Client Lifetime Value: It's Not Just about the Revenue

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Advisors know that it is increasingly difficult to differentiate themselves in the marketplace and maximize their resources. Balancing your love for what you do with what clients value most, while maintaining efficient and effective service models is grueling. Financial advisors want to make sure that every client is getting maximum value in the relationship, and growth for growth’s sake is not a healthy strategy. At the same time, like parents, advisors love all their clients equally. All these factors make understanding your client lifetime value (CLV) of crucial importance.

But how does one do that? How can you tell which prospects you should focus most on attracting and retaining and which ones are going to cost you more to service than the revenue they will bring into your firm?

Knowing your CLV is essential, and it can guide the decisions you make in the course of your career. CLV is a relatively new metric, but it is quickly gaining popularity among marketing researchers as a more reliable way to measure and evaluate the true value of a client relationship.

What is CLV?

CLV is the total worth of a client to the business, considering all aspects of the relationship between the firm and the client. It accounts for everything a business knows about a client and then calculates the average amount of revenue and profit the client will contribute throughout the lifetime of the relationship.

Though different marketing analysts may use slightly differing formulas of varying complexity, the following calculation will give you a quick, concise way to evaluate CLV (what marketers refer to as “historic CLV”):

CLV = Client revenue per year X average years of retention – total cost of acquiring and serving the client (cost of doing business)