One of the most important and oft overlooked metrics, I come across when I speak to CEOs, MDs and entrepreneurs is the knowledge of the lifetime value of each of their customers.
Too often companies are focused on generating new customers through new marketing and sales campaigns. However, it is (almost) always preferable and more profitable to nurture and develop an existing client relationship rather than find and develop a new relationship.
To highlight just how important this factor is, you will need to calculate your Customer Lifetime Value. To do this you will need to perform the following calculation:
Average transaction size
Number of purchases per year
Number of years as a customer
Estimated Direct Lifetime Value
Value of client referrals over lifetime of client
Total Customer Lifetime Value
Most of these numbers are pretty straightforward to find out and calculate. However, the tricky one and the one where there is a lot of value is the ‘Value of client referrals over lifetime of client’. This can be calculated by multiplying the estimated direct lifetime value of the customer by the number of total referrals that your average customer brings over their lifetime and then this is added to the estimated direct lifetime value of that customer to give the result: Total Customer Lifetime Value.
Do you know this number for your business?
When you do, you will see the value that your customers deliver to your business and, hopefully, it will spur you on to focus on keeping your existing customers for longer and developing those relationships.
When a business starts to have a proper understanding of its Customer Lifetime Value it can be a key to a successful and sustainable business.
Finally, let’s take an example to illustrate this. There is anecdotal evidence to suggest that accountancy firms keep their clients, on average, for between 6 and 7 years. What would be the impact of extending that by one? Both in terms of the estimated direct lifetime value of a client and the value of the referrals they deliver to the business?
What would be the impact of extending your customers lifetime by one on your business? What would it take to do this?
Thanks to orvalrochefort for the image