What Are Your Customers Worth?

What Are Your Customers Worth?
Establishing a Strategy for Managing and Leveraging Client Relationships

Like most businesses, your firm probably takes a periodic look at the profitability of your client base. Perhaps you segment your client base according to product area, or by total client assets, or by some other measure.

Most financial institutions, according to a study by Ernst & Young, organize their clients by:

  1. Products & services – 35%
  2. Profitability – 35%
  3. Other – 23%
  4. Income and total assets – 7%

What does this mean? That today, overwhelmingly, the financial services industry looks at product-related measures to quantify the value of their customer relationships.

We believe that this measurement approach undercounts the true value of customers to a firm over time. Instead, we suggest looking at your customers in two ways.

  1. Customer lifetime value, or the total value of your customer to you over their purchasing lifecycle.
  2. Purchase influence value, or the total value of the business your customer can refer or influence.

This is a very different approach to measuring customer accounts, and will result in a very different “ranking” of clients than the more typical approaches.

The upshot of this exercise is a clear roadmap for long-term resource deployment across your customer base.

Using this model, you may choose to create different types of client account designations, products, or even different levels of service, according to where your clients rank in terms of customer lifetime value and purchase influence value. You may discover that clients who are very profitable by today’s measures have little potential to grow with you over time, or that your smallest clients — in terms of current dollars — actually may hold the keys to your future.

To leverage the total value of your client base, you’ll need to measure your book of business differently, and you’ll probably want to do business with your clients in a different way as well. Those firms that link the measures of true customer value to their business practices will reap the rewards of customer lifetime value, and will take full advantage of their clients’ ability to drive more business to them over time.