Customer Lifetime Value

Disruption is everywhere. Some of its good – think of Uber eats, shopping around for a hotel deal, news fees onto the smart phone, Netflix bringing you the latest movies into your living room. Some of it not so good: the list is getting longer and so is the anxiety level of accounting and bookkeeping professionals who struggle to keep up with technology-driven changes. These same professionals may well be locked in to monthly accounting software subscription deals which seem to release a never-ending stream of features and (sometimes questionable) benefits.
Each of these offers come with inducements; look no further than mobile phone providers and their inducements of the newest and most high-tech smartphones at free or near-free prices when you agree to sign-up for their service for two years. What is driving this endless string of time-saving, money saving services and giveaways by companies? The answer can be summed up in a single, very important metric: Customer Lifetime Value.

Lifetime value

Companies like Amazon have mastered the craft of giving away benefits to convert a customer and become a subscriber to their service (like Amazon Prime). Yet it obviously must pay Amazon to do this. It is nearly certain that Amazon makes investment decisions about spending money to acquire new Prime subscribers.
Bottom line is this: the value of a customer is how much profit you expect to make from any given customer in the future. The first element, and the most challenging one for any company or professional firm, is the life expectancy of your customer. Each of your customers will stay with your service for a different amount of time. With increasing technology-driven disruption, there will be churn of customers.

Customer lifetime value will only have real meaning to a professional when they estimate churn rate individually for each customer, based on their pricing, packaging, billing, and payment histories.

Calculation of customer life expectancy

Bookkeeping professionals are rapidly adopting subscription models for their pricing which, not only drives a more reliable revenue stream than hourly billing, but also enables the assessment of lifetime value of a customer. For example, a customer whose renewal period is annual with an estimated annual churn rate of 33 percent will have a life expectancy of 3.3 years. Clearly, how much value you think you will earn from your customer in future periods is largely dependent on monthly subscription or fixed fee applied.
For the business-minded professional, there will other questions to address. Do you expect your customer to buy an upsell, that is, an added service?

Establishing an acquisition budget

The corporate sector knows how much it can spend to acquire a new customer because it has done the metrics on assessing the lifetime value of a customer. At the firm level, the owner will want to estimate how much it costs to deliver their service. If a bookkeeping firm’s customer is on a $500/m subscription fee, they could be attributed as having a lifetime value of $19,800.
There are, unfortunately, risks over future revenue streams and, like all business decisions, it is necessary to strive to underestimate lifetime value for customers — err toward the conservative calculation.

What the lifetime value calculation does bring is the opportunity to set aside a marketing budget. How much can be spent up front to acquire a customer whose lifetime value is $20,000?