How much is the average client worth to your business? Not just per project or even per year, but for the lifetime of your business. Calculating the lifetime value of a client is an eye-opening exercise I recommend to every small business owner.
Let’s take several examples. A client who eats a $15 lunch at your restaurant every Monday is worth $780 for one year and $2,340 for three years. It really adds up, doesn’t it?
A personal services business, such as a chiropractor, massage therapist, manicurist, or hair stylist has a similar business model where hopefully they can attract repeat clients. A client who gets a $20 manicure once every two weeks is worth $520 per year and $2,600 in five years, and that does not include the tips. Grocery stores, hardware stores, clothing stores, and office supply stores are just a few industries with similar models.
Large purchase with add-ons
Some businesses rely on a larger but less frequent purchase than some of the industries listed above. This may include furniture stores, airlines, and computer sales. Many of these larger purchases can be increased by adding service contracts, delivery charges, financing charges, and by selling more items.
Some businesses will benefit from becoming aware of the lifetime value of their vendors, partners, and employees. For example, contractors are often reliant on their subcontractors to deliver great services so they can complete the construction projects. Landscaping firms make great partners with nurseries and bring them much business. And employees who sell and close large contracts can have a lifetime value to your business of millions in some cases.
One way all businesses can increase the lifetime value of a customer is by counting the amount of referrals the customer sends you. Let’s say Marni spent $500 with you. She was so impressed with you that she sent three clients your way. They each bought $1,000. Marni is now worth seven times what she originally purchased from you: $3,500. When each of these new clients refer more people and buy more in subsequent years, Marni’s value to your business gets bigger.
This might just have you treating your clients like Marni with a lot more respect!
Multiple service lines
The more products and services you offer, the greater your opportunities for increasing the lifetime value of your customers. Let’s say Katie buys a $500 product from you in January. In May, she comes back and wants the $2000 service you talked about in a newsletter you sent her. She’s so happy she refers two clients to you that buy $1,000 apiece. What can start out as a $500 client has now morphed into a $4,500 client and can easily mushroom into a five-figure client by the end of the year. I’m sure it’s happened to you over and over again.
Take some time next week to create a spreadsheet that shows you the lifetime value of your clients. I think you’ll be pleasantly surprised to see how valuable your current clients really are. If you need help with the calculations, let us know. We’re here to help.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.