Player Lifetime Value

TRANSCRIPT

Hello and welcome to episode number 27 of the Tennis Business Academy Podcast.

In today’s episode I want to cover the concept of player lifetime value. What it is, why you should really be tracking it, and how to calculate it.

And when I say player lifetime value, what I really mean is customer lifetime value.

If you Google player lifetime value you won’t really find any good results. But Google customer lifetime value and you’ll get tonnes of results.

And this is because it’s widely understood in the business world that customer lifetime value is one of the most important metrics to understand and measure for businesses that want to build strong and lasting relationships with their customers.

Just like we do in the tennis industry!

And this is really why I’m recording this episode.

So, let’s start with the definition of customer lifetime value, which is this:

Customer Lifetime Value is the total worth to a business of a customer over the whole period of their relationship

And by worth we really mean profit. That’s the basic definition of worth in this context.

Now, there are other ways in which a player might be worth something to a business. Like for example by referring other people to your club or coaching programme. That’s also worth something to us, of course.

But by and large, if you want to measure a player’s worth to your business, you should be measuring how much profit that player has contributed to your bottom line.

So, Customer Lifetime Value is about calculating how much profit the average customer has generated for your business throughout their whole relationship with you.

Now, if I just say it like that, it might sound like a soulless metric.

It might sound like we’re just focusing on getting profit out of every player.

But in reality, the opposite happens.

Because lifetime value is measured throughout the whole length of the relationship, it helps a business shift its attention and resources towards building long-standing relationships with customers instead of just trying to find new customers all the time and squeeze as much as you can out of them in the first few months.

And here’s an example that illustrates just this.

If you can keep a customer for a decade on your coaching programme, or as a member to your club and that customer keeps contributing to your bottom line every week, every month, every year, then by the end of that 10 year relationship they will have contributed with a lot of profit, even if they weren’t spending that much money each week, each month and each year.

Contrast that with someone that maybe spends a lot of money in the first 6 months, but then leaves.

If you just looked at your monthly income statement or P&L, the second customer who spent a lot of money in those 6 months would be much more valuable to your business.

And you might even say to yourself that you should go and try to find more of those customers.

But if you take the long term view, then the customer who stays for 10 years is actually a lot more valuable. But you will never notice that if you only look at your P&L each month.

And that’s where customer lifetime value comes in.

If you’re measuring lifetime value and trying to improve it, then you’ll only be able to do that by keeping customers happy and playing at your club or coaching programme for the long term.

And this is the key here. Customer lifetime value is the metric that measures the value to your business of longevity and loyalty.

It puts a $ or £ figure on exactly how much each customer is worth to your business in the long term.

Focus on measuring and improving lifetime value and really what you’re saying is that you want to focus on keeping your players for as long as possible, while at the same time trying to make your business as efficient as possible, so that you can generate as much profit from each customer while they’re playing with you.

It’s pretty powerful stuff, really.

Ok, so hopefully by now you understand what lifetime value is and what we’re trying to achieve when we measure it.

So now let’s discuss how to actually calculate it.

And the first thing you need to know is that in order to be able to calculate lifetime value, you first need to calculate average customer lifespan.

Now, I’ve already discussed customer lifespan in the previous episode, so I won’t cover it again today.

Instead I strongly recommend that you go and listen to that episode now, if you haven’t done that yet.

It’s episode 26, it’s only about 10 minutes long and it explains exactly what lifespan is and how to calculate it.

Ok, I’m assuming that you’ve listened to that one by now. So, let’s talk about how to calculate customer lifetime value.

And here’s the formula: average customer lifespan x average profit per customer.

Or if I translate that to layman’s terms, the formula is the average amount of time that players stay in your club or coaching programme, X the average amount of profit they generate for your business in that period of time.

So, if a particular customer stays with you for 120 months (which is 10 years) and each month they contribute to your bottom line with $50 or £50 of profit, then their lifetime value is 120 months x $50 = $6,000

Or in other words, the customer in this example is worth $6,000 to your business.

Now let’s take the other example of a customer that only stays with you for 6 months, but each month spends more money and ends up helping you generate $100 of profit.

This customer’s lifetime value is 6 months x $100 = $600

So, even though this customer is worth a lot more during the 6 months they were with you, overall they are worth 10 times less than the first example I gave.

Now, the first thing to note here is that when you’re calculating these metrics you want to use the same time periods.

If you’re calculating your profit monthly then you want your lifespan to also be calculated in months.

But if you want to calculate your profit yearly, for example, then you should also make sure that you’re calculating the lifespan yearly.

Basically you want to multiply apples with apples, or else you’ll get the wrong figures!

Ok, so we understand how to calculate the basic formula for lifetime value which is just to multiply average lifespan x average profit, and we already know how to calculate lifespan from the previous episode.

So, all that’s left for us to do is to discuss how to calculate profit.

And I sure hope that this is something that you already do, since it’s a key component of assessing the health of any business.

To run a business without knowing how much profit is being generated is the same thing as flying a plane blind.

A business needs to be able to generate a profit or else it will eventually cease to exist.

There are no 2 ways about this.

Ok, so how do we calculate profit then? Pretty simple.

Take all the revenue or income that you get from your customers and then subtract all the costs in your business like coaches salaries, court rent, equipment, utilities, maintenance costs, other staff costs, marketing costs, your own salary, etc. etc.

Once you do this you’ll have a figure that represents the net profit for your business for that time period.

But remember, we’re looking for the average profit per customer.

So, you need to take one more easy step which is to take that profit amount and divide it by the number of customers (and when I say customers I mean players, really) you had in your coaching programme or club during that time period.

So, as an example, if your club or coaching programme generated a total of $5000 profit in a particular month and you served 200 players during that month, then your average profit per customer would be $25.

You would then take those $25, multiply it by the average customer lifespan and voilà, you’d get your customer lifetime value.

Now, these figures I’m using are all made up.

What matters here is that you find out where your club or coaching programme is right now, so that you can work to improve the figures.

And again, just like with lifespan, the value in these metrics isn’t in measuring it once and then just leaving it.

The value is in tracking them frequently and consistently so that you can understand whether your business is moving in the right direction or not.

Because we know that if we’re being able to improve upon customer lifetime value, then what that means is that we’re either keeping players for longer, becoming more efficient on how to serve them while still keeping them happy, or maybe even both at the same time - which obviously would be the ideal scenario!

Alright that’s it for today’s episode. As always I’ll be back next week with another instalment of the Tennis Business Academy podcast.

Until then and thanks for tuning in.