There’s already a fair amount of data you’re collecting on your clients through their lifecycle. Are you using it to your practice’s advantage?
The business model is changing from a commission based structure to a fee-for-service structure. Practices are now more inclined to operate a recurring revenue business model. In this instance an ideal metric to use is Client Lifetime Value – which is frequently used by SaaS businesses. Client Lifetime Value (CLTV) is an effective way to monitor practice performance and maximise value.
If you’re using Valuiza to collect client feedback, you’ll already have access to the CLTV tool. Here we explain what CLTV is, and how it’s relevant to your practice.
CLTV is a prediction of what a client is worth to your practice. It represents the total net profit your practice will make from a given client (or group of clients) over their economic lifetime.
CLTV differs from client profitability, which is a result or lagging indicator of client behaviours. Instead it focuses on financially quantifying the impact of FUTURE client behaviours = FUTURE profitability. It also reinforces why practices need to focus on the long-term health of their client relationships.
Because CLTV represents future client profitability, it also represents the:
- Upper limit on what your practice should be willing to pay to acquire the client relationship; and
- The upper limit on the amount your practice should be willing to invest to avoid losing the client relationship.
Research and anecdotal evidence suggests that businesses rely on existing clients for 85-95% of their revenue. Other research suggests it can cost 7-8 times as much for a business to bring on a new client as it does to keep an existing one. Imagine being able to increase your marketing effectiveness by a factor of 7-8 by using CLTV as a key financial metric.
How Your Practice Can Use CLTV in Decision Making:
- Define Objectives: introducing a KPI of increasing CLTV is a more exact measure of the practice’s economic development.
- Adjust Market Strategies: identify how different target markets, budget allocations, pricing policies, sales channels and client segments compare with current strategies.
- Complement Your Client Segmentation: each segment will have a different CLTV, which can be used to define which segments are best for your practice, and whether this warrants special services for them.
- Forecast: converting client feedback results into predictions of business consequences.
- Allocate your marketing budget better: using client segmentation and CLTV, you can focus on high CLTV groups, appropriate communication channels, and specific messaging.
- Structure your customer service: invest in services that clients with the highest CLTV prefer to use, address complaints in a cost-effective manner.
- Business development: strategically allocate resources and deploy employee rewards programs.
- Increase share of wallet: identify prospective client groups and cross sell products or services to them.
- Be proactive: reactivate or reinvigorate clients whose CLTV is potentially above average.
- Practice valuation: use client segmentation and CLTV as part of the valuation needed for mergers, business acquisition and sales.
There are several metrics that feed into CLTV – here’s a summary of the prime ones.
This represents the gross revenue derived from the sale of your products/services, less the variable costs associated with the delivery of the same products/services.
Estimated Referral Rate
Your best estimate of the rate of referrals by existing clients for others to become clients of your practice.
Customer Acquisition Cost (CAC)
How much money you spend throughout the acquisition funnel to turn a prospect into a client. It’s the one-time cost of all marketing and sales activities, plus all physical infrastructure and systems required to motivate a client’s first purchase, including fully loaded labour costs. The lower the cost of acquisition, the better – you will always want your cost of acquisition to go down.
Annual Retention Cost
Sometimes referred to as Cost of Service Delivery (COSD) or Cost of Service (COS), this represents the recurring cost of all support, account management, customer service and billing activities, plus all physical infrastructure and systems required to maintain a current client, including fully loaded labour costs.
Weighted Average Cost of Capital (WACC)
If your CLTV calculation needs to account for the changing value of money, you should include WACC. This is the average of the costs of various sources of financing for your business, each of which is weighted by its respective use in the given situation.
Annual Retention Rate
This is the inverse of the Churn Rate (see below) and represents the percentage rate of clients retained over time (usually on an annual basis).
This is the percentage of your clients who do not come back to your practice. The lower the churn, the better. For example, a churn rate of 85% means 85 out of 100 clients do not come back to transact with your practice. A low CLTV generally indicates a high churn rate (singular transactions).
CLTV is one of the most important metrics you should be tracking in your practice. If you’re not already using CLTV then you should seek a tool that does the work for you (with some data inputs from your end). Valuiza is the service for you.
To view an infographic with topline benefits CLTV can have for your business CLICK HERE.