Lifetime Value
There are many costs in business. They range from unavoidable through to unnecessary. When it comes to the cost of sales, for example, costs include salaries, travel expenses, samples, merchandising to name a few. When calculating cost the temptation can be to only look at immediate, measurable and directly related costs. One of the costs that many businesses fail to calculate is the cost of acquiring new talent and new clients. The charge for recruiting a top quality salesperson can be between 3 to 4 months of their annual salary. A similar expense can be incurred in acquiring a new “A” client when viewed from their contribution to turnover.
A great way to give perspective is to look beyond the immediate upfront costs. Looking at their (potential) lifetime contribution helps a business to value their staff and clients. Lifetime value is calculated in a variety of ways. When looking at internal team members we can look at the cost of recruitment, onboarding and retention (which obviously includes things like salary, Kiwisaver, ACC, uniform, training, licences, vehicles, equipment and tools etc) and then compare what additional revenue and services the business is able to earn and to offer because that person is part of the team. Sometimes businesses calculate that each trained and contributing team member should allow them to increase their turnover by $x amount, or grow market share by ‘y’ amount e.g. One gold standard aims for $1 million in turnover for each person employed.
In a similar way you can calculate the cost of acquiring a new client. By calculating the marketing expenses required to secure a client (this includes rep visits, meetings, presentations done, samples given), the onboarding of that client and the cost of key account management verses how much that client will contribute in sales and or turnover over their lifetime with the business. This is not to say that the business owns the client. Rather a focus on building loyalty and being easy and effective to deal with retains customers beyond the initial purchase.
When a client is set up to deal with you, knows you, your team and product and service offering there is an increase in trust. This enables a business to enhance the relationship by exploring all the ways they can serve their client. Often this leads to cross selling and up selling opportunities. Additionally as trust grows so does the ability to partner with key clients in joint R&D projects. Jointly co-creating innovative solutions to meet the challenges and opportunities in your clients industry can open new markets and significantly fuel growth for both companies.
Is there an opportunity in your business to review your client base and consider the lifetime value of your clients? How might you structure your forward strategy differently? Might you treat clients differently if you review them in this way?
