What is Lifetime Value of Your Clients?
There are many school of thought about this marketing terms but for our purposes, we will keep things as pragmatic and focus on applicability and its impact on your business.
The lifetime value of your client essentially is the total value of future cash flows attributed to the customer during his/her entire relationship with the company.
- Let’s say you own a spare part supply business and the average order size for each transaction is RM1000.00 from the various distributors, workshop owners and the like.
- On average, each of your buyers will re-stock their inventory once a week so on average you will have 4 orders from each customer per month.
- RM1000 average order X 4 orders = RM4000.00 transaction per month.
- So per year, that amount is RM48,000.00 (RM4000 x 12 months)
- We are assuming that you are operating a strategic and profitable business and service your customers with utmost integrity and provide great value.
- On average, each of your customers will stay with you for at least 5 years.
- That means each year, your customer will spend on average RM48,000 and will stay as your customer for at least 5 years.
- Over the lifetime of the customer, their value will be worth RM48,000 X 5 years = RM240,000.00
- Now let’s say your profit margin from your sales average at 15%.
- That means you will net RM36,000.00 in profits from each customer over the period of 5 years.
So as a business owner, these numbers are very important and can help you to make decisions such as how much to spend to acquire a customer for the first time.
Why the first time?
The reason is because once you have acquired them as your customer, you do not need to spend the same amount of money as you did initially to get them to buy from you for the first time.
For example, to get your customers, you will advertise in newspaper and trade publication and buy ads space to get these distributors. You will need to spend a certain amount of money to get these prospects to buy from you for the first time.
However, after they have bought from you, you do not need to advertise to get the same customer anymore. You now have their contact details and can continuously market to them without the initial spending on advertising. Makes sense?
It cost you 6 times more to acquire a customer than to maintain one
It is widely believe in business that it cost you 6 times more to acquire a customer than to maintain a current business relationship.
So businesses that are forever spending money to get customers through the front door, but not selling or up selling more products to their existing buyers simply are not maximizing their business potential. Their focus is only on the Front End and not on the Back End where the real fortune is to be made. That is also one of the contributing factors why so many businesses fail.
We will talk more about Front End and Back End sales funnel in another article.
Applicability to joint venture
Understanding the lifetime value of your clients is crucial for your ability to structure deals with your joint venture partners. When you understand where your profits are coming from, how much it cost you to acquire each customer, how much you can afford to spend and the real worth of each customer, you are in a better position to make informed and strategic decisions that will have a large impact on your business.
Let’s go back to the illustration above.
- We have worked out that each customer that the spare part supplier maintains is worth on average RM240,000 over a period of 5 years.
- From this, the profit margin for this business is about RM36,000.00
Now with this information at hand, this spare part supplier now can start approaching potential joint venture partners from businesses that are:
- Complimentary to their business
- Similar to their business
- Competitors of their business
They can ask for referrals from each of these sources of joint venture partners and pay them generously for the first time transaction knowing that the real money is to be made on the back end over a period of time.
For example, this spare part business can go to a major lubricant supplier and do a joint venture deal or a strategic alliance. The key why this partnership will work is because both of these businesses are selling to the same target market: the dealers and suppliers of auto parts. Here is what this spare part supplier can get this lubricant supplier to do:
- Write a letter to endorse this spare part supplier to all of their customers
- Provide incentives to take action by giving special discount as agreed with the spare part supplier
- Write a sales letter, or send out flier or catalog to their list of customers on behalf of the spare part supplier
What is in it for the lubricant supplier?
Here is where the lifetime value comes in. The spare part supplier can do a deal with a variation of pay off for their joint venture partner. They can:
- Offer 100% of the commission on the first sale after deducting the cost
- Or they can have an overriding commission on the next few purchase or over a certain period of time for future repurchases
- Or they can do a cross promotion where the spare part supplier will in return endorse this lubricant supplier to its list of clients
- Or any other combination that both parties deem fair and equitable.
The spare part supplier knows that from each newly acquired customer, they will have a net profit of RM36,000 over the next 5 years. He is now in a better position to decide how he wants to reward his joint venture partner.
Here are the key learning points:
- Without the joint venture partner’s referrals, he would not have this new client
- He would have to spend money on advertising anyway to get these first time buyers through the door
- With an endorsement from the lubricant supplier to their list of customers who trust their recommendations, their customers are likely to respond better and are more likely to take action as compared to a newspaper as selling cold
Calculating the lifetime value of a client is as much an art as it is a science. There are many method of calculating the LTV (lifetime value of a client / customer) and you can explore each accordingly.
We are looking to provide you with the most pragmatic application and understand of this subject so that you are in a better position to make informed decisions that will increase the success of your joint venture deals.
Thank you for reading until the end. Please leave a comment about your thoughts and if you have any joint venture ideas that you would like to explore with us, please leave a comment or get in touch with us via our contact form or via Facebook.
Looking forward to serve you further.