How SmartBooks Improved Our Labor Value Multiple by 33%

Hi, everybody. I’m Jeff Provost, Chief Operating Officer at SmartBooks. Today, I’d like to share insights about the Labor Value Multiple or LVM, one of our favorite metrics at SmartBooks. LVM is a simple measure of profitability. You calculate it by dividing a client’s revenue by the total cost to deliver service to that client. It doesn’t include overhead, sales, or marketing just the direct cost of service delivery.

Tracking Labor Value Multiple by Client

At SmartBooks, we calculated LVM for every client over a six-month period. Looking at trends over time helps avoid the impact of short-term fluctuations. We focused on the 20 clients with the lowest LVM. Then, we dug into what was driving that. There are only two factors that affect LVM price and cost. So, we looked at both.

Reducing Costs to Raise LVM

On the cost side, we explored ways to deliver services more efficiently. In some cases, a lower-cost team member could deliver the same service at the same quality level. We also improved processes and adopted better technology. With a few clients, we reduced delivery costs without changing the scope of work or pricing. These changes moved LVM closer to our target benchmarks.

Adjusting Pricing to Match Value

Next, we reviewed pricing. We found gaps in how we had adjusted pricing over time. Many clients had growing service needs, but their fees stayed the same. Using LVM data, we showed clients how their needs had evolved. We used that data to justify fair and necessary price increases.

When It’s Time to Part Ways

LVM also helped us identify clients who had outgrown our services. In a few cases, we created transition plans to move them to more suitable providers. These decisions are tough. But LVM gave us clarity. It helped us align cost, pricing, and service quality in ways that made sense for both sides.

Results of the Labor Value Multiple Exercise

This LVM initiative produced excellent results. By addressing the 20 lowest LVM clients:

• Our company-wide LVM improved by 33%
• Contribution margin increased by 1.5%
• We parted ways with 3% of our clients—freeing resources for better-fit partnerships

The team now uses LVM as a shared target. It’s become part of our culture and helps everyone aim for the same financial goals.

Final Thoughts

Labor Value Multiple is a powerful tool for any service-based business. It simplifies decision-making around costs and pricing. If you’re interested in using LVM to improve your business, reach out to us we’d be happy to help.