How to calculate the lifetime value of a client

How to calculate the lifetime value of a client

How to Calculate the Lifetime Value of a Client

As a small business owner, it's important to know how to calculate the lifetime value of a client. Why? Because this number can help you make key decisions about where to allocate your resources. If you know that the lifetime value of a client is high, then you'll be more likely to invest in acquiring new clients, for example. Conversely, if you know that the lifetime value of a client is low, then you might decide to focus your efforts on retaining existing clients instead.

But how do you actually calculate the lifetime value of a client? 


There are a few different methods, but the most common one is to take the total revenue that a client generates and subtract the total costs associated with acquiring and servicing that client. This will give you your net profit margin. You can then use this number to estimate the number of years that a typical client will remain with your company. From there, you can multiply the net profit margin by the number of years to get the lifetime value of a client.

Let's say, for example, that you own a small coaching business. The average client generates £5,000 in revenue per year and costs £500 to acquire and service. That gives you a net profit margin of £4,500 per year. If the average client remains with your business for 10 years, then the lifetime value of a client would be £45,000.

This is just one method for calculating the lifetime value of a client.

There are other ways to do it as well, so if this method doesn't make sense for your business or you're not getting the results you want, then feel free to explore other options.

The important thing is that you have some way of estimating the lifetime value of a client so that you can make informed decisions about your marketing and sales strategies.
 
The lifetime value of a client is an important metric for small business owners to track. By knowing how much revenue an average client generates over the course of their relationship with your company, you can make informed decisions about where to allocate your resources.

There are a few different methods for calculating the lifetime value of a client, but the most common one is to take the total revenue generated and subtract the total costs associated with acquiring and servicing that client. Keep track of this metric and use it to guide your marketing and sales strategy—it could make all the difference for your bottom line!

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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