How much is a client worth?
Is that a question you can readily answer? If you are like most business leaders, the answer is an emphatic no.
Despite the wealth of detailed financial reports and transaction data showing profit and loss from various product lines, businesses fail to evaluate the most important financial information of all—what is the Lifetime Value or Equity of a client relationship?
Customer Equity modeling enables business leaders to measure the value of client relationships at every stage of the lifecycle—from Acquisition, through early repeat purchases, to Loyal Client, to Defector. Doing so enables you to segment and profile prospects and clients more precisely while providing an accurate picture of which relationships are profitable, which ones have the potential to be profitable, and which ones are unprofitable and should be allowed to defect or go the way of natural attrition.
While the idea of evaluating client relationships in terms of value seems rudimentary, very few businesses actually engage in the activity. And costly mistakes are made as a result.
Take for instance the real life example of a software development firm selling an Internet-based business management solution for a very specific vertical market. The firm’s product was developed for businesses as small as one user up to large enterprise operations of 50 or more users, or seats. The go-to-market strategy was based on a pay-per-seat pricing model.
As the company acquired customers through beta test and post-launch marketing efforts senior management believed the greatest value would be derived from the small business segment comprised of 1 to 14 users because they lacked the technological sophistication required by modern businesses. We identified three additional segments in preparing the marketing plan—15 to 30 seats, 31 to 50 seats, and 51 plus based on the existing install base.
Management’s plan called for hiring, training, and supervising a large inside sales force responsible for making contact with businesses with 1 to 14 users, scheduling an online product demonstration, closing the sale, and providing installation and service support via telephone and Internet connection.
Prior to investing the considerable funds necessary to make the strategy happen, MindMeld developed a Client Equity Model based on revenues from existing clients and projections of recurring revenues over a five-year period, which at the time represented the average lifecycle of SaaS technologies.
The resulting Client Equity model indicated that the 1-14 user segment was actually the least profitable of all segments. The cohort also showed the lowest potential for profitability for a number of reasons we were able to identify and label as common causes, which meant the issues were outside the control of the software seller.
In actuality, the 51 plus segment offered the highest Lifetime Client Value along with the lowest cost of sales and marketing, which meant the cost of acquiring a customer in this segment was far lower than the other groups. As a result, management avoided making a costly investment in developing an inside sales force and directed marketing funds where they would produce the greatest positive impact on the long-term viability of the organization.
So the question still stands—do you know how much a client relationship is worth? If not, we would welcome an opportunity to help you figure it out. After all, not knowing is probably costing you a lot of money.
MindMeld develops Client Equity Models that measure the value of client relationships at every stage of the relationship lifecycle, providing valuable insight for making critical decisions that drive business growth. To learn more contact Doug Knuth at doug.knuth@mindmeldmarketing.com.