Lifetime Value of a Client

 Calculating Lifetime Value of a Client

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Marketing >> Marketing Principles >> Lifetime Value of a Client

Calculating 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 it.   

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 profitability. 

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.  Not practical.  

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.

Divide 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.

Marketing >> Marketing Principles  >> Lifetime Value of a Client





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