The secret of successfully scaling your business starts with understanding the lifetime value of your client.
Recently, a prospective client was referred to me to help with promoting her mindfulness practice. Although the business model was the same as others that I’ve helped, I still wanted to dive into more details to better understand her particular practice better.
One of the first things I wanted to know was this:
How much is a client worth to you in the long-run?
If you haven’t asked yourself this question before, then get ready. This could be a game-changer for you. Truly understanding the the total value of a client can completely shift your marketing mindset and give you a tremendous competitive advantage.
Big promise, I know. But that is what it did for me. Let me explain…
I first came across this concept from Joe Polish, a renowned marketer, entrepreneur, and networker. At the time, I was running my photography business and had started growing from serving local clients to national clients.
What struck me was something that Joe said. Essentially, he said that you’ll never know how much you can afford to invest in marketing, until you know how much a client is worth to you. In other words, once you determine the average revenue a client brings in, then you can figure out how much you can afford to spend in attracting new clients.
Determining Lifetime Value of a Client
Here’s a photography example:
Let’s say each wedding client typically spends $3,000 with you (Some more, some less, but all averaged together it comes out to $3K). And let’s say that the average wedding client will also go on to purchase at least one family photo session with you within 1-5 years after the wedding. So you add an additional $400.
So far, we’re at $3,400 in value for each wedding client ($3K for the wedding + $400 for one family session).
But it doesn’t stop there. You can also add word-of-mouth referrals to your lifetime client value.
In the photography case, let’s say that 1 in every 5 wedding clients will send a referral that books a wedding. So that would be an additional $600 ($3000/5 = $600), bringing the total lifetime value to $4000.
To keep it simple, let’s just stop right there. We’ve determined that the average revenue that each new wedding client will bring in over their lifetime is $4K. This means…and here’s the cool part…is that it shows me how much I can afford to invest and still come out on top.
In this photography example, I could invest $250, $500, $1000, even $2000 to bring in just 1 new client…and still come out on top.
Now, certainly the goal isn’t to spend as much as possible and jack up your acquisition costs. BUT it illustrates how far you can go to bring in new business. I mean, if you could generate $2 for ever $1 you put in, wouldn’t you do that all day long??
And what’s so powerful is that most businesses (ie. your competition) likely has NO IDEA what their lifetime client value is and therefore, has NO IDEA how much they can invest into marketing.
I remember other photographers that would freak out if they spent $350 and only brought in one client. They had no idea about the implications of Lifetime Client Value.
But as for me, it gave me a massive advantage because I knew my numbers. I remember the first month of running Facebook Ads. The lifetime client value concept really resonated with me but I was still nervous. But it proved to be a lightbulb experience.
Photography Campaign Results
Here’s what happened: I invested $239.04 into ads and by the end of the month, it had turned into $2,500.
Month 2: invested $406.52 and it brought in $7,200.
THIS is what can happen when you know your numbers!
As you can see, I didn’t end up spending up to $1,000, $500, or even $200 for a new client…but I was prepared to do that because I had confidence that it would still be profitable for me long-term.
Here’s the process for determining the lifetime value of a client:
- Calculate how much a client is worth to you each year
- Multiply that by the # of years they typically remain loyal to your business
- Factor in the # of referrals/client each year and add that into the figure
Questions? Reach out. Happy to help out where we can.
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