Here’s the Most Important Thing You’ll Ever Measure in Your Business

I keep saying that if you aren’t participating in our Wednesday Member Call-Ins, you’re missing one of the most valuable parts of your TaxCoach membership. But some discussions are just so valuable, they bear repeating here in the Briefs.

David Tuck, a former IRS agent and longtime member from Oregon, puts great stock in creating systems to manage and measure his business. Here’s a question he asked on yesterday’s call:

“What are the key performance indicators (KPI) that TaxCoach members need to focus on to be REALLY successful?”

I’m not sure what sort of answer he was expecting. But Keith and I both had an answer at the ready, and it was even the same answer (!). And that answer was (drumroll, please) total client value. Understand that single number first, and everything else will fall into place.

How much can you afford to spend (on staff, software, etc.) to fulfill an engagement? Gotta know total client value.

How much can you afford to spend to get a client? Gotta know total client value.

A different member on the same call asked a question that illustrates the value of knowing that number. He had contacted a local trade association about a possible seminar, and learned that they wanted a $3,500 sponsorship fee. Our member replied that he had contemplated counteroffering $50/head, with an expectation of 60 attendees. What did we think?

Tying it back to David’s question, we outlined a series of questions to ask to determine if the investment was worthwhile: 1) how many clients do you expect to get from the presentation; 2) how much will those clients be worth to your business over time; and 3) do the math. If you expect 3 new clients out of 60 attendees (which seems realistic, if not actually conservative), and you know those clients will be worth an average of $5,000 over the next three years – making the expected value of the seminar $15,000 – then why on earth would you say no?

Does walking through that process guarantee you’ll make $15,000 on the seminar? No. Does it mean you’ll make $15,000 every time you give that seminar? Of course not.

But if the math indicates you’ll average that sort of ROI over time, then do it. If you do a poor job the first seminar, you’ll probably make it up over time. If you continue doing a poor job, then revise one of your metrics (in this case, your closing ratio) and see if the investment still makes sense.

As Keith and I discussed David’s question, Keith referred a couple of times to gambling – he said that if he knows his total client value and closing ratio are high enough, he’s willing to “make that bet” and “roll the dice” on that $3,500 seminar. I had to take exception to the gambling terminology. To me, it’s an investment – and if you know your numbers, you can expect to come out ahead over time. Really, the more appropriate gambling analogy is that you’re the house – and, while a customer may walk away with a big win every so often, we know the house always wins.

(Contrary to popular opinion, casinos aren’t in the “gambling” business. They’re in the “law of large numbers” business. That’s why the house always wins, and that’s why Wall Street bankers are willing to lend them billions. You might want to file that one away in the back of your head.)

Now, not all clients are created equal. Not all target markets are created equal. So feel free to segment your clients by whatever type you like. You might find, for example, that your 1040 clients average $400/year and stay with you for eight years. But your business clients average $5,000/year and stay with you for five years. If your pastor invites you to give your congregation a presentation about charitable giving, you’re safer assuming a $3,200 prospective client value than a $25,000 windfall.

This process will help you decide how much you’re willing to spend in time as well as cash. Your time is the most valuable thing you have. It’s easy enough to measure its value when you’re fulfilling client engagements. But knowing the value of a client helps you measure the value of the time you spend prospecting and marketing, too.

So there you have it – the most important thing you’ll ever measure in your business. What’s your total client value? Understand this one number and you’ll be a long way closer to making smart marketing and practice management decisions.