Customer lifetime value (CLV) is a common process in most businesses especially the service sector, but for some reason it is hardly used in the advisory profession.
This is usually, because, while it is a common concept in marketing, those without a background in marketing rarely understand it or how to measure it. However, it is a technique that can add real value to any business.
CLV helps a business identify the net profit a client will provide over the lifetime of the relationship with that business.
CLV is fundamentally important as it can give you a clear picture of how much each client is worth to you and the repeat business you should expect from them.
This is because your clients do not represent a single engagement but a relationship that is far more valuable than any one off transitional activity. The secret is to understand this relationship and map out the engagement opportunities and what they are worth to your business.
CLV should not just be about one client; it should be about a helicopter view of your entire client bank.
This will highlight that while some clients never return and others never leave, on average your business will have a typical client lifetime journey. This has a specific economic value which can and should be calculated.
How do you calculate CLV?
CLV is not a dark art, but a marketing technique that can influence your future client acquisition and retention strategies going forward.
Trust me, the process is fairly simple and any business can do it. The calculation is as follows:
It is the total gross profit of a customer throughout the lifetime of the relationship with your business, minus acquisition, marketing and ongoing service costs.
This figure is the lifetime value of each client. For example:
Let’s look at a very simple example of a client that has invested £100,000 three years ago.
The initial charge was a fee of £3,000 and the ongoing service proposition chosen by the client costs £500 a year. The acquisition cost of the client was £1,500 and ongoing costs are £200 a year.
The current CLV is £1,900 made up of:
- Year 1 £1,300
- Year 2 £300
- Year 3 £300
The client has done no new business with the firm. However, they are due to retire and will have possible investments of around £200,000.
So over the next three years, the potential CLV, again using a 3 per cent initial advice charge, the same acquisition costs and ongoing charge is £6,800. Making this a client well worth retaining.
- Year 4 £6,200
- Year 5 £300
- Year 6 £300
Once your CLV is calculated, this insight can help any business formulate their client acquisition strategy safe in the knowledge that they now know the current and future value and profile of their most profitable clients.