Calculating CLV helps you decide how much you can invest in retaining a client so as to achieve positive return on your investment in acquiring that client. You probably don’t have a lot of money to spend on client acquisition, and probably want to nurse along the clients who will generate the greatest revenue for your practice.
You can only know this by calculating the projected cash flow of a client over his or her entire lifetime with you.
Once you have calculated CLV of your clients, you can develop a plan for spending on client acquisition and client retention.Once you have calculated CLV of your clients, you can develop a plan for spending on client acquisition and client retention. Click To Tweet
Your CLV can be considered one of the metrics which guide your marketing activities, and guide you in developing marketing strategies and client communications strategies.
Customer Lifetime Value is usually defined as the total net income a company can expect from a customer. The exact mathematical definition and its calculation method depend on many factors, such as whether clients are “subscribers” (as in payroll and most monthly accounting services) or “visitors” (as in project oriented or consulting services).
CLV plays a major role in your firm, and is influenced by factors such as Churn.
In the context of retention campaigns, the main business issue is the relation between the resources invested in retention and the corresponding change in CLV of the target segments.
In general, a CLV model has three components: customer’s value over time, client’s length of service and a discounting factor.
The client’s length of service in this analysis is affected by your Churn Rate. The industry average (not yours of course, but the industry average for the accounting profession) client lifetime is five years. Five years.
The formula for calculating expected lifetime is one divided by your churn rate (1 / %churn). If your churn rate is 50%, then your expected client life is two years.
Some of the commonly used metrics for computing customer value include RFM, Share-of-Wallet and Past Customer Value.
RFM stands for Recency, Frequency, and Monetary Value. This technique utilizes these three metrics to evaluate customer behavior and customer value.
- Recency is a measure of how long it has been since a customer last placed an order with the company.
- Frequency is a measure of how often a customer orders from the company in a certain defined period.
- Monetary value is the amount that a customer spends on an average transaction.
Two methods are generally used for computing RFM. The first method involves sorting customer data from the customer database, based on RFM criteria and grouping them in equal quintiles and analyzing the resulting data.
The second method involves the computation of relative weights for R, F, and M using regression techniques and then the use of those weights for calculating the combined effects of RFM. RFM can be considered as the sum of the weighted recency, frequency, and monetary value scores for a customer.
Both of these methods require large databases. RFM is not ideally suited for an accounting practice. But, not to worry, there is a way.
Later, when we start doing that SWOT stuff, I’ll introduce you to LSRP and the BCG matrix. Yeah, you’re gonna love it!
Meantime, how about you calculate the lifetime value of your clients using your current statistics. Go ahead and download the Rainmaker’s Client Lifetime Value Worksheet and experiment.
Save this information, we’ll use it later when we’ve finished calculating an LSRP Score and classified your clients as Cash Cows, Stars, Problem Children and, of course, Dogs.
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