Lifetime-value Analysis

Few catalogs make money on first-time buyers. Ultimately, the profitability of a new buyer depends on his or her lifetime value (LTV) to your company.

Catalogers tend to evaluate lists based on the first sale. You compare the results against an incremental break-even point and determine if that particular list will be mailed again. That is, some catalogers take a short-term view to a long-term opportunity. It’s the value of a new name over time that’s important.

LTV helps you determine how much you can afford to invest in a new buyer, looking beyond his or her initial purchase. For example, you can afford to invest in a new buyer as long as it’s less than the average lifetime profit per customer (including your buyer-acquisition cost). This assumes your cash flow is sufficient to handle that level of spending. You’re making a financial investment to acquire a new buyer in hopes of future payback. How long you can afford to wait for the payback depends on your financial situation and the payback opportunity. I think the payback should come within one year.

Most likely, you’ll find new buyers’ LTV depends on how they were acquired. For example, people who buy as a result of an event (e.g., sale, promotional offer) probably don’t have the LTV of new buyers who convert from catalog requests or from rented lists.

You’ll also find LTV differences among the types of prospect lists you use (e.g., direct response, subscriber, compiled). This also could be true for first-time Internet buyers. For all of these reasons, calculate the LTV of a buyer garnered from different media, lists and offers.

Contact History is Crucial

Determine what your contact history has been with the group of customers you’re analyzing. This history often is needed when analyzing LTV — and it can create an obstacle.

For example, early results are easy to calculate. But once you have the initial buyers, their repeat activity and contact pattern will be as diverse as your housefile segmentation. You won’t know how many catalogs you sent following the initial purchases.

If you want to know the LTV of a group of prospects you mailed three years ago, the only way to really know how many catalogs you sent this group is to track your contact history. This is expensive and hard to recreate, but it’s essential.

How to Track LTV

Usually, you can get the information needed to understand your payback and how much you can invest by analyzing a prospect’s 12-month value. This assumes all new buyers will get every mailing for a 12-month period, and it takes the guess work out of subsequent mailing costs. It’s also a lot cheaper than maintaining contact history.

The chart “Sample: 12-month Value Analysis” (below) shows the initial results and the 12-month repeat results rolled into an income statement. Data in the left-hand columns show that you’d need $1.31 per catalog mailed to break even on your initial mailing.

If you were to use this as the threshold for what to mail, you’d cut out a large portion of your prospecting, which would have a negative impact on your long-term growth.

As shown in the chart’s middle column, the initial mailing resulted in a loss per customer of $14.45. But after 12 months of activity, we saw an overall gain of $5.52 per customer. So if you made the initial investment, you’d make back your money in less than a year, which is good news, assuming, of course, that you want your business to grow.

Data in the chart’s right-hand columns show what the initial results must be to break even after 12 months. In this example, if you were to invest $19.97 per customer initially, you’d break even after 12 months.

Ideally, you want to break even within a year. Use the chart above to roughly determine what your initial sales should be to meet your goals. It’s important to track your actual results for initial and 12-month subsequent activity to be sure each list met these goals.

Maximize the LTV of New Buyers

Focus on reducing the payback period and on maximizing the LTV of a new buyer, most especially during his or her first year. Following are a few ideas you can try:

• Offer a special promotion to first-time buyers.

I refer to someone who purchases once as a buyer. (Someone who buys more than once is a customer.) Include bounce-back offers to first-time buyers to encourage them to purchase again, in order to increase their LTV.

• Put a “Welcome new buyer” notice in their outgoing packages.

Make new buyers feel special, and let them know how much you appreciate having their business. This may encourage them to buy again.

• Mail first-time buyers more often — at least initially.

It’s difficult to over-mail your housefile, especially first-time buyers. Increase the frequency of mail drops to this group or to a portion of this group to encourage them to purchase again.

• Use promotional offers to encourage buyers and customers who haven’t ordered from you in a while.

For those who haven’t bought in more than 12 months, send a special offer to encourage them to purchase again.

Conclusion

Know where and how to prospect, and know how much you can invest in a new buyer based on his or her LTV. Don’t assume or hope the LTV will be there. Use promotional and bounce-back offers, add mailings, whatever it takes to improve your housefile’s LTV.

Good marketers know they can affect the LTV of their customers. Take a long-term view regarding the cost to acquire a new buyer, because basing your mail vs. don’t mail decisions on initial results may not be enough.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He spent the first 25 years of his career with leading catalog companies. He can be reached at (302) 541-0608, or by e-mail via his Web site: www.lettdirect.com.