The lifetime value of a customer is one of the most important numbers every business owner must know and understand. You calculate it by taking the average price that your customers pay for your main products or services and multiplying that average by the number of years they will remain a customer. Then add the value of the average number of referrals they will send you during their time as a customer.
Calculating this number often changes how much you would consider spending with each customer and how you and your staff treat them. In my case, the average personal tax return customer is charged $250. If I only look at this amount, how much should I spend on advertising and how much time should I spend with each return?
But let’s calculate the lifetime value of that new tax return customer. Assume that this new customer will stay an average of seven years and refer two other tax return clients during that time. The lifetime value of that customer is $5,250, calculated as follows:
$250 x 7 = $1,750
Two referrals @ $1,750 = $3,500
For a total of $5,250
Now let’s look at how upselling and cross-selling can massively increase this customer’s value. Upselling is adding related products or services to the original purchase. Cross-selling is getting this customer to buy a product or service totally unrelated to the original purchase.
Your current customers are the easiest sales for you to make. They already know you, like you, and trust you. So why do most businesses spend all their money and effort trying to sell to new customers who don’t know them, like them, and trust them? It’s because they do not understand how much upselling and cross-selling can quickly increase their profits.
By training yourself and your staff to offer other services and products to customers, you can easily boost profits. By addressing your customer’s needs when they buy one product, you may learn of other products that will further help them. This will instantly increase sales and profits and improve your relationship with your customers.
Let’s look at what happens to the lifetime value of my tax return client if I use upselling and cross-selling:
Tax return preparation ($250 x 7 years) $1,750
Upsell year-end tax planning ($750/yr x 7 years) $5,250
One-time QuickBooks training for their business $1,250
Annual QuickBooks support ($600/yr x 7 years) $4,200
For a total of $12,450
Two referrals with same services $24,900
For a total lifetime value of $37,350
Upselling and cross-selling increases the potential lifetime value of that one customer from $5,250 ($1,750 x 3 customers) to an amazing $37,350!
Knowing this, how much time and money do you think I should spend to get this client and to keep them happy? This is why I spend so much time with a new tax return client. This is why we mail monthly newsletters. This is why I email them tax tips and business growth advice multiple times each week.
How would knowing the lifetime value of your customers change the way you and your staff treat your customers? More importantly—how does knowing this number change how much you are willing to spend to get a new customer?
- Using the formula in this article, calculate the lifetime value of your customers.
- Review what you are spending to get a new customer. Adjust as needed based on this information.
- Be sure to add the steps that you will use to upsell and cross-sell your customers.
- Review your client retention process. Should it be changed now based on this number?