So exactly how much is a new client worth?

[frankturner]

Has anyone done the math to figure out the value of a new customer?

If so, would you mind sharing what that number was?


(I’m doing some industry research for my business plan)
I think you need to calculate:
- your repeat customer percentage
- your average profit made per customer
- Customer referrals
- ?

 

[gikstar]

Sorry, don't have an answer for you, but also consider:

Business - breakdown by # of servers and employee workstations

Types of Businesses - some are more needy than others

Managed Contracts - can at times bring in 10K a month per company but can require 1-2 full time dedicated employees

Home Offices

Home Clients

 

[frankturner]

Great stuff! thank you

 

[nesrinamb]

Managed Contracts - can at times bring in 10K a month per company but can require 1-2 full time dedicated employees

Excellent thing to point out.

The link is the calculator you are probably looking for
http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html


(Business stuff used a lot in corporate finance and marketing, kinda boring if you dont like business.)
Churn rate, the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. Most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship.
Discount rate, the cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
Contribution margin.
Retention cost (extremely important), the amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.
Period, the unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 3–7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.

 

[jdpetrov]

From my handful of college business classes, the cost to acquire a new customer is called "Customer Acquisition Cost". Let's say you spend $1,000 advertising to get 20 customers, your CAC would be $50. So long as you get at least $50 out of each customer, you will break even on your advertising.

What you need to do is take a look at how much each new customers brings you in sales. Do a CONSERVATIVE average, NOT your best case average! Then give yourself profit of this average, and the rest can be your CAC.

So for me, an average customer will be at least 1 hour of work (minimum 1 hr charge) at $45. I give myself 50% of this as profit, so I put my CAC at $22.50.

For advertising, you have two metrics...RESPONSE RATE and CONVERSION RATE. A response is when someone emails you, visits your website, or calls you because of your ad. THEY ARE NOT A CUSTOMER YET! You only get to count them as a customer when they CONVERT and actually utilize your services.

For example, you spend $1,000 on advertising. R-Rates will vary by ad media type, but usually 3% is a good conservative number. Now let's say 10% of responses convert to a customer, again a conservative-ish number.

So your $1,000 gets you a big color ad in the local small-town newspaper. The paper is seen by 25,000 people. 750 people will respond to your ad, and 75 will end up becoming a customer. Your CAC is $1,000/75 or $13.33. You end up earning $45 per customer $3,375 in total. A great result for your campaign, which means that the rate percentages might still be too "best-case".


Then there's retention rates, but that's for another time.

The main thing here is that if you do homework before advertising, you can really gauge if you have any hope of making money off the effort. Industry-average response/conversion rates can be obtained through some internet searching, and then you run the numbers from there.

My advice is to always use numbers that are borderline "worst case". Sometimes a response rate can go as low as 0.001%, or lower, and a conversion rate can be the same. There's a lot of research into ad design to improve those rates, but again internet searching is your best friend.

Good luck!

 

[TimJacobs]

<SNIP>

The main thing here is that if you do homework before advertising, you can really gauge if you have any hope of making money off the effort. Industry-average response/conversion rates can be obtained through some internet searching, and then you run the numbers from there.
<SNIP>
Good luck!

Ok, but the question is, how much time do you spend researching?
So lets say you spend 10 hours researching at $45/h that is $450 so in reality you aren't spending $1000 on advertising you are spending $1450 on Advertising.
My biggest problem is doing the research. I don't know where to start, and what is true and not true.

 

[wimwauters]

Ok, but the question is, how much time do you spend researching?
So lets say you spend 10 hours researching at $45/h that is $450 so in reality you aren't spending $1000 on advertising you are spending $1450 on Advertising.
My biggest problem is doing the research. I don't know where to start, and what is true and not true.

Advertising is about testing and measuring. Each location and demographic reacts differently to each form of advertising.

The problem with business analysis (aka statistics) is that past experience does not have anything to do with new customers. It also does not account for the constant changes in society and technology.

So go ahead and try stuff (but always start with a small budget), and then improve on it, based on the measured result.

Also, your existing customers are a goldmine: talk to them, ask them questions

 

[16k_zx81]

So go ahead and try stuff (but always start with a small budget), and then improve on it, based on the measured result.

Also, your existing customers are a goldmine: talk to them, ask them questions

What he said +1

Particularly the bit about running small, low cost trials, and measuring effectiveness.

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