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How much do you really think a good customer is worth to you?
Most financial advisers will easily (I hope!) work through the basic formula of the average fee/sale per customer multiplied by the number of transactions they have with you each year, and then multiplied by the number of years you expect to work with them (see graph below).
That is all simple enough - if you know these averages and key business metrics for your firm.
But is that the total measure of what a good customer is worth to your business?
How many referrals to other great customers could you get from a really happy customer over the expected lifetime of the relationship? What extra value can be attached to your brand, or business value, from having great advocates in your clientele?
How about a working example for a typical adviser who looks after their clients well and provides great value....
Let's assume that your client pays monitoring and service fees of $500 in fees each year (not all that much really) to you, and on average your customers require (significant) new advice every 3 years or so at about $2,400 per time. So that's another $800 p.a. on average - meaning that the average annual revenue is about $1,300 p.a. for a happy client valuing your advice.
If you provide good service and advice they will be working with you for the rest of your working life - call that another 15 years for this example.
So far this happy client that paid $2,400 in initial planning fees and provides ongoing revenue of $500 p.a. has an apparent lifetime value to your business of $19,500 - which in itself is pretty impressive.
However if that happy client refers other good clients to your business then their value to your business exponentially increases. It is not as simplistic as using the same formula above for each additional referral, because over time (if your expected business time frame remains the same) then each new client in subsequent years has a lower incremental value, and it would be wildly inaccurate to attribute every new customers own "lifetime value" to the referring client . But the acquisition cost per referral will be lower than most other forms of marketing, so that saving can in fairness be attributed to the lifetime value of the original referring client.
A typical advisory firm might spend (say) $250 in marketing for each new client it brings in each year. so using the client example from above, there is another $7,500 in "value" in that client providing the referrals.
Not bad really....that $2,400 initial client is now looking like they have a lifetime value of $27,000 to your business over the next 15 years.
But the REALLY big value is within the impact these advocate customers have on your overall business valuation. To illustrate the point let's continue with some further really simple assumptions.
If an adviser business had 500 clients, averaging $1,300 p.a in revenue (as above), it has a nice little turnover of $650,000 p.a. gross. Depending on what valuation methodology is used, and what market conditions are prevailing, that business valuation might typically be (say) $975,000. However, premium value is attached to those businesses where there is strong loyalty, constant referrals, and turnkey business operations. The valuation on such a business (in comparison to one with little referral business and strong client loyalty) could be expected to be closer to $1,600,000 - a difference of $625,000 in this example.
That can be the difference for a retiring advice firm business owner between having a great boat to play on in their good retirement, or just having a retirement.
The concept of "lifetime customer value" is not just a simple one of how much revenue they generate for your business. You should also be thinking about how much those engaged and happy customers can SAVE your business. Get it right though, and it really becomes a matter of how much more your business is worth because you have happy and engaged clients that love dealing with your firm.
That's where the real value is.
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