Do You Know the True Value of Your Clients?
Imagine you're running a marketing agency, and the average client spends $2,000 per month on your services. On average, clients stay with you for 12 months and it cost you $500 to acquire a new client through marketing efforts.
Lifetime Value (LTV) Calculation:
LTV=Monthly Spend × Months Retained
LTV = $2,000 x 12 = $24,000 (the value of your client)
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Now, let's calculate the profit margin by subtracting the Customer Acquisition Cost (CAC):
Profit Margin=LTV−CAC
Profit Margin = $24,000 - $500
Profit Margin = $23,500
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Let's illustrate the power of client retention
What happens when you lose a client ?
Costs Associated with your Client Leaving (doesn't renew):
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Future revenue lost from client's renewal: $2,000 x 12 = $24,000
Cost to acquire a new client: $500 -
Net profit from losing this client after 12 months: $0 - ($24,000 + $500) = -$24,500 (loss)
Other Potential Costs that can affect your business in the long run... Loss of Referrals | Miss potential word-of-mouth referrals. Negative Brand Impact | Tarnished image from dissatisfied clients. Missed Collaboration | Limits future partnerships and collaborations. Reduced Advocacy | Diminished brand reach without client advocates.
Now, what if you keep that client? ...
Costs Associated with your Client Staying (happy to renew):
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Total revenue from the client over 12 months: $2,000 x 12 = $24,000
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Cost to acquire a new client: $0
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Net Profit from this client: $24,000
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Upsell Revenue (assuming the client buys an additional $500/mth in services): $500x12= $6,000
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Net Profit with upsell: $30,000 in revenue.
Other Potential Impact that can affect your business in the long run... Revenue Boost | Increases monthly revenue with potential upsells. Client Satisfaction | Enhances client experience with additional valuable offerings. Customer Loyalty | Strengthens client loyalty through personalized upsells. Positive Engagement | Encourages positive interactions and engagement with clients. Brand Loyalty | Fosters brand loyalty as clients see ongoing value. Enhanced Relationship | Builds a more profound, mutually beneficial client relationship. Strategic Growth | Positions the business for strategic, sustainable growth. Market Differentiation | Sets the business apart by continuously meeting client needs.
This example was intentionally kept simple to help illustrate that by keeping your current clients happy and including an upsell, you'll see your profits grow. What's more, with no acquisition costs (since these are existing clients), and the potential for additional clients through referrals, the impact becomes even more substantial.
This is the value you are giving up when a client leaves!
Can you afford to lose them? This doesn't even consider referral clients.