In Philip K Dick’s story “A Little Something for Us Tempunauts”, three men travel to the future to see how the world is like then. On the re-entry to their time, however, they fall into a time loop and end up having to relive the same situation over and over again.
As much as I wouldn’t like the latter to happen to me, I often wish I could glance into the future.
But no, I am not really interested if we’re going to have electronic chips embedded into our brains or have androids living among us.
What I care about is my own future.
- Where my business is going to be in, say, a year or two?
- Will I go through some awful feast or famine time in the next couple of months?
- What financial ordeal should I prepare my business for?
(In case you wonder, yes, I do ponder about some personal things too but don’t feel I need to include them on this list).
I am sure you think about similar things too. After all, who wouldn’t like to predict the state of their business? Taking a good look at your customers is a great way to start the process.
Here’s why.
- Not all of your customers are responsible for your income. In fact, approximately 80% of your money comes from only 20% of your customers.
- Moreover, retaining customers is 5 times cheaper than winning new ones.
- Lastly, your best business comes from referrals.
What does this mean?
Knowing your customers worth and the amount of sales you can expect from them each year can give you a glance into the future state of your business
Finding out how much your customers are worth can help you:
1. Keep track of how many sales you still need to stay afloat
I am sure you have a financial goal you want to reach each year. Knowing an estimated annual sales value of your customers will help you establish how many more sales you need to come close to that figure.
2. Establish which clients you want to invest in retaining
Retaining and building strong business relationships consumes a lot of time and resources. Those occasional lunches or small tokens of appreciation do add up. At the same time, not all your clients are worth investing in. Knowing the value of your customers helps you single out those you should really be building relationships with.
3. Estimate how much repeat business you can expect from a customer
There is no new business like repeat business. And knowing how much of it you can expect from each customer can also help you point which ones are worth investing into retaining.
Here’s a quick way to determine the worth of your customers
Begin by collecting this information about each customer:
- What is your average sale a month from a customer: Firstly, find out what is the average value of a single sale from the customer. If you hired them on a monthly retainer, it will be the monthly price they pay. If they send you work on a once off basis with them, add all transactions with them to date and divide that by the number of those transactions.
- How many times a year they buy from you: Next, check how many times they actually engaged your company. If it’s a retainer, how many months they worked with you so far. In case of once off, how many individual orders did you get from them so far.
- How many years do you think they will be buying from you: Lastly, what’s their average retention time. It could be tricky to establish in SEO, where many clients work on an ongoing contracts basis. In that case, use the length of the contract to predict that. With once offs, i.e. building links on behalf of a larger agency, estimate this on the length of time they have been using your services so far. It might be tricky but with some clever deduction you can come up with the figure.
Import your data into this simple formula (you can easily create an Excel spreadsheet which will calculate the rest for you):
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
For example, let’s say that your customer pays you $300 for a monthly retainer and the average business relationship lasts 2 years. The formula then would be:
Annual value: $300 x 12 months (monthly retainer, price per single month) = $3,600
Lifetime value: $300 x 12 months (monthly retainer) x 2 years = $7,200
To use a non-retainer example, let’s say you offer content marketing services. A customer buys 3 articles from you a month and average price for article is $150. Their gross annual spend with you then is $5,400. If you know that the average lifespan of a business relationship is again, 2 years, their total lifetime value is $10,800.
One More Variable – The Referral Power
There is, however, one other factor you should take into consideration – the customers referral power.
Customers who see results from SEO are likely to tell their business colleagues about it. Therefore, their power to bring you more business should also be considered when establishing their worth.
To do so, add two more variables to the formula:
- How many people per year does that customer refer you to: Depending on how long you’ve worked together, you may have to guess this one. Usually the number is between 3 and 10.
- What percentage of these people become customers? You may have to check your data on this. On average, it would be about 20%-50%
In an example of the content marketing client above, their annual worth for your business was $5,400. But let’s say they refer you to 5 people each year and two of those people become customers. This new business worth combined is $10,800 and thus your clients annual worth for your business increases to $16,200.
Bringing It All Together
The power of this exercise lies in the information it can offer you.
- Adding the annual value of every customer will give you the estimated sales worth of your business for the year. Make sure that you only include customers who still work with you. A client who hasn’t sent you any work for a year shouldn’t really be considered an active one.
- Subtract your sales figures to date from it: This will give you an estimate of how many sales you could potentially expect from customers. If the figure is equal or higher than your annual goal, you don’t have to engage in aggressive sales strategy. But if the figure is lower, you will know that you need to get your sales act together.
- Look at each client separately too: Their annual worth combined with referral power will tell you which ones you should be focusing on more, building stronger business relationships to retain their business.
Just remember, these are only financial predictions conducted to give a glimpse into the state of your business. None of these figures are final though. Clients move on, conflicts happen or simply you push the goal post further. Therefore, you should never stop selling.
