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What is Your Firm's Lifetime Value to its Clients?

Oct 21st 2010
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This topic takes me back to the late 1980s, when I began to seriously study Total Quality Service, as it was then called by Karl Albrecht in his book, The Only Thing That Matters.

This book had an enormous influence on my thinking (it's one of my Top Ten Best Business Books), because it was TQS that led me to the study of Value Pricing.

It was an epiphany when I realized that billing by the hour not only generates lousy customer service, it's also a lousy customer experience. No one likes to be surprised by price.

Studying TQS leads you into customer loyalty economics, and one of the metrics is always "What's the lifetime value of a customer to your firm?"

The logic being that you need to sometimes ignore the math of the moment and make an investment in the relationship. This is also where the billable hour fails miserably, as pointed out brilliantly by VeraSage senior fellow Paul Kennedy in his essay on why timesheets are damaging to customer relationships and lifetime value.

But I believe there is a more important metric: What is the value of your firm to your customer?

This forces us to think about constant innovation, and offering services that can help customers through the various stages of their lives and business--from womb to tomb, so to speak.

One method to measure this is the "Value Gap." For each customer, list the total value that your firm has provided over some period of time (usually one to five years).

This isn't the price you charged; it's the value you created. Some firms get this metric from customer advisory boards, or conducting After Action Reviews with their top customers. Don't get hung up on accuracy. You're trying to guage value created, and that is always subjective.

Then answer the following question: If this customer were to purchase everything we think they need from us--estate, retirement planning, advisory services, etc.,--what would be the total value we could create for them.

Firms that have conducted this exercise have reported an increase in revenue per customer, since it forces the firm to become obsessed with value creation.

Try it, and let us know your results.


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