We all want new business and we all want to grow. How should we market and advertise our businesses? Should it be on social media? Yes. What about Google? For sure. However, before you go forking over your hard-earned cash, have you asked yourself the most important question, how much are you willing to spend to get a new client?
If you had a cash machine that gave you two dollars back every time you put a dollar into it, would you keep putting a dollar in it? Of course, you would! That’s what marketing is—we know we have to spend money to make money, but what is the maximum amount you want to spend to acquire a new client? If you know your lifetime client value, then you would know what your max spend should be.
What Is Lifetime Client Value (LCV)?
A lifetime client value is how much your client spends with you for the duration of your business relationship. Include referrals when you make your calculations, because without the first client’s relationship with you, you wouldn’t have the additional clients.
To calculate your LCV, take your top 5 to 10 clients and determine the following:
- How many years has each client stayed with you?
- What is the total spent in products and/or services for each client?
- What is the total value of the referrals you received from each client?
Now add the total revenue and the total referral revenue together. Divide that total by the number of clients you used for your sample. Do the same for the number of years. That will determine the average lifetime spend every new client brings you.
Look at the diagram in the example below.
Reviewing your results can be surprising
If Joe never tracked his revenue before, this exercise was probably eye-opening. I know it was for me, the first time I did it. Since Joe’s clients typically spend $20K with him, if he spent $1,000 in advertising to get a new client that would be an amazing return on his investment. Remember that $1,000 includes time spent meeting potential clients, fuel, print materials and the formal ad spend. The key is to recoup your acquisition cost in the first year of business, not the lifetime of the client.
Knowing Your Business Is Knowing Your Numbers
American businessman, Mark Cuban said it right when he said, “As a business owner you have to know your numbers.” Knowing your LCV can definitely change how much you spend on marketing, but it will also cause you to see if you’re spending it in the right place. My next article will discuss one of the cheapest ways you can acquire a new client. Until then I wish you much success in leveraging your brand to realize your dreams.
George Paul III is a branding expert and award-winning designer. He’s the Founder of Seize the Brand, an education platform designed to empower business owners by leveraging the power of branding to realize business and life goals.