By Matt Wacek
Originally Posted: November 8, 2017
Last Updated: Tuesday, September 9, 2020
Calculating the average lifetime value of your clients helps you figure out how much you can afford to spend to acquire new ones.
First things first, I could talk about this subject for hours & hours because it’s one that gets me the most excited when it comes to business of all shapes, sizes, & types.
Also, I’m not the type to get hyped up about something and say it’s the “Key To Success” or “Getting Rich Easily”. . .
BUT when a business calculates what we’re going to cover in this post, it gives the company the clarity of raw numbers it needs to know which allows them to know how much they can spend to acquire leads/clients and this is what big businesses (not just the green industry such as TruGreen or Brightview, but Target, Best Buy, etc.) primarily focus on:
This can somewhat be a technical subject for those who are new to business ownership or have never broken down their numbers in this fashion – but it’s imperative to know, so get ready & let’s dig in!
One of the most important metrics in your business is knowing how much each client you obtain is worth to your business. Once these numbers are calculated, everything else (labor, materials, equipment, office staff, etc.) can be fit into place when it comes to budgeting.
Giving you an accurate picture to grow your business in all aspects – hiring employees, investing in new equipment, and more. It all begins with knowing how much a client is worth to you.
I also can’t stress this enough that these numbers are POWERFUL because they give your company the ability to know exactly how much can be spent to acquire clients.
One of the best ways to describe how essential knowing the value of every client is to your business, is if you’ve ever seen advertisements (online and offline, generally from larger local & regional or even national companies) for services at prices far below the “going rate”.
Most green industry business owners (including me until I realized the importance of this metric) will simply balk at this & lash out by saying…
“Man! How are we supposed to compete and make a living with prices this low?! I’m done!”
The most unfortunate part of this thought process is that it’s incredibly short sighted! The biggest profits are in the higher ticket & higher margin back-end services, for example in lawn maintenance this would be having the front-end service be weekly/bi-weekly mowing and the up-sell (back-end) services such as:
The same process can be replicated when advertising to acquire landscape design/construction clients (dropping margins to obtain sales) with the ever-present goal to sign on as many of those clients into recurring maintenance packages. This practice can also be done with any first service to entice a client to sign on and then up-selling them (ie. 1 free fertilizing application if they sign on for the season with 5 total fert./weed control applications). . . the possibilities of these promotions is endless and requires testing which offers convert best (get the most clients) and the direction you want to take your company.
When a company is willing to run an ad promoting low-priced front-end at break even or potentially lose money strategically (such as free month of mowing when a client signs on for the season, or free spring clean up with signing on for mowing for the season are just some of many examples), the majority of the time they know their numbers and how long it takes for them to get an R.O.I. on their advertising and then eventually make a profit after a certain point in time because they know the average lifetime value of a client.
So many business owners don’t know these numbers and it really hinders knowing how much they can invest into advertising and worse, it prevents them from calculating how to grow strategically.
When your business calculates how much a client is worth on average along with gross/net margins, you’re then able to see how much your business can spend to acquire a client.
The company that’s spending more in advertising (for ex. beating their competition in the organic search rankings or bidding higher to pay more per click on Adwords/Facebook) is certainly well aware they may be losing money at their front-end (ex. deeply discounted weekly mowing for the first year or a landscape installation that’s 20% off, etc.) but they will make their money back & eventually become profitable from:
This puts your company in a powerful spot by purely being able to outspend and push out your competition (especially online with pay-per-click on Google Adwords & Facebook Ads) who is still complaining about your ad for a low-cost front-end service and how it’s “undercutting”.
Now, let’s figure out how to do all this. There are two main factors that must be determined right away:
Calculating how much a client is worth to your business is very simple using the Lawn Maintenance Client LTV chart:
Now that you have an idea of calculating this figure, you’ll need to do this for every client in your business (also be sure to determine the amount of time a client stays with your company).
Then once you have the total revenue generated for each client, add up your total revenue and divide that figure by the amount of clients you have which will give you the average revenue from each client lifetime value.
As shown in the example on the right, it can be kept simple by just using the overall revenue & profit figures or it can be super-detailed to calculate the average of client value for each service offered.
The important takeaway from this is that the more about your numbers that you know, the better off your business will be when it comes to investing in growth – advertising, equipment, employees, etc.
When you know this number, can you justify spending $100 to acquire a client when they generate an average of almost $1,300/year or $25 to acquire a lead if your average close rate of 25% (1 client signed out of every 4 leads), or investing even more?!
Yes, all day long!
This is how the largest companies in the world operate! Raw numbers and knowing their client acquisition costs & lifetime value.
These averages were lower priced estimates with a low profit margin, and do not include any longer term client relationships OR high margin & higher ticket landscape construction services.
This also does not include having every prospective client on an email follow up funnel/newsletter where additional sales can be acquired for mere dollars without having to start another advertising campaign.
Acquiring new clients is very important to growing a business, however it’s also equally important to increase the value of your existing clients by continually contacting them throughout the season to educate them on the array of services your company offers, whether it’s through email marketing, retargeting ad campaigns to past website visitors & email list subscribers, or simply sending announcement letters via mail or included with client invoices.
Even the best of sales processes can let extra revenue slip away – clients may not be interested in specific products/services at certain times, or their budget doesn’t allow for it quite yet, but regardless of the reason it’s imperative to dig in to the “hidden value” in your existing client-base by employing the aforementioned strategies to keep your company & its offerings in your clients’ minds.
This will also help with increasing referrals when your clients may be discussing their lawn, new outdoor space your company constructed, trees/stumps removed, irrigation system installed, etc., to their neighbors, friends, & family. This is a subject that we will go more in-depth about in another post, but having a solid referral program in place to encourage your clients to spread the word about your services is very powerful because word-of-mouth jobs/projects cost MUCH LESS than most other forms of advertising because your clients are already paying you to go out and tell everyone they know about how amazing your products/services are!
I’d say that giving them a free mowing service, fertilizing application, or a bottle of wine & a Christmas card to spread the word and help you obtain another client that didn’t require additional ad spend & had minimal competition to get the job is worth it, wouldn’t you?
This can increase the value of every single client greatly!
Here’s another big kicker – if these clients came on during the fall, for example – irrigation system winterizations (blow-outs), core aeration, or fall leaf clean ups (these services require specialized equipment that most clients see more value in paying a company to do the work vs. investing in the equipment and the time to do the work themselves), make sure these new clients are added to your database to send them spring service announcement letters next spring, as well as get them on your email list so you can get them into your long term sales funnel and retarget them more offers.
The possibilities are truly endless when an entrepreneur knows their numbers and looks at advertising from a 30,000 foot view instead of that first sale where they may be just breaking even.