve talked about, but more importantly, how do we help clients improve it? Because I think there’s a huge value that we can add for clients, is to help somebody elevate the lifetime value of a customer. But before we get there, I’m curious what you are seeing in the agency landscape and how you envision… As you work with more agencies and look over the world that in which we operate, what are you seeing in terms of trends of how agencies are showing up and the work that you see them doing with clients?

Speaker 3:

What I’ve noticed in the last two years, Drew, is that we see more agencies struggling to acquire new customers and to keep their existing customers and that’s, of course, because the demand is not so wild as it used to be one and two years ago.

Speaker 2:

Yeah, agreed.

Speaker 3:

And that means the agencies are waking up to a reality where they need to become way more data-driven. The brief, let’s say, that the clients are giving us, any agencies, we do have a consulting arm as well. We have around 25 people which is doing managed services for other clients in which are training other agencies to do this type of customer value optimization services and use our technology. So we’ve learned that what is the most important and the most impactful thing when an agency wants to differentiate is to know more than their clients about their business model because that’s the sort of like you are the doctor and you have a patient which is struggling there.

So unless you do this and knowing this kind of data, asking a few questions, you are showing, you are demonstrating to your clients that, “Oh, fuck. I don’t know about the lifetime value. I don’t know what is my customer acquisition cost. I don’t know what is the ratio between lifetime value and customer acquisition costs.” So without knowing this type of things, then you can’t really help your clients. My vision is that in the future, agencies will be obliged, let’s say, in order to survive and then thrive, will have to know this type of metrics. We’ll have to come up with the model which is making sense because at the end of the day, it is not only about selling the promise of a better future to your clients, it’s actually delivering on that promise. So basically, that’s the law of trade itself under promise and over deliver.

Speaker 2:

Yeah. Before we hit the record button, you were saying that you’re noticing a shift in how agencies are structured and how they’re serving clients. You used the word syndication. So talk a little bit about what you’re seeing.

Speaker 3:

What I’m seeing is that as the customers, let’s say, as the customers as in eCommerce companies or clients that are getting to the agencies, as they’re struggling to be profitable, they are making decisions way harder than before. They are not throwing some money on some ad campaign or, “Let’s do email marketing,” and whatever. They are more cautious and skeptical when they are getting into a retainer with an agency, which means the agencies are now challenged to be really impactful in the life of their clients, which means that they will have to work… Let’s suppose you’re an email marketing agency. If you’re an email marketing agency, your success, your progress is depending on the quality of the traffic that the media agency is doing and on the website’s conversion rate.

So basically, it’s not like a siloed approach. You have to work with other service providers which have to be at a level of understanding and to provide, let’s say, some sort of a unified or a consistent customer journey to the clients. I’m seeing this trend of syndication because there are now email marketing agencies working with media agencies, with SEO agencies, with content agencies, and they are now at a level where they are working together for a client offering a real impactful service. So I think this syndication is the way to go in the future. And of course, the other trend is that big agencies are leading up the smaller ones offering one size fits all approach, like a full-service, digital agency.

Speaker 2:

One of the things we’re seeing a lot of is the pendulum is swinging. A few years ago, clients wanted lots of different agency relationships. They wanted a specialist for everything, but they wanted to manage all those relationships. So if you were a generalist agency, it was a struggle for you to get a big piece of the client’s business because they had an SEO agency, a PR agency, a media buying agency, but the client was managing all of those. And now what we’re seeing is the pendulum is swinging and client is saying, “That’s too much work to manage all those relationships. So I want to pick a core or a lead agency and I want them to have partners to bring into the relationship that have the specializations that the agency doesn’t have. So if you’re a brand agency or you’re a messaging agency or you’re a content agency, you can be our lead agency, but you need to bring in the SEO agency or you need to bring in the PPC agency or the PR agency. You’re going to manage all of them for me and you’re going to bring me a unified product or suite of services. I’m going to pay one bill to you and you’re going to pay all of the other agencies or all of the other vendors.” Is that what you’re seeing too?

Speaker 3:

Yeah, I’m seeing this happening for sure, Drew, because the owners, let’s say, the owners or the clients simply can’t cope with the advancements on all of those different channels or approaches, and that’s why they need, let’s say, a very reliable and data-driven agency that they can trust and then they are, let’s say, being used as a consultant, as a strategy advisor, as someone that actually knows if they should be working with that SEO agency or with the other one. And basically, that’s the trend. The alternative, of course, is quite grim for the specialized agencies, which they don’t have good relationships with other agencies and they also don’t know about the business model of the clients that they are serving the entire business model because there were all these spikes and glamorous ideas around influencer marketing, about this, about the other, shiny new objects. But now, these days are gone. You have to deliver positive return on investment. If you can’t do that, the patience is not there anymore for the clients.

Speaker 2:

Yeah, that’s certainly one of the things and we saw it a little bit pre-COVID but boy, are we seeing it post-COVID that clients’ tolerance and patience for results, the window gets shorter and shorter and shorter. They’re under an incredible amount of pressure to deliver results and to prove “For every marketing dollar I spend, here’s what I get back.” And their tolerance for not being able to prove that and not being able to do it pretty quickly is short right now, I think.

Speaker 3:

That’s right. And if you think about it, Drew, it’s not going to be way better as the economy is not going to get into this V shape very, very fast. That means the demand is not going to be as high as it used to be and that means the companies will be way more skeptical about onboarding an agency with two years retainers and very bad terms when it comes to canceling the contract.

Speaker 2:

One of the things that you just talked about I think is so critical, which is agencies understanding the entirety of the business model of the client. So not just understanding their marketing but understanding their customer base, understanding how they recruit talent, understanding their distribution, their packaging, their supply chain issues, all of that. I think some agencies struggle with the idea of being data-driven. I think that’s hard for them to gather the data. They don’t know how to crunch the data. We do an annual salary and benefit survey and we just released the 2023 salary and benefit survey and for the first time, we had enough respondents for data analyst that we could look at average salaries for that role, but that wasn’t even a role that lived inside an agency five years ago. So talk about how you are seeing agencies grapple with the idea that they have to be more data-driven, and how are they dealing with that?

Speaker 3:

It is becoming, of course, mandatory to have someone that can crunch the data and that could understand the data, that could understand the concepts like minimum sample size or statistical significance or things like the trends. I’m talking here not only about what I’m preaching about, customer lifetime value and the business model of their clients. I’m talking about any kind of endeavor that you’re doing. So let’s say if you are an SEO agency and you want to produce content, you have to go back in time, you have to look at the topics that you’ve addressed, you have to look at the bounce rate, you have to look at the number of leads that that type of content has generated down the line and for that, you need to be able to crunch the data. So the ones which are just staying on the creativity side of things are going to be left behind because even the CMOs are having a lot of pressure.

I’m talking here about larger companies. CMOs were in a very good position because the demand was there. They could spend the money on that, that, and the other, but now we have the CF