Life Time Value

by on 15/05/2009

Some time ago I released an article titled ” Can you build a successful business with one-time clients? ” … where I dicussed shifting focus from giving one-time value to Life Time Value (LTV).

So what is Life time Value?

When a business acquires a client and that client stays for a certain period of time, the amount of profit that the business gains is the life time value of that client.

Here is an example

Take a firm of accountants:

Their Average Annual Fee is      £3500
Their Average Gross Profit         £2500

Average number of
Years a client stays
with that firm                                5

LIFE TIME VALUE                     £12,500 (£2500 X5)

Why is knowing LTV important?

Unless you know how much combined profit a client represents to your business for the life of that relationship, you cannot determine how much time, effort and money you can afford to invest to acquire a client in the first place.

How will this change your marketing decisions?

Decision 1:     If each client is worth £12500 over the life time of that client how much are you willing to spend to acquire that client?

Decision 2: Will you market, to a transactional buyer (one off purchase) or relationship buyer (on going purchases providing life time value)?

How will this change your client retention strategies?

What would the outcome be if you asked the question ” How can I (or we) keep our clients for longer?” (If you expect your customers to be loyal, they have the right to expect the business to be loyal to them!).

What is the LTV in your business? Here are some guidelines!

1.    Identify and document your ideal customer. Get very specific. What are their job functions, key frustrations, buying behaviour, lifestyle, age, willingness to advise you on new offerings, and typical spending habits with your firm? Do they value expertise and are they willing to pay a premium for good service, or are they transactional buyers who only care about price Write down the percentage of firms in your portfolio that fit each description.

2.    Guesstimate how much your ideal customer will buy from you during the entire buyer/seller relationship. For example, if you are an accountant, and a typical client stays with you for 5 years, and their net worth to you is £2500 per annum, then the current lifetime direct transaction value of a client is £2500 x 5 months = £12,500. But that is not ALL.

3.    Guesstimate how much business each client will refer to you over the next 5 years. Let’s say the typical client sends you 1 new client every 2 years at £2500 a year. That’s £5000 in referral value.

4.    Add all 2 figures. The true lifetime customer value, including referrals is £17,500.

Once you arrived at your LTV, now it is decision time!

– How will your marketing strategy reflect this? (How much are you willing to spend to acquire a new client)?

– Once you get a new customer, how can you become so compelling that your customer wants to stay with you for ever because of the superior value to him/her and it would never occur to them to look let alone move to your competition?

 

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