Life Value Cycle - The Cost of Client Acquisition
Most businesses have no idea what the lifetime value of a customer or client Life Value Cycle (LVC) means. Or, if they do, they don’t know how to calculate this crucial figure.
Worse yet, they don’t even have the slightest clue as to how to use this extremely powerful concept to increase their profits. So, I’m going to explain LVC to you, how to work out this crucial number, and why this is so important for your success. Firstly, the definition of the lifetime value of a client is this:
LVC = the amount of profit you make from your client during the lifetime of your relationship with them.
Now, let’s work out your LVC and then I’ll explain why it’s important for your success.
How to work out your LVC
Here’s what you need to know to work out your LVC:
How much do you get paid for the average transaction?
How many times a year the average client uses your services?
How many years the average client stays with you?
Your average profit margin?
Multiply those four numbers together and you’ve got your LVC.
Don’t worry if you don’t have the exact numbers - it’s okay to make a good estimate. You see, knowing the LVC is so important, even having a close estimate will give you a guideline to use. However, be conservative with your numbers if you need to estimate.
So let’s have a look at an example…
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. They could be less or more.)
Now multiply these four numbers and you have the lifetime value of an average client.
£100 x 12 x 3 x 50% = £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.
WHY LVC IS IMPORTANT FOR YOUR SUCCESS
Okay, 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.
How much you spend to get clients is called the ‘cost of client acquisition’ (that’s the fancy name!).
What’s significant about selling most services is that the amount you can spend to get clients can be relatively high. This is good because it means you can afford to spend more to get clients. The result is a sharp increase in the number of enquiries or appointments.
You see, traditionally, sales and marketing techniques only look at the profit or loss on the first sale. So for your business, this is the wrong approach to follow.
Unlike product-based businesses - where it’s a one-time sale and then that’s it - as a service business for example, sell repeatedly to your clients… over and over again. So, as a service provider, making a profit on the first sale isn’t important. It’s not the main thing you should be concerned about. What you should be focusing on is not how much you make but, instead, on getting the client in the first place. This is the most important and hardest task you face after all. However, knowing the LVC makes it very easy for you to obtain clients. Simply because you can afford to spend more to get them!
A THERAPIST, AS AN EXAMPLE
Let’s say you run an ad in a newspaper. It costs £500. You get 5 clients and appointments at £30 each. Your income (£30 X £5 = £150) doesn’t’ even cover the cost of the ad.
Now, most therapists would consider this a failure. But it’s not. Here’s why: if you know every client you get is worth an average lifetime value of £540 profit for example, you’ve actually just invested £100 per client (£500/5 bookings) to get a £540 return.
In other words, you’ve invested £100 now for a future profit of £540. For the 5 clients, that’s a future total profit of £2,700. Your ad, that seemed to have lost you money, is actually going to give you a return on investment (ROI) of over 5 times. That’s pretty good by anyone’s standards. I don’t know about you, but I’ll take as many new clients like that as you can find me!
This is the most powerful, but intangible, aspect of lifetime value. Can you see how it affects your marketing perspective? Once you realise clients are actually an ongoing revenue source - rather than a one-shot sale - you can shift your marketing focus. Instead of the constant struggle to keep getting more and more new clients, you can now begin concentrating on keeping your existing clients longer and selling to them more often.
In fact, you can actually increase your earnings several times without ever increasing your client base. Regardless of what you may have heard in the past, there are only three ways to increase your revenue:
1. Get more clients
2. Get existing clients to spend more each time
3. Get existing clients to spend more often
With this new understanding of LVC, you can afford to spend more than you thought to gain new clients. You can make much stronger, more attractive offers to obtain clients today who will contribute to your income tomorrow. As long as your cash flow can support it, you can invest more in the beginning to take larger profits later on down the road.
We hope you found this information useful. We would like to remind you that this subject is best served, and more effective as part of a complete marketing plan or strategy, rather than in isolation. For further expert advice please contact us to discuss your requirements or post a question in our blog.
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