Life Time Customer Value

How much are your customers worth to you?  Have you ever stopped to analyze it?

A customer’s life time value is something that few businesses ever calculate.  Understanding this concept, though, can mean the life or death of your business, or whether or not you’ll be capable of achieving an INCOME EXPLOSION.

So let’s look at a simple definition of life time value.  Essentially, if you add up the amount that an average client spends with you over the lifetime of your relationship that is your lifetime value.  Why is it so important?  Simple, it allows you to know how much you can spend on advertising, payroll, administration, fulfillment, and just about every other cost that you have.

The truth is that it is so much easier to sell to an existing client than to create a new client.  The existing client already knows you, likes you (hopefully), and trusts you.  They’ve already voted in your favor by way of their wallet.  To sell one time to a client and then to ignore them beyond that means that you are leaving a pile of cash on the table.

For example, as a dog trainer I know that if I can sell a client on the brand of dog food for which I am a distributor I can add about $100 to their lifetime value.  If I can sell them some training equipment I can add perhaps another $40-$80 of profit.  If I agree to watch their dog while they are on vacation and do some touch up training I may add another $500-$1000 to their life time value.  This is all selling based on the fact that I already put man hours, advertisement cost, and other efforts into acquiring them as a client in the first place.  All the hard part in getting them to be a client is done, if I don’t have other things to offer each client I’m losing out on money.  In the above example, if I had put all that effort into acquiring a client to whom I sold a $600 training package and then done nothing to increase their lifetime value then all I would have profited would have been that $600 instead of a potential $640-$1180 of back end profit.

Now, of course not everyone is going to purchase all of your back-end products or services but what if a portion do?  What if you’re able to convert at a rate of 10%?  Working on our numbers of $640-$1180 that would mean that the lifetime value of your customers just increased by $64-$118.  Now let’s say you acquire, on average, 15 new clients a month.  How does an extra $960-1770 a month sound?

This doesn’t work solely for trainers.  I see a lot of dog groomers who put a lot of effort into marketing and advertising.  I see their ads in local magazines and newspapers.  I see them advertise online all to gain new clients.

Then what I often see, unfortunately, is that they get the client in the door and do very little to increase lifetime value.  They don’t have any postcard or email campaigns designed to bring those clients back.  They don’t offer them a bag of dog food on check out.  They don’t upsell them on a special grooming service.  Here they spent all these advertising dollars to bring people through the door but then they did very little to keep the money flowing in.  What a waste!  That $50-$100 they got for the grooming could easily be turned into thousands of dollars.

Of course, sometimes this will happen on it’s own; clients will like your service so much that they’ll keep coming back on their own and buying as much as they can.  As a business owner, though, you can’t count on that for your strategy.  It is your job to make it as easy as possible for your clients to spend their money with you.

Understanding lifetime value, though, gets even better.  If you knew exactly how much each client was worth to you over their lifetime you could know exactly how much you’d be willing to spend to acquire them as a client in the first place.

For example, let’s say you’re a pet sitter and you were amazing at marketing and you knew the average client brought you a life time value of $850.  How easy would it be for you to offer referral fees to the dog trainers in your area of $50-$100 to funnel clients your direction?  That would be an incredibly powerful referral system that plenty of trainers would jump on.  Even if the client they brought you only netted you $50 for their first use of your services you could know that you would make plenty of money to cover the referral fee over the lifetime of the client.

What about other means of client acquisition?  If you’re that pet sitter with a client lifetime value of $850 is it going to kill you to pay $35 worth of google advertising before you get a client?  Of course not.

Are you starting to see the power here?  Most business owners fly blind.  They don’t know how much a client is worth so they hope that when they spend money on advertising or referral fees that they get a good return.  They don’t know how much a client is worth so they aren’t sure how much they can pay their employees to make sure the customers are taken care of.

Simply knowing the lifetime value of your clients will open up doors to you that you never imagined.