I read a great article by Lucinda Lions on Smallville recently. The topic of the…
Lifetime Value is Valuable
In my latest series of articles, I’ve focused on the concept of value from various viewpoints.
In this article, I want to discuss the concept of lifetime value. And share with you some examples of how you can organise your business around this concept.
Just this week I was doing a calculation for a customer, comparing two similar businesses with slightly different business metrics and following their potential performance for a period of 10 years, the difference in where both ended up was stark.
It was all around this concept of customer lifetimes.
Compare the pair.
In the calculation above, we took two businesses in professional services that started with a million dollars of revenue in year one. Both businesses had an average customer value of $2,000, and both were getting a similar number of leads a year for new customers.
- Business 1 managed to convert about one in three leads to new customers. And they retained about eight in ten of their customers each year. Meaning, they lost two in ten customers at the end of each year.
- Business 2 converted one in two of their leads and kept nine of ten of their customers each year.
By the end of 10 years, Business 1 had declined in revenue to $570,000 whilst Business 2 had grown to $1.53 million in revenue. It was about three times bigger.
One of the biggest force multipliers (important influencers of growth) in this comparison was keeping one more customer out of every ten.
As it turned out, Business 2 was better at surveying their customers, keeping close to their customer on how well they felt the business was servicing their needs, and as a result, they could head off any potential issues early. Business 1 didn’t survey as often and lost clients because they unknowingly were failing to deliver a valued service.
If you lose 20% of your clients each year, the average time you keep a client is four years. If you reduce this to 10%, then you are keeping clients on average for nine years.
It doesn’t take a genius to work out that having a client spending money with you over nine years is going to be more valuable to your business than just four years. But the calculation can also go deeper than that.
Keeping clients is cheaper than finding new ones.
By a wide margin. Not only will you have more revenue, but you’ll also have more profit since your marketing expenses will be lower. Keeping clients happy and well serviced over many years, having a high lifetime value of a customer, is like compound interest. It’s the gift that keeps on giving.
Keeping a customer over many years takes work, you need to take a dedicated approach to continuing to understand what your customers want and how well you are servicing their needs. But it pays off in higher income and higher profit.
My recommendation to you is to pay attention to your clients and pay attention to lifetime value.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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