You have just spent the last 6 months trying to land that million dollar account and now the prospect (or current customer) is making demands for a mere 5% (of your margin) concession.  Wow, just 5% to get a Million Dollar Customer!  Is it worth it or not?  Just what is this deal and this customer worth to you?  Whether the customer is worth10 Dollars or 10 Million Dollars, you need to know how much a customer is worth to you in order to determine the value of their business.  So how do you figure it out?

There is a scientific method for determining this CLV.  Being sales people, we don't do scientific methods normally.  Since you still have to know, here is an easier way to figure it out:

• Annual Revenue The amount of revenue collected from a customer in the time period.  Again, for easy math - $1mil
• Profit Margin What is the average profit margin on their deals? Varies, but let's say 25% - $250k/Year
• Acquisition/Retention Cost How much does it cost you to get a customer? Time, travel, staff resources, etc.  This varies by industry and product, but try assume it costs at least 20% of your annual GP to get or keep the client - 20%
• Retention Rate  Enterprise accounts tend to re-buy from the same vendors, but there is turnover every year - 80%
• Time period Customer lifetime varies, but assuming a 20% annual account loss: 5 years is average.  5

So now our formula is: ((A * P) - C) * T * R  (For the less math inclined: $200k * 5 * .8 = $800,000 in Gross Profit over the life of the client for every million dollars in annual revenue that you will get from them.

Now how about that 5% concession?  There are 2 things to note; the customer will always get that 5% from you again and your costs do not decrease, so... $150k * 5 * .8 = $600,000/million in annual revenue.

So what does that 5% of margin you give up now cost you over the lifetime of a client relationship?  25% of the GP you would have seen from them overall!  So maybe now it is not just your CFO that is mad about "Just 5%".