The lifetime value of your clients

Yesterday, we discussed the cost of acquiring a new client. The piece that makes it worthwhile to invest $200, $500, or even $1,200 to acquire a new client is the fact that this new client is going to spend significantly more than that with you over the years.

The amount that a client spends with you over the course of their business relationship with you is the Lifetime Customer Value (LCV) to you. LCV is a very important number for you to know for all of your clients. Let’s look at an LCV example.

Let’s say we send an 8-week sequence of jumbo, full color postcards to a group of 300 tax liens at a cost of $2,500. If we get a 2% response rate for a total of 6 responses over the course of the campaign, and 2 of those 6 purchase our services, we’re sitting pretty in terms of return on investment. Each of these clients cost $1,250 to acquire, which is definitely on the high end. Let’s track the LCV of these two new clients.

Client “A” needs several years of tax returns prepared, and an Installment Agreements needs negotiated. If the initial fee for this work is $2,500, then you’re already ahead of what it cost to acquire this client. In addition, this client requires ongoing annual tax return preparation at $500 per year, which is $10,000 over the course of two decades. So, the LCV of this client is $12,500, which is ten times what it cost to acquire the client. This is an excellent return on investment.

Client “B” is all caught up on their tax preparation, and there tax problem is fairly easily resolved. So the initial fee they pay you is only $1,000. Many practitioners would balk at this, since it cost $1,250 to acquire the client. However, Client “B” happens to be an active real estate investor, and purchases, on average, two rental properties per year. Every time they purchase a new rental, they buy an hour of your time to review the numbers on the transaction and offer your advice. In addition, they have a complicated annual 1040 with multiple schedule E’s. Their 1040 next year is easily going to be a $1,000 tax return, plus $500 per year in advisement, if not more. Over the course of the next twenty years, the LCV of this client is at least $30,000, or 24 times what it cost to acquire this client. That ROI is incredible.

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Understanding the LCV of your client relationships puts into perspective the cost of client acquisition. I will spend $1,250 all day, every day, in order to get back $10,000 or $30,000 for doing so. Heck, even if that $1,250 only returns $3,650 in tax resolution fees only, then that is still a “win”.

What if your practice is exclusively personal income tax return preparation? While I would obviously suggest you expand the services you can offer to your clients, you can still make this work. If it costs you $200 to acquire a new tax prep client, and the average client spends $200 per year with you, then your $200 client acquisition cost still returns $2,000 over the course of a decade. This is still a good ROI for a service business.

Calculate your own LCV for your practice and your service offerings, then compare that to your client acquisition cost. I’m willing to bet that you will discover you have more room to increase your marketing budget than you think you do.