Most salon owners and stylists look to cutting hard costs like inventory, staff and operational expenses when it comes to improving their bottom line. But what about your clients? We all know that you need a healthy roster of incoming clients in order to stay in business, but how much are they costing you versus how much they make you? In this article, Larissa Macleman from Timely Booking Software breaks down how to compare costs to value when it comes to how much your clients cost.
“We all want to make more money. As a business owner, you already know that to do that you have to set goals that you can work towards, but you also need to work out what your obstacles are. For example, how much can you afford to spend on getting a new customer?
To answer that question, you must look at your Lifetime Value of Client, or LTV. The LTV is a powerful figure that’s calculated by dividing the income that client brings you by the length of time you can expect to have them as a customer. Knowing that figure lets you determine how much you can spend on getting new clients.
Let’s start with an example. Rebecca, a new client, comes in to your business and spends $140 in total. She’s thrilled with your work, and decided to rebook for 6 weeks. Sure enough, Rebecca comes in for her appointment and decided to see you every 6 weeks for a haircut. She maintains her colour every second visit (12 weekly) and she buys a shampoo and conditioner every 3 months.
In the course of a single year, Rebecca is worth $1150 to your salon. That’s good! Now let’s say that Rebecca likes you so much that she stays your client for 4 years. At the end of that time period, she will have spent a minimum of $4,600 with you. If 40% of that is profit, then you stand to make $1,840 profit off that one client over the four years.
The question is then, how much will you be willing to pay to get her as a client? You could actually spend up to $1,840 and still break even but I wouldn’t suggest that! Would you invest $50 to get $1,840 back in 4 years? I bet you would, but you don’t even have to wait that long. On your first sale, you’ll make more than enough money to cover the $50 investment.
If I said to you, “Give me $50 today and in four years I’ll give you $1,840 back.” Would you view it as a good investment or a risky expense? I’d like to think you would see it as a prudent investment and that is exactly how you should look at the investment into gaining a new client – an investment in the future income and profits that that client will bring.
The challenge today for many salon owners is old thinking; let’s call it the ‘”in the good old day’s syndrome.” This is where we remember the days where it was easy to stick an ad in the paper or a leaflet in local letter boxes and we’d get a huge response. We used to have weekly sets and blowaves to keep the profits rolling along, but we don’t see how the market has changed. We know it has changed, but we haven’t adapted to it and still expect that large response – so much so that we now say marketing doesn’t work. But if you had a budget of $50 each to gain a new client, how much better do you think your marketing would be? In many cases you don’t even need to spend anywhere near that sort of amount.
Let’s look at this scenario:
You spend $1000 on a well thought-out, professionally designed letterbox drop flier and you get 500 of them printed. You deliver them yourself around your salon neighbourhood and you get 10 new clients from this. That would mean your cost to acquire a new client is $50 each. Now assuming all being equal and they all stay for the average customer lifetime of 4 years, the income from those 10 clients over their, or their LTV, would be $46,000. At a 40% profit rate, that’s $18,400 in profit, which is not a bad return for your $1,000 investment.
The lesson here is to calculate your Lifetime Value of your Clients and then work out just how much you would be willing to invest in their acquisition. Think about the referrals that could come from your new clients too. This makes them even more profitable as you haven’t had to spend anything on gaining these customers. Start calculating the lifetime value of your average client and then work on specific promotions to gain new ones. Work on strategies for increasing the average client bill too by selling them more products and services. Follow these simple guidelines, and you’ll be running a more profitable salon in no time.”
Want to learn more about Timely Booking Software? Visit their site, HERE.