Strategy: How Lifetime Value Differs in Catalog vs. Web

Lifetime value (LTV) is the value of all purchases a given customer has made to date, plus the value of purchases that customer is likely to make (discounted for present value) over time. LTV helps determine how much you can afford to invest in new buyers looking beyond their initial purchases.

For starters, you can afford to invest in a new buyer as long as you spend less than the average lifetime profit per customer (including your buyer acquisition cost). This assumes, of course, that your cash flow is sufficient enough to handle a given level of spending. You’re making a financial investment to acquire a new catalog buyer in hopes the payback will come in the future. How long you can afford to wait for your return on investment depends on your financial situation and the payback opportunity itself. I recommend one year or less.

Found ‘It,’ Not You
But not all buyers are created equal, even if they reside in the same RFM cell. The LTV of a Web buyer, for instance, is often not as great as that of a catalog buyer. That’s because buyers who come on to the file through organic or paid search are often “item” buyers, not catalog shoppers. They were looking for a specific item and found it. Mailing catalogs to these buyers because they’re in a most recent RFM cell won’t stimulate repeat purchases, no matter how many catalogs they receive.

Channel of origin does make a difference. This affords catalogers an opportunity to maximize contribution to profit and overhead by learning to deviate from traditional RFM segmentation.

Consider an example of the 12-month value of non-Web buyers vs. Web buyers driven by a catalog vs. Web buyers driven by the Web. The cost to initially acquire the buyer isn’t part of this particular analysis; this example is based on already having these buyers on
your housefile.

Web-Driven Buyers Weakest
The weakest group in this example is Web-driven Web buyers. The biggest weakness of these people is their low repeat purchase rate since they’re typically only seeking single items. Mailing them repeated times won’t alter LTV; it’ll only increase direct selling expenses.

Catalog-driven Web buyers have the highest value over time, because they have a higher repeat purchase factor. There are also more of them to repeat. This group also includes the most recent hotline buyers — buyers who receive catalogs and go to the Web to place their orders. Non-Web buyers also have a higher repeat factor and 12-month value.

Identify customers with only one prior purchase who found your brand by looking for an item through paid search or affiliate programs. Don’t eliminate Web-driven buyers who searched for your company name.

Best for Web Buyers
Flag your Web-driven buyers in the merge, and reduce or elimin-ate mailings to them when you’re selecting older or lower-performing segments.

Instead, send e-mails to Web-driven buyers on a regular basis. Give these customers a strong promotional offer to encourage them to buy again.

There can be exceptions to this strategy for niche companies. If you have concerns about not mailing catalogs to Web-only buyers, run a test. Split them into two equal groups.

Mail catalogs and send e-mails to one group; then just send e-mails to the others. At the end of the test period, determine the contribution to profit and overhead from both groups, and base your mail vs. no-mail decision on those actual results.

You may even want to test mailing postcards to your Web-only buyers as a less expensive way to drive them to the Web. (For more on mailing postcards, take a look at the feature I co-wrote with Susan McIntyre, “Can’t Afford Catalogs Anymore?,” on pg. 24 of this issue.)

Circulation strategy is more complex today than ever; traditional RFM isn’t as easy to apply as it was in the past.

There are noticeable differences between catalog, Web and multichannel buyers, and adjusting your circ plan to fit the channel will help control costs while maximizing results.

Stephen R. Lett is the president of Lett Direct Inc., a catalog consulting firm. He’s the author of the Catalog Success-published book “Strategic Catalog Marketing.” You can reach him at (302) 539-7257 or steve@lettdirect.com.