How Managing Average Customer Spend (Value) increases your bottom line

Average customer spend, what we call average customer value or ACV – is a critical metric because increasing ACV is the best way to get the most out of your marketing.

Here’s how it works:

The reality of marketing is this: the one who pays the most for a customer wins.

Yes, capabilities matter.

But if you are competent and know precisely what you are doing, you have many customers and make more money.

• Since you make more money, you can spend more money on sales and marketing.
• Since you can spend more money on sales and marketing, more people get to know, like, and trust you.
• Since more people get to know, like, and trust you, more people buy.
• Since more people buy, you can spend more on sales and marketing.
  

What happens if a competitor starts selling a similar product, investing in marketing, and taking your customers? The logical next step will be to increase spending.

This truism gives rise to another: for any new product, the amount of money (or time equivalent) required for successful sales and marketing is 1/3 of the price. Another third goes to delivery, and the final third goes to profit.

This isn’t prescriptive; we aren’t saying this is the way it should be. It is observational; this is the way it is. You are competing with your marketing, and you are competing with others who are spending money but also have mortgages to pay, and if you were to take the time to crunch all the numbers, the result would be close to this rule.

These numbers are straightforward for a product with a fixed, one-time price. They are also a good indicator for a subscription product, but the math is a little more complex.

How much should you be willing to spend on sales and marketing for a client worth $3,000 in monthly MRR indefinitely?

Well, the value of $3,000 a month in perpetuity is somewhere around $360,000. So the 1/3 rule would suggest you would see people spend up to $120,000.

That doesn’t happen, though, mostly because people don’t believe in “perpetuity.” They think in a time frame they can imagine and measure. In this case, generally about a year or, at a stretch, three years.

So the answer is about $12,000; you should expect to spend about $12,000 to acquire one customer worth $36,000 a year. Actually, a better way to say this is that $12,000 is not an unreasonable amount to spend on acquiring this customer.

A significant amount of marketing budget goes into figuring out how to reduce this cost of acquisition (CAC) through repetition and automation. Also, the more experienced and specialized you are, the more successfully you will reduce your acquisition cost.

As an aside: the more specialized and narrow your focus, the lower your cost of acquisition can go. The more generic (agnostic) you are, the more competitive the space and the more you will have to spend competing with everyone else.

Regardless, the cold hard truth is that customer acquisition costs money; it costs a lot of money.

But what is the cost of the second sale to a customer?

Well, that is the cheapest sale you will ever make.

Most marketing cost goes to the early stages of the customer value journey. Once you’ve made the sale, you don’t have to repeat those steps. You already have a customer, and if they already love you and you can solve another problem for them, why wouldn’t they buy from you?

The answer is they would.

No marketing process is required.

And that’s why managing the average customer value is so crucial to MSP profitability. Rather than seek out new customers, you sell more to the customers you already have.

So next, we’ll define average customer spend and average customer value, then dive into how to increase them.

What is average customer spend or average customer value

Average Customer Spend is your total revenue divided by total customers.

Average Customer Value (ACV) is slightly different; we define it as your total contribution (revenue minus direct cost) divided by the total number of customers.

So, if you have a total contribution of $100,000 and ten customers, your ACV is $10,000 (gotta love round numbers).

Average customer spend is easier to calculate (use total revenue), and ACV is a better metric but slightly harder to calculate (you have to throw direct cost into the mix). Both work for this analysis.

The most straightforward, automatic, and customer-friendly way to increase ACV

The best tool you have to increase ACV is your Quarterly Business Review (or, as we prefer, your Strategic Business Review, SBR).

The SBR is powerful in the first instance because it directly supports your customers. They want your support and expect you to help them solve business problems.

A customer-centric SBR specifically addresses their weaknesses and needs. Through the process, you identify areas for improvement in their business and suggest solutions that add value.

Your solutions should always help them grow, cut costs, increase production, or reduce risk.

When you make the suggestion, you present it within the context of a business case, and there is no reason for your customer to turn you down. They love your work, you offer to solve more problems, and the solution’s value is worth more than the cost, so why wouldn’t they buy?

You should conduct an SBR at least twice a year, but this could be quarterly or even weekly, depending on customer needs.

In our experience, when an MSP starts SBRs, their customers are often surprised and delighted to learn that one of their preferred vendors also provides XYZ service. The sale is easy.

Use the cross-ascension matrix to identify cross-selling opportunities.

Another tool that helps identify opportunities to increase ACV is our up-sell cross-sell matrix.

This tool, which you can download here, is a straightforward way to map all the solutions you offer and cross them with all of your customers. You will almost always find gaps in that you have solutions or products that would be valuable to customers who have not bought that solution or product.

In this case, you can make a business case for your solution and approach your customers. More often than not, they welcome your presentation, know they need something, and are happy you provide it.

Raise prices to increase ACV

The final way to increase ACV is to raise prices. If everything else stays the same, a price increase goes straight to the bottom line. It is the most powerful profit lever you have in your business.

And you see it easily in ACV. Let’s say you put your price up 50%. As a result, you lose two customers. Your new total contribution is $120,000; you have 8 customers; the ACV is $15,000.

In this case, you have more money, less effort (fewer clients), and more resources that you can dedicate to marketing.

We often find opportunities to increase prices, but there are limits, so you should consider and plan price increases rather than putting up your prices every other month.

ACV is your friend

This is one of the most neglected metrics and yet one of the most relevant.

Remember, the second sale to any customer is the cheapest. You avoid all the customer acquisition costs. And, since you know your customer and their challenges, it is easy for you to make a compelling business case.

So our recommendation is to manage your Average Customer Value actively:

• conduct regular SBRs
• review your products and which customers are buying them.
• adjust your prices in line with the value you offer.