May 16, 2013
What’s a Customer Worth to You?
2 min read
A lot right? OK but how much? As I hope you will see by the end of this post it’s really useful information to know.
Let’s start with what’s your average commission per account? Don’t know? It’s simple to figure out. Take your total commissions (do PL and CL separately of course) and divide by the number of customers.
Now, what’s your retention rate? This one is tougher. If you have an agency automation system it’s pretty straightforward. If you don’t maybe you should think about it. OAA has pretty incredible discounts on this amazingly useful item. Contact our Agency Development Coordinator for more info.
OK, so somehow we got retention. Let’s say it’s industry average of 80%. Let’s say you’re a PL agency and $450 is the average commission. What’s a customer worth to you?
In our example we lose 20% of our existing customers each year. So, the average customer lasts 5 years, right? Not exactly because that 20% compounds. The answer from the excellent calculator at www.genroe.infusionsoft.com is $1210.
Knowing this number is useful for a number of reasons. In the first place it begins to help us understand how much we can afford to invest in marketing and sales activities to get a new one. How much are you willing to invest to get another $1,210 in revenue over 5 years?
Alternately, if we know our profit margin we can express lifetime value in those terms. In this example, if our profit margin is 20% a customer has a lifetime value to us of $450. Now, how much can we invest to get one?
Also, if we know how much an average customer is worth we may want to think about whether it’s worth it to invest more in that customer to increase our retention rate. For example, what is a customer worth if your retention rate rose to 90%?
If our profit per customer is $90 ($450 commission x 20% profit margin) and our retention rate is 80% the LIFETIME PROFIT VALUE of a customer is $162. If we increase retention to 90% the lifetime profit value increases to $242. That 10% increase in retention translates to a whopping 49% increase in the average lifetime profit value of a customer.
Is that enough to make you want to focus on retention a little harder?