CLV or Customer Lifetime Value / PRR or Project Rate of Return
How much what you spend in marketing to attract a new customer? Here is an example: GoDaddy at the time I wrote this was offering an affiliate program to pay $120 to the advertiser for a customer who signed up for a year of hosting with them. The hosting plan this was for would be around the same amount, so why would GoDaddy pay out almost the same out it is bringing in off a sale? CLV or customer lifetime value, they know that they can spend a certain amount to obtain a customer because over that customers time with them they spend a lot more than $120.
CLV is more important to some businesses than others, if you know for a fact that a customer will only purchase form you once and that is it, then there is no need for you to know this KPI. However if you continue to sell to existing customers than you need to know your CLV.
Calculating your CLV first you need to know what your AOV is you can check the previous post for that, if you have not read it already. Below is the formula.
Number or orders by a customer per year ____
Number of years for customer _____
If you don’t have a years of data that’s fine just calculate with the amount of data you do have and as you get more data do the calculation again. To start you can do it every quarter for a couple years and then you will have a more accurate CLV. Good data is so important to marketing and knowing what to do with that data. I hope as you are reading this serious you can see that, I get excited about it because it gives you the power to successfully market your business.
PRR or project rate of return is about how much money your business must earn on its marketing in order to be profitable. Profit is different then revenue, it takes in to account other factors than just marketing that take away from the revenue of a sale. PRR is usually around 25% however, every business is a little different. Newer businesses might have a higher PRR because they are being more aggressive when starting out, more well established businesses might have a lower PRR.
You will need to use your PRR in order to calculate other KPI’s or key performance indicators so it is important to learn it. It will also give you a guide to keep your marketing efforts in check, so you don’t spend to much. Calculating your PRR requires you to know the profits on the different products and services that you offer.
You will need to take into account everything that it costs you to run your business and how much each product or service costs you. After that you should have a idea of the profit you make for each product or service. Most businesses already know what amount of profit they want to make and set there prices accordingly. So with that in mind your PRR is just a percentage of that number and allows you to remain in profitable. For example say you are selling paper notebooks and it for each one you sell at $10 it costs you $4 that leaves you with a $6 profit. In most cases the PRR is 25% meaning for every dollar you spend in marketing you earn $4. So in this scenario a PRR of 25% would mean that you could spend $1.50 on marketing to sell a $10 notebook.
PRR is not the most exciting KPI in my opinion but it is good to know and again you will use it calculate other KPI’s. If you are running a small business don’t get to hung up on the PRR you will more than likely need to change it regularly in order to meet the demands of running a small business.
by Jason Ross Weiss