How much is a new client worth to you and how much can you pay to attain that customer? I’ve spent a lot of time in the sales and marketing space and I have found that one thing that has been consistently difficult for me to analyze, and especially for business owners that I’ve worked with analyze, is the value of a customer and their business, and the price they’re willing to pay to get that customer. So here are some different ideas that I’d like to explore. One question about what is the value of a customer is are we talking about the lifetime value of the customer or the value of that customer in a shorter period of time, like one year?
I’ve always tended to want to look at the lifetime value of a customer because in many cases you continue to bring in revenue past that one year mark and it seems only fair and relevant that you would consider the lifetime value of that customer. For instance, a property management company will keep a customer for say, up to five years, and continue to bring in revenue that whole time. Whereas the one year value of a client to that business may be $2,000. The lifetime value of that customer is often up to $10,000. So we measuring what we can pay to get that customer at the one year mark or the lifetime value of that client, I think the lifetime value is the way to go.
Another question that then comes up is what are you willing to pay for that client? Is it five%, 10%, 20% of the lifetime value of that client, or is it percentage of the one year value?
And then another question is are we looking at gross revenue, gross profit or net profit?
For me, I think that it’s important to look at profit, but net profit is often not realistic because it’s such a small fraction of the gross profit of a customer. So I like to look at the gross profit of the customer and consider that I’m willing to pay up to 20% of the gross profit of that customer or client.
A good way to determine the value of a typical client in your business is to look at the last year of revenue and divide it by the amount of clients you had. So if you brought in a million dollars last year and you had in 100 clients, then the value in that year of a client is $10,000. And then take a look back at your books and determine how long those clients stay with you. Is it one year, two years, three years.
This is often a more manual process, but totally required and it’s totally helpful.
If you were to go onto, say, Shark Tank and want to raise capital for your business, or determine the value of your business, if you want to sell it, you will definitely need to know what the lifetime value of that client is and ultimately what you can pay to get that client in the first place.
What do you think? Let me know in the comments below.