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Aug 04

E252: The Value of a Client

How many of you know the average lifetime or annual value of a client?

I thought I would continue on with something I talked some about yesterday. Customer Acquisition Cost (CAC) and Lifetime Value (LTV).

  1. Some definitions
    1. CAC – the cost to get new customers/projects – Total Sales/Marketing Spend divided by # of clients obtained
    2. Customer Retention Costs – Additional costs associated with keeping a customer – sometimes associated with project spends for hospitality, etc.
    3. LTV – the gross revenue the each client / project brings in on average – Total Project Revenue – Cost of Goods
  2. Know the numbers to be successful
    1. To be successful you must know your numbers and keep on top of them – you need to have some Key Metrics for your sales and marketing efforts – you can use something different than CAC and LTV but have something.
    2. CAC and LTV can help signify profitability – calculate LTV/CAC and compare to Total Overhead Cost/Sales and Marketing Cost – LTV/CAC must be higher to generate profits
    3. Example:
      1. Handyman wants to improve sales – hires a sales rep and increases his advertising
      2. Total sales and marketing = $100,000
      3. New clients = 100 annually
      4. CAC = $1,000
      5. Average project = $2,000 / COG = $800 / LTV = $2,000 – $800 or $1,200
      6. End of the year he makes $20,000 or $200 x 100 clients/projects
  3. Use these numbers
    1. We need Key Metrics to improve our business
    2. Use these numbers to help set your goals and trajectories
    3. Test things and see if they work
    4. If you want to track something different that is Okay – key the thing is to have a metric and track it

Key Questions:

  1. What is the value of your clients / projects?

  2. How can you improve that number?

  3. What is your CAC?

  4. How can you improve it?

Take-Action Items:

  1. Calculate your CAC and LTV

  2. Improve and track these key metrics or something similar

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