This concept is one of the not-so-secret secrets to knowing how much you can afford to spend on gaining new clients for your salon.

The (not so) secret to getting big returns from your marketing budget

For a metric this important, it’s surprising that many salon owners don’t use it in determining their marketing budget. In fact it is little known, let alone widely used in salons, but today I’m here to reveal it’s importance to you and show you how it works.

Here’s what I’m talking about: the Lifetime Value of a Client, or LTV. The LTV is the total income produced by an average client of your salon over their lifetime coming to you. And once you know that figure, you’re then in a strong position to decide on how much you will spend to get new clients.

As an example, let’s say that the first time your new client comes in she spends $145 ($65 haircut and $80 colour.) She comes back in every 6 weeks for a haircut, and 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 she is potentially worth $1150.00 to your salon. Now let’s say she stays a client for 4 years, 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 $55,000. 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.

This post was written by Larissa Macleman from Timely smart booking software and Malcom Gibbons from Shock Consult. Malcom helps salons owners run better businesses by offering them consultation and coaching services. If you have any questions or need some salon building advice, email Malcom here. He’d love to talk with you.