Lifetime Value of a Client
Simply put, lifetime value of
a client is the monetary worth (profit) of any given client
that you serve. Each
client will have their own value, but since you cannot determine
what that is until after you have stopped servicing them, you must
work on the principle of averages.
Why do you want to know the
average lifetime value of any client?
If you know how much a client will bring in the door, you
can forecast your gross profits, analyze what your potential
earnings are based on how many clients you obtain, and therefore,
plan your growth instead of just letting it happen and reacting to
Once these figures are in place,
you can then analyze the long term effect of minute adjustments in
pricing and determine the balance you want between adding as many
customers as you can by keeping costs low, OR raising prices (but
losing a few potential clients) and still maximizing your
Calculating the lifetime value of
a given client is easy. Compile
how much their account was billed and paid over the lifetime of
that account, subtract the cost of providing those goods/services,
and you have the gross lifetime value of the client.
For the sake of determining breakeven point and ROI on your
marketing efforts, you can also divide this by the number of
months/weeks that they were served.
You could then just add all this
information up for all of your past clients, but this would not
only be tedious, it would give you some pretty old data. Instead, simply determine how long your average client stays
with your services.
Of course clients can come back
to you and do so years later.
Thatís fine. But
of course that means that they only way you could calculate a
lifetime average would be to wait for them to die.
Instead, choose a number like two
years since their last billing.
If they havenít done business with you in the last couple
of years, they are probably gone and if they come back, they will
be more like a new client, interested in new services and you will
probably have to sell them all over again anyway.
At least this puts a cap on how long someone can be
considered an active client.
your monthly gross income by the number of clients you have
(giving you your average monthly profit per client) and multiply
by the average lifetime of your clients.