The $ 100,000 Stamp on Your Client’s Forehead
"When I see a frown on a customer's face, I see $50,000 about to walk out the door."
Renowned Management Guru and bestselling Author Tom Peters once wrote that Stew Leonard, the erstwhile Norwalk, Connecticut, grocer, said this thing about the “frown”. Tom further says, when the Federal Express courier comes to my office reception area, she is greeted by Annah Salas. When she looks at Annah, she should see $180,000 stamped on Annah’s forehead.
What’s The Amount of the Stamp on The Forehead of Each of Your Clients?
- Let’s say, each month, you earn $ 1000 per client.
- The average annual revenue from each of your clients is $ 12,000.
- Let’s say, your marketing cost to acquire each customer is $ 2,000 a year.
- On an average, if the customer stays with you for 10 years, you are looking at the forehead with a $ 100,000 stamp!
The Concept of “Customer Lifetime Value” (CLV)
The concept of “Customer Lifetime Value” (CLV) is not new and with the explosive growth in startups and the “apps-economy” where consumers pay for subscription, CLV is a make-or-break financial key to the success of such businesses.
To make sure we are on the same page, CLV can be defined as:
“The present value of the future cash flows attributed to the customer during his/her entire relationship with the company”…….Source: Wikipedia
But There’s Far More to CLV Than What is Obvious on The Face of it.
The key is to be able to see, feel and internalize the way you recognize the CLV in your day-to-day interactions with prospects and clients.
Do you get new clients through referrals? One of the recent surveys discovered that referrals are a source of new clients for as high as 96.8% for small (1-10 staff) accounting firms. 92% of larger firms cite referrals as the largest source of new clients!
Therein Lies the Catch!
Not just the direct business a customer does with you year after year, it is also the new business an existing clients helps you bring in should be added as the indirect lifetime value of that customer.
Wait! It’s Not Just About Only You.
Ok. You totally understand the CLV of your clients. Unless you are a solo practitioner, your client does not deal with just you. Every person at your practice who deals with the customer has the power to add to the CLV or even reduce the CLV. If your staff solves your client’s problems, quickly and to the satisfaction of the client, your staff adds to the CLV. Conversely, well….. you know the math!
And even if you are a solo practitioner, your vendors, banker, friends, the staff at your client’s office, several people you deal with in the course of your business; and otherwise; can add to or subtract from the CLV stamp on your client’s forehead.
What to Do Now?
- Compute the average CLV of your clients now: Click here to download a free excel calculator for computing the CLV.
- Remember that figure (in absolute Dollar terms). Write it down on a post-it; stick it onto your computer screen; put it in your line of sight at office and at home and in your car! The idea is to “internalize” it so much that it comes to you as easy as you breathe.
- Visualization, they say, is a powerful tool to make things happen. And measurable visualizations are better than non-measurable ones. E.g. think of a $ 100 bill now. You can almost see it, right? Visualizing a “stamp on the forehead” of the customer would be great. Take an image / picture of a forehead; print it and handwrite the CLV Dollar value on it and post that picture on your “vision board”.
Why Calculate CLV? Because of These Five-Star Impacts!
CLV can be one of the most important metric for understanding your customers. CLV can help you make the most fundamental strategic decisions about growth of your practice, e.g.:
1. Marketing and Sales Investments
What should your “customer acquisition cost” be? It can also help you set sales targets based on time and money you invest. It can also help you define your ideal customer and help you focus more on acquisition of such customers.
2. Services Mix
What are the core services your clients need and what else can you offer along with it to increase the CLV? It will also tell you the strategic tie-ups you should get into for such services that you do not personally provide. “Leverage” is a powerful tool to earn more.
3. Customer Support Costs:
Do you often find yourself on the phone with customers for 30 minutes or more, without getting paid for such calls? Computing the “opportunity cost” of your time and then comparing it with your average CLV can tell you if you are investing enough in customer support or are you really losing opportunities. Let’s say you decide that you will include customer support cost in the cost of acquisition of customer. When you quantify the support cost, you can quantify how much free time you can give to your customers. You can then include something like “Monthly 30 minutes free consultation. Then $ 100 per hour” or something like that in your “package” descriptions.
4. Technology Investment Decisions:
When you compute your CLV and compare it with your sales and support costs, it can prompt you to review your processes and find out your true “opportunity costs”. It is easier for you to justify to yourself the need to invest in technologies such as CRM and Automation etc. What sounds expensive now, can make more sense in light of quantifiable CLV information.
5. To Find Ways to Boost Your Revenue
Knowing the CLV lets you measurably focus on repeat orders to increase the revenue. It also helps you “up-sell” to increase the average value of your sales to each customer.
ABOUT THE AUTHOR
Hitendra Patil is COO of Pransform Inc., which provides accounting outsourcing services to accounting and tax practitioners. Ask him about “The Secret of Millionaire Accountants”. He brings intelligence and passion to the tax and accounting industry, drawing on deep experience with enterprise-class technologies and best practices from multiple industries.