What is lifetime value? It is a summary of the incremental future profit expected from each name on your database. The British Institute of Direct Marketing said this, “It is the net present value of all future contributions to profit and overhead expected from a customer.”
Here is one model for gauging a client’s lifetime value.
Today, you clean Mrs. Jones’ carpet and receive $175 for your service. What if Mrs. Jones has you clean her carpet twice per year? That comes to $350 per year. But it does not’t stop there. Mrs. Jones remains happy with you, so she has you clean her carpet for the next 10 years. Assuming that you never raise your price, you will make $3500 in 10 years from Mrs. Jones.
Now, let us consider how this thing can “mushroom”. This is where it gets interesting. Let us assume that you have a referral generating program in place. Furthermore, let us assume that Mrs. Jones refers you to 2 more customers (like herself) per year.
Year #1: $350 from Mrs. Jones plus $700 from her referrals = $1050.
Year #2: Mrs. Jones and her 2 friends, each refer to you, 2 more customers like themselves. You will receive $1,050 from the Mrs. Jones and her friends. You will receive $2,100 from their referrals = $3,150.
Year #3: You now have 9 customers who each refer you 2 new customers. You will receive $3,150 from the 6 customers, plus $6,300 from their 18 referrals = $9,450.
Year #4: You now have 27 customers who each refer you 2 more customers. You will receive $9,450 from the 27 customers, plus $18,900 from their 54 referrals = $28,350.
Year #5: You now have 81 customers who each refer you 2 more customers. You will receive $28,350 from the 81 customers, plus $25,200 from their 162 referrals = $56,700.
Year #6: You now have 243 customers who each refer you 2 more customers. You will receive $85,050 from the 243 customers, plus $170,100 from their 162 referrals = $255,150.
Year #7: You now have 729 customers who each refer you 2 more customers. You will receive $255,150 from the 729 customers, plus $510,300 from their 1458 referrals = $765,540.
Year #8: You now have 2,187 customers who each refer you 2 more customers. You
will receive $765,540 from the 2,187 customers, plus $1,530,900 from their 4374
referrals = $2,296,350.
Year #9: You now have 6,561 customers who each refer you 2 more customers. You
will receive $2,296,350 from the 6,561 customers, plus $4,592,700 from their 13,122
referrals = $6,889,050.
Year #10: You now have 19,683 customers who each refer 2 more customers. You will
receive $6,889,050 from the 19,683 customers, plus $13,778,100 from their 39,366
referrals = $20,667,150.
That’s over twenty million dollars in sales for year ten! And, it all began with just one happy customer. One happy customer who referred two of her friends.
In just one decade of time, your contact with Mrs. Jones will have grossed you a little over 31 million dollars. It isn’t unreasonable to expect a client to generate two referrals for you per year. And remember that these figures are based on a modest job average of $175.
The exponential growth outlined above is simply a model that demonstrates the vast
potential that every client holds for your company. With such a model, you can quickly appreciate the lifetime value of each of your clients. You can also see where the saying “the customer is always right” comes from!
So, nurture your database. Take care of Mrs. Jones and work those referrals!