Why your buyer file may not be as valuable as it used to be: A lesson in lifetime value

The internet is a wonderful marketing tool for most companies, but the impact it has on your house file is often not accounted for. Let’s take a journey back in time; say 5 years ago, when there was an explosion of online marketing services that helped deliver new customers, online, at an unbelievable return on spending. There were a myriad of companies that offered SEM, SEO, CSE, affiliates, email, mobile optimization, the list goes on.

After several years of cross-channel Hunger Games as our CEO wrote about 2 weeks ago, most of the time it was determined that the ROAS that each vendor was claiming was inflated, since there were often multiple touch points for each new customer. Even after the dust settled from the “games,” most programs were coming out ahead, and therefore more and more budget was devoted to those programs to increase their reach and impact. Many times that additional budget was at the expense of catalog prospecting, which can be terribly expensive and doesn’t fit into the new exciting world of online marketing.

Companies were focusing more and more resources on digital marketing, and pulling back more on print, using the catalog as more of a retention tool. The math made sense in the mind of leadership; I can bring in more online customers with the same amount of money as I can through catalog prospecting. A win-win right?

Wrong! The reason it’s wrong is that the Lifetime Value (LTV) by source was not a part of the overall equation.

LTV looks at the 12 or 24 month value of a customer, after their initial order. Some companies expand out even further to 4 or 5 years, but mainly when dealing with a major growth initiative. To calculate a customer’s total value, you need to determine what the initial order costs (in some cases a profit) by acquisition source and then combine that with the LTV for that same source. Below is a simple example for a few acquisition sources:

Graph 1

In looking at the acquisition P/L by source, it would make common sense to allocate more budget to the four online sources, since they are acquiring new customers at a PROFIT, while the catalog is dragging down the business with a new customer LOSS. As is clear when evaluating the acquisition in conjunction with the downstream value, the catalog as an acquisition source is the most valuable, where the affiliate program is the least valuable, even though the initial acquisition is the least expensive.

Fast forward to present day, and many executives are scratching their head, asking themselves “why is my 12 month buyer file the same size, but its performance continues to decline?” The answer is simple. Five years ago a decision was made to invest more heavily into acquiring customer via online sources, which began to skew the active file to less loyal, less valuable customers, while at the same time reducing the acquisition of more loyal and valuable customers.

Graph 2

The chart above represents what the same scenario would look like a few years later, after the decision was made to invest more heavily in online marketing and pull back on print. The total acquisition cost declines to basically a breakeven (which is great), but at the same time the total value decreases significantly. The same amount of customers were acquired in both scenarios, only now the value of the file has declined by $200,000 when the total demand is extrapolated.

This is a best case scenario, since what we are seeing play out in the real world is that as you reduce the offline prospecting, the acquisition cost gets better, while the online prospecting profit begins to decline as the budget is increased. At the same time we see the 12 month LTV move in different directions, where the offline value increases and the online value decreases. A double whammy, as can be seen below.

Graph 3

The most important consideration when making a change is the number of customers that need to be acquired, by source, to come flush at the end of 12 months. As presented in these scenarios, the downstream value of an online acquired customer is about half of the value of a customer acquired offline. Therefore to come flush, any change in online marketing would have to acquire 2x+ the number of customers that will be lost through catalog prospecting.

When making budget decisions for 2016, it is imperative that the downstream value of your customers is accounted for in any changes in acquisition that are made.

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