What are your clients REALLY worth to you?

by Tony Vidler.

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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What's in a name?

by Tony Vidler.

...that which we call a rose by any other name would smell as sweet.

Shakespeare raises an interesting line of thought with that quote:  something is called a particular name only because that is what the majority of humans agreed to call it.  A rose could just as easily have been called a "hippo" couldn't it?

What triggered this line of thought on the matter of naming things, or labeling, was an interesting little article about some research done by a firm called Cerulli in the States.  The key finding of this piece of research was:

59%of Advisors perceive themselves as Financial Planners, but only 30% truly offer planning services.

I have no idea of the size of the research group, or whether it checked beyond American borders or anything else, however my guess is that this finding would be largely accurate here too.

In essence, the research asked advisers to classify themselves and their practices on their own perception of the services they offer the market.  The researchers then reviewed those answers against what the adviser practices actually were, and the work that had actually been done with their clients.

Several interesting conclusions arose.  Most advisers seemed to offer some of the elements of financial planning, but then focused nearly all of their efforts on asset accumulation and/or wealth management work.

Also, it is strongly implied that many advisers aspire to provide in-depth or comprehensive planning services, but the majority of their retail clients are not necessarily in need of such services.

Thirdly, it highlights the ongoing confusion amongst clients AND advisers over the industry terminology and titles.

Certainly there is nothing inherently wrong or unethical about calling oneself a financial planner (for example), if one is qualified to use that label and is offering financial planning services to consumers.  That is not at issue at all.  It is irrelevant whether the consumers use the full range of such expertise or not really, if the adviser has the expertise and is offering it.

I do wonder though whether an adviser is giving them-self the best chance of capitalizing on their core value proposition in the consumer minds?  That is, in their branding are advisers linking their expertise and value to what the consumer thinks they want or need?

The essence of appropriate labeling, or naming of anything, is surely to convey an image which is immediately understandable to the target audience.  We continue to call a rose a rose simply because that is accepted, understood by the majority, and instantly conveys an image to the person we are communicating with.

In other words, it works as a form of communication.

So professional advisers might need to re-consider how they label - or brand - themselves.

Despite the many years of work that may have gone into earning the right to be called a Financial Planner (or any one of a number of other suitable professional qualifications), and how much distinction there might be within the industry in using such titles or qualifications, it may actually be largely meaningless to the target market.

It is all well and good to comprehensively explain to an audience that this pretty thing with a nice aroma is a typical example of the Rosaceae family.  It is completely accurate, clearly imparts that you have some specific knowledge of the subject, and sounds very clever.  

But do people get it?  More importantly, will they want one?


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