How do you Value your Clients

It is quite an interesting questions, how do you value your clients. Many business owners see the value of a client as the profit made from their last purchase. Others see the value of a client as being something that cannot be quantified, which in some cases may be true. However in fact it can be quite easy to gain a rough idea of what the average value of a client is to your business.

There is to some extent a little bit of guess work involved, however this is very much so dependent on the amount of time that you want to spend getting together a few details. To get the best results it is best to work on a full year rather then a part year, but either can work. The primary number’s that you are going to need are as follows, Total Profit for the year (before expenses), Total number of invoices or sales, Total number of customers (if available, not all business track individual customers), and finally a calculator.

To makes things simple I will use a generic set of figures to demonstrate the method. Total profit will be $20,000, the Total Sales will be 200, and the Total number of customers will be 50.

Average Profit per sale

The first step is to get the average profit per sale, this is calculated by dividing the total number of invoices or sales by the total profit. For example $20,000(Profit) divided by 200 (sales) = $100 (average profit per sale)

Average Sales per Client

The second step is to get the average number of sales per client, this is calculated by dividing the total number of clients by the total number of sales or invoices. For example 200 (sales) divided by 50 (customers) = 4 (sales per customer)

Value of one customer

So finally to calculate the value of one customer for the period of one year you can multiply the average profit per sale by the sales per customer. For example $100 (average profit per sale) multiplied by 4 (sales per customer = $400 (average profit per customer)

Conclusion

The final step that can be a little more guess work then actual science is to calculate the Life time value of a customer. For example you may expect that the average customer will continue buying from you for 4 years. So the lifetime value of the customer is calculated by multiplying the Average profit per customer by the expected average years. For example $400 (average profit per customer) multiplied by 4 (years) = $1600 (lifetime value per customer)

These sort of calculations can be used to work on and get a lot of useful information for your business. Everything from calculating what you can afford to spend to acquire a new customer through to estimating your profit for the coming year. It is worth spending a little time to put a value on your customers along with some of the other information that can help to enhance your business when you know what the real value of things is.

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[…] The first consideration is how much the customer is worth to your business. Or in other words the Lifetime value of a customer. This is basically a estimation of how much any particular customer may spend over a certain period. It is something that can really be calculated over any period really, 1, 3, 5 or even more years. However while 1 or 3 years may be useful any further may not really provide any true insight, as even in 3 years many things can change. To calculate the Lifetime value of a customer you can find more details in this article. […]


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