The lifetime value of a customer is a commonly used marketing metric that is rarely used by health clinics. It calculates the value of the likely revenue from a customer and is used to determine the return on investment for a particular form of marketing and to set limits on the maximum amount to spend per customer acquisition.

Taking the logic of lifetime value to its extreme allows some businesses to deliberately make a loss on their initial sale in order to win the lifetime business. The logic is that the profit made from all future transactions with the customer will compensate for the loss and provide a profit at some later date.

On the whole we have found that health clinics typically don’t take lifetime value of a customer into account when analyzing their marketing activity. On the face of it one might think that this degree of conservatism is prudent, but there are two problems with this:

  1. It under estimates the potential revenue that a customer will likely bring to the business. For example, you may be judging a Botox enquiry as being worth a potential €500 in revenue, but if you look at the likely revenue over the lifetime of the customer it might be worth more like €2,000. This ultimately results in the business under valuing the effect that marketing has on its business.
  2. It encourages short term thinking which leads to clinics maximising initial revenue from a customer instead of focusing on customer care and retention. If you start to look at your customers in terms of having a lifetime value you soon come to the realization that your retention rate is a critical business metric. A ten percent increase in your retention rate will have a dramatic affect on the long term profitability of your business.

Factors That Affect The Lifetime Value Of A Customer

There are five factors to take into account when calculating the lifetime value of a customer:

  1. Initial Purchase. In our experience this is typically the only figure that clinics take into consideration when valuing a customer.
  2. Likely Ongoing Annual Purchases. This should take into consideration both routine maintenance and other large scale procedures. For example, you might say that a customer will typically have check-ups worth €100 annually and one procedure worth €4,000 every ten years. This would make the likely ongoing annual purchase worth €500 (€4,000 divided by ten plus €100).
  3. Gross Profit. Some procedures are going to provide you with very little profit but others will be much better. This is one of the reasons that it is best to segment the marketing efforts of your business as much as possible.
  4. Retention Rate. This is a critical figure and represents the percentage of your customers that will still be with you in one year’s time. Remember that although customers will primarily leave you due to dissatisfaction, they will also stop coming back for other reasons: they move city or country, their money situation changes, they even die. Also, bear in mind that your retention rate is cumulative so that if you currently have 100 customers with a retention rate of 50%, then you will have 50 customers after one year and 25 customers after two years.
  5. Number of years. Typically businesses run the model over 3 or 7 years. Unless you have very high levels of retention it simply doesn’t make any sense to run it any longer than this.

Worked Example One – Dental Implants

In this example, Philip needs two implants with crowns. The initial price for these is €8,000 and routine checkups and maintenance typically results in €100 per year. Also an additional €2,000 every five years in major work is typical. This averages at €500 annually. The Dentist has a retention rate of 85% and a gross profit of 50%. Because the dentist has such a high retention rate she runs her models over 7 years.

7 Year Lifetime Customer Value

7 Year Lifetime Customer Value

In this example you can see that the value of Philip to the business reduces each year. This reduction reflects the probability of Philip not being retained by the business. The overall lifetime value of Philip is €4,807, compared to €4,000 if the clinic had only been looking at the value of the initial treatment. This difference may seem small but it could easily allow for additional marketing activities to be explored.

Worked Example Two – Botox

Linda wants Botox treatment to address some lines in her face. The initial treatment cost is €500. However, treatment is typically provided 3 times a year. Retention rates with these ongoing elective treatments are low (60%), however gross profit is high (80%). The cosmetic clinic runs their models over 3 years.

3 Year Lifetime Customer Value

3 Year Lifetime Customer Value

Even thought the model is only run over three year the lifetime value of the customer is radically different to the value of the first treatment. In this example the clinic would be well advised to do a root and branch analysis of all of their marketing activities in an effort to increase business and profitability. It would also be worthwhile to look at ways of improving rentention.

Calculating the lifetime value of your customers may well differ a little if you’re not operating a health clinic. Tell us your experiences with measuring and acting on on customer retention in the comments below.