August 8th, 2007
Clients often ask us how much they should spend on acquiring new clients. It is important to know what the average client will spend over their life time with you. Statistics indicate that companies keep clients for an average of 3 years; however, please do not take this figure as gospel, as it could be far longer. One on my veterinary clients keeps their clients for 10 years, so it greatly depends on the type of industry you are in.
If you know, without doubt, that your clients stay, an average of 5 years, then use this figure in your calculations based on the example below.
Here’s why lifetime value is so important and how you can use it to increase clients, referrals and your income. Knowing this value is important for one major reason; when you know how much profit a client is worth to you, you know how much money you can afford to spend to find them.
Cost of Client Acquisition
How much you spend to get clients is called the ‘cost of client acquisition’ (that’s the fancy name!). So let’s have a look at an example of a Therapist…
- Let’s say a client uses your services once every month - 12 invoices a year - and it costs them £100 each time.
- Let’s also say they remain your client for 3 years and the profit margin is 50%. (You’ll know what your average client lifetime and profit margin is - it could be less or more than the example shown here.)
- Now multiply these four numbers and you have the lifetime value of an average client.
- £100 (Spend) x 12 (Months) x 3 (Years) x 50% (Net Profit Margin) = £1800
- That’s how much profit your average client is worth using this example!
Here’s where it gets interesting… If you manage to get your clients to have longer consultations, or a combination of services, or increase the frequency of transactions, the lifetime value goes up. So let’s say they opt for longer consultations each time, costing them £150, and increases the number of transaction from 12 a year to 18. Their lifetime value goes up to £4050 (£150 x 18 x 3 x 50%).
Imagine 100 clients like that! That’s an income of £405,000 over 3 years… or £135,000 a year! And it’s not difficult to increase the amount a client spends with you.
No longer doubt your marketing or advertising spend - calculate the ROI
So, if you only receive one conversion from an ad or promotion (and you spent £100 on the ad), knowing these above facts, it is quite possible that you have made a handsome profit on your marketing activity, though it did not seem very cost effective without these facts.
Further details of this subject can be found on our web site at: http://www.objective-marketing.com/marketing/the-essentials/lvc-life-value-cycle/ or by calling us on 020 8523 2028, or please feel free to post a comment or question on this blog.
Entry Filed under: Marketing