What is the lifetime value of a customer and why do you care?
At a very basic level, the lifetime value of a customer is the total amount of revenue you can expect to generate from any new client walking in the door. You care about this number because that’s the payoff for your marketing investment.
Marketing Investment?
Yes, that’s the nature of marketing. You take a small amount of money and expect to receive a large amount of money in return. This is the Return On Investment (ROI). The lifetime value of your customer will ultimately be the most amount of money you would be willing to spend to acquire that customer to receive the return on investment you’re looking for.
Now we all know that each client walking through the door will ultimately generate a different value. Some will need a smaller sliver of your services, and some will need a lot. Some will stick around for a day, and some will stick around for the lifetime of your business. This is and what we’re talking about.
The basic layout of the lifetime value of a client is the amount of money you expect to generate within a year, the number of years you expect to do business with that person and the number of referrals that new clients will bring to your business.
Revenue
The single most important value to know is the amount of revenue that new clients will generate for you every year. For one time only businesses, like roofing, that number may be somewhere around $15,000. If you’re a veterinarian, that number may be somewhere around $750. If you’re running a salon, that number may be around $1200 for women and $300 for men. It’s important you know this number, so go look back into your business. Don’t take an estimate or a thought or a feeling. It’s critical that this be concrete and in the real world.
Years
The other opposing important figure is the number of years a new client will be with you. Your Business will have a different average number of years that the client will stay with you. It’s important that you know this information. It’s difficult to put your thumb in the air in squint a bit and guess. It’s important you look back through your records and know how long a new client will stay with you. If you’re a one time only business, like roofing, then expect that number to be once in every 20+ years, meaning you should call at one-time transaction or just one year for our calculation. If you’re a returning business, like veterinarians, then usually that number somewhere around 4 years. If you’re a salon, that number may be upwards of 6 or 7 years. This is all based on customer loyalty and how often people like to make changes in their services.
Referral
The last number we use is the referral rate. Most returning businesses have referral rates between 25% and up to 40%. This means that between 25% and 40% of that business comes from referrals from existing clients. Some businesses get almost none of their business from a referral, like oil changing. This number is important because it adds more value to the value of the new client coming in the door. They will bring their friends with them! So despite closing the single deal, you’re actually getting their close friends who they trust and love.
If your business is a one-time-only business, like roofing, the net amount of income is based on the business you generate on the spot. The income may be on average $15,000 for residential roofing. The number of years is one. Even the roofing business has a referral rate. Meaning that the client will refer their friends who need a new roof. I have seen referral rates for roofers however between 20% and 30%. It’s like earning an additional 25% or 30% on that initial $15,000. So for the mass of this fictitious roofer were talking about now, the income is $15,000, the lifetime value of a client’s one-year, in the referral rate is 25%. So conservatively we can say that a client raising $15,000 and you can uplift that $15,000 by 25% to get $18,750dollars. That’s the lifetime value of a roofing client. That’s how much money you’ll earn when you land a new roofing client. How much money would you be willing to spend to earn $18,750? Quite a bit.
If your business is a returning business, like veterinarians, then the numbers are completely different. Annually you might expect to earn somewhere around $500-$750 depending on the type of business. Those new pet patients may stick around for between three and five years, we’ll stick with four. Pet owners tend to refer their friends at between 25% and 35%. We’ll stick with the low end of 25%. So conservatively the average new pet patient coming in the door is worth $2500. And really, if you think about the possibility that each year a pet patient will bring in one-quarter other people, that means over the four years of their relationship with you they will bring in at least one friend of theirs. So for each new pet patients, you bring in, you’ll have a second one. That means the full-blown value of a new pet patient is $4000. How much money would you be willing to spend to earn $4000? Since all of your fixed costs are already paid for, this is almost all variable income. You should be willing to spend upwards of $3,500 dollars for that $4,000 payoff and still make $500.
This lifetime value of a new client is the single most important number you need to keep in mind to grow your business. If you don’t know how much that new client’s worth, then you won’t value the cost of bringing that new client in. If you’re concerned about how to generate this number for yourself, schedule an appointment with me and I’ll walk you through the numbers for your business.
