SHAPING STRATEGY What Would You Pay for $100? MARK MEHLING, MANAGEMENT ADVISOR T
hat’s a goofy question, isn’t it? But it’s an important concept to metalcasting business own-
ers and leaders. Tis article is about one of seven numbers that give an instantaneous “cardiac screening” to the business. Presented at the 118th AFS Met- alcasting Congress in April, this is Client Lifetime Value (CLV). As a refresher, CLV is the direct
revenue and indirect value of each cli- ent over its lifetime relationship with a metalcaster. It can be further refined by including client valuations as negative biases (see March’s “Shaping Strategy” column), and referral, testimonial or case study appraisals as positive biases. For this article, however, let’s com- pute simplified CLV using just gross revenue: CLV = Average monthly spend x
months as a client Consider a client who orders $100,000 of casting services a month and is predicted, if properly nurtured, to remain a client for 27 months. Tat translates to a simplified CLV of $2.7 million. Would you pay $27,000 for that
client? Tink of the carrot being dangled:
$2.7 million of business over 27 months. Depending on the facility, 20 clients like this would fill your plant to capacity for more than two years. By hypothetically spending $540,000 (20 new clients times $27,000 each), the production schedule is filled. If these clients were properly selected and handled, the future would be set! However, most metalcasters can’t
fathom the concept of “buying” clients and almost faint when large numbers like $27,000 are suggested. Tis is where CLV can give perspective; so can an ROI measurement tool. Get your thinking (and imagining)
hats on and try this game I play onsite to bring out these points. (Note: Due to space constraints, this is only a small
glimpse of the full exercise). Scenario 1: Here is a $100 bill, which represents a new client. As a
team, what would you pay for this $100 bill, if you were the only bidder? Te ensuing team discussion argues
different responses until someone realizes: Tere is only one bidder! Te best answer? Bid one cent. Tere is no reason to bid more than a penny. Tis is the lowest possible bid. Interpretation: Tis is how many
metalcasters invest in getting new clients. Tey believe spending a penny will get the $100/new customer. Tey act like they are guaranteed the client (no competitors) and are only willing to spend the absolute minimum. But that isn’t reality. In the real
world, you are not the only bidder. Scenario 2: For the onsite game,
the next format is bidding for the $100 in a silent auction format. Each attendee competes without knowing others’ bids. Without a system to determine what to bid, most players cling to their penny investment strategy. By “spending” $5, they might win the $100, a very respectable 20:1 ROI. But without a system, or simple logic to guide them, most participants stick to “Pay the least possible,” and they never win the new client ($100 bill). Interpretation: Knowing the value of the $100 new client and not know- ing what your competitors are bidding changes the game. Most attendees estimate a number. Few have a sound method for determining how much they are willing to risk. Tey make an incred- ibly low investment, which never wins. So how do you choose the level of
investment for getting new clients? In the real world, CLV can solve the dilemma. Knowing simple CLV and using ROI, it is much easier to determine an acceptable number that can actually win without giving away the farm. While competitors spend the least, hoping to secure a great client, smart metalcasters will invest more to win the best clients. Let your competi- tors have the lower value “C” and “D” clients. Would I spend more to secure an “A” client than a “C”? Absolutely.
Would I budget more to win a client with a larger CLV? Sure. Investing more in acquiring the “As and Bs” brings long-term stability, reputation, measured growth, increased CLV, higher margins and profitability. Another difference from the game: Tat $100 bill has a fixed value, but clients do not. A good client, properly managed by your systems, could be worth much more. Adding in client valuations, referrals, testimonials and case studies can significantly increase the CLV.
Tis game should reorient your
thinking. Few consider the lifetime value of a new or existing client. Remember the beginning example
of the article? Budgeting $27,000 for that one $2.7 million client is the equivalent of winning the $100 bill for a single dollar. Tat’s a 100:1 ROI. Te lesson here: Don’t be freaked out by the investment figure. Instead, look to CLV and ROI for the decision. Tis is one of the true uses of CLV.
It gives logical reasoning as well as confidence for the investment in cli- ents. And it helps shape a reasonable set of fences for the budget based on reality and goals, not gambling. Te last Shaping Strategy column
addressed the Message-Market- Media method. With CLV, a properly composed message now has a specific target and a justifiable budget. All that is necessary is choosing the media to deliver your message. So, how much would you pay for
$100?
Scan the code or use this link:
http://bit.ly/1oXmluc
As a special bonus, MODERN CASTING subscribers get a free advanced discussion of this topic just by scanning the QR code below. Contact the author at
Mark@TeFoundryMarketer.com with your com- ments and questions.
September 2014 MODERN CASTING | 45
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