Lifetime Value of Relationships

Posted by | July 25, 2013 | Small Business | No Comments
Shaking hands

The lifetime value of a relationship with a customer is one of the most critical aspects of business. Too often do companies waste time working with clients who take up 80% of their time while giving them only 20% of our income. A classic scenario of 80/20 rule that most small to medium sized businesses forget about. Let’s dig in a little more. What exactly is lifetime value of a relationship?

For typing sake, we’re going to refer to Lifetime Value of a Relationship as LVR. LVR is the amount of revenue a company will give you over the course of a period of time (revenue/time). You have two clients who provide the same amount of revenue over the course of a year. However, one client takes up 80% of your time haggling, questioning, and being difficult to work with. Even though it is good money, should you get rid of them? The answer is a tough yes. It is hard to let go of revenue that is tangibly there however you have to remember that you still have your other clients who value your service, don’t haggle, and take up only 20% of your time. What would happen if you took that extra 80% of your time to land another 60% of business? You would literally get 3x or more the amount of revenue while still having 20% of free time to offer even a better product.

The LVR can also apply to the length of a relationship. The longer a customer stays with you and the tighter the relationship, the more valuable the client becomes. The reason for this is that they will provide consistent income for years to come with little to no effort to sell as long as results are there. Creating these relationships do take time however they provide great benefits for long periods of time.

A good example we have is a company that we used to work for in the past. They had a client that needed work done and we had the type of work paired with quality that they wanted. We went on a trial run and killed it for them. Over the course of the year, this one client did the equivalent of landing 62 clients at a standard level which was the primary source of income. This one client was essentially valued at 62x that of a normal client just on income alone. Factor in the fact that they took 1/2 or less the amount of time to design, develop, and manage and you might as well double the value factor. If that company spent the same amount of time or marketing money on landing the same type of business (or even half of that value), they would have reaped profits beyond belief.

With Lifetime Values of Relationships, constantly cross reference revenue against time as a client. Then, be sure to realize when a client is a dream to work with or being a pain in the ass. Finding the right balance between the two is a dream that everyone should strive for.

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