Have you heard the term lifetime value or seen LTV used when talking about business metrics and KPIs? It’s a fundamental metric to understanding the health of your business. It’s going to help you determine what marketing efforts are worth your time and money, as well as if and when you’ve recouped your money on an investment or marketing tactic. We’re going to be doing some math here, but don’t freak out, I’ll break it down for you and keep this simple so you can apply it to your own numbers. Let’s dive in…
So, what is client value exactly? Well, it’s exactly what it sounds like…the value of a client…the revenue your business can expect from each client you see. So to calculate this, you’ll find your average client spend and multiply that by the average number of visits during that same time period. We can keep this very simple overall, or we can break it down to be a bit more detailed and tell us much more about our clients and our businesses. Let’s dig in here…
Let’s say your revenue is $52,000 for the year.
And during that year, you saw a total of 1,040 appointments (not different clients, just separate appointments). That’s an average of 20 clients per week, by the way.
That’s an average spend of $50 (52,000 / 1,040)
Now how many of those clients were repeats, and how many visits did they come for that year?
This is where you’ll need to sit down and really look over your books! Just for an easy example, let’s say it breaks down like this…
25% were weekly = 260 clients at 52 visits
25% were bi-weekly = 260 clients at 26 visits
25% were monthly = 260 clients at 12 visits
25% were single visit = 260 clients at 1 visit
So the lifetime value of your weekly clients for that year would be $50 x 52 = $2,600
LTV of your bi-weekly clients = $50 x 26 = $1,300
LTV of your monthly clients = $50 x 12 = $600
LTV of your single visit clients = $50 x 1 = $50
Now, we can calculate some averages here.
If we want to average out our client visits per year, we calculate
52 + 26 + 12 + 1 = 91
91 / 4 = 22.75
So that means your average client comes in 22.75 times per year
Then we average out your client spend per year…
22.75 visits x $50 per visit = $1,137.50
So your average client spend for the year, or your yearly client value, is $1,137.50.
Now, how many years at that rate are clients coming? If you’ve been in business for a while, how long are your average clients staying around? 1 year? 2-3 years? 5 years or more?
If your averaging a 3 year keep for your clients, that’s a total of $3,412.50 as a lifetime value for each client.
This is a great metric to know to understand when you’re recouping the money you’ve invested into getting those clients. I also think it’s important to focus in on your breakdown of who is coming to you more often. Just like in any business, client loyalty is crucial. Determine the segment of your clientele that is coming more often, and therefore has the highest client value. This will determine where and how you market. If you know it’s those high-end events that deliver the highest value clients, that’s where you need to be; even if it costs you more upfront, you have to keep in mind that lifetime value of those clients above just the initial costs to get them. Getting one client with a high lifetime value is far better than getting several clients who only come in once or twice.
Start digging deep into your client numbers and get serious about knowing what’s going on in your business, and how you need to move forward. These kinds of metrics, and whether you know them and can tweak them as you want, that’s what makes the difference in those who succeed and those who fail.
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