Life-Time-Value (LTV) is the value of all of the purchases a given customer has made to-date plus the value of the purchases this same customer is likely to make (discounted for present value).
LTV helps determine how much you can afford to invest for a new buyer looking beyond their initial purchase. For example, you can afford to “investment-spend” for a new buyer as long as it is less than the average lifetime profit per customer (including your buyer acquisition cost). This assumes, of course, that your cash flow is sufficient to handle a given level of spending. You are making a financial investment to acquire a new catalog buyer in hopes that the payback will come in the future.
How long you can afford to wait for the investment to payback depends on your financial situation and the payback opportunity itself—generally, one year or less is recommended. A LTV analysis—done tracking promotional history for every record—can be run over a 12-month, 24-month and lifetime basis to get a feel for the contribution over time. It can be a complicated process.
All buyers are not created equal—even if they reside in the same recency-frequency-monetary value (RFM) cell. The Web has caused us to look at buyers and the way they shop differently. The channel of origin does make a difference. The LTV of a Web buyer is often not as great as that of a catalog buyer. That’s because buyers who came onto the file from organic or paid search are “item” buyers, not necessarily catalog shoppers. They were looking for a specific item and they found it.
Mailing these buyers catalogs because they are in a most recent recency-frequency-monetary value (RFM) cell will not stimulate them to make a repeat purchase no matter how many catalogs they receive. Analyzing the channel of origin affords the cataloger an opportunity to maximize contribution to profit and overhead by learning to deviate from traditional RFM segmentation.
Be sure to look at the 12-month value of non-Web vs. Web buyers driven by the catalog or by the Web. This shows what happens when you mail these buyers over a 12-month period. The weakest group is the Web buyers who were Web driven. Once more, these buyers are item purchasers, not shoppers. This means they were looking for a specific item and hey found it—mailing them repeated times will not alter their lifetime value. Mailing these buyers will only increase direct selling expenses. The biggest weakness of this group is their low repeat purchase rate.
The Web buyers that are catalog driven the highest value over time. That’s because they have a higher repeat purchase factor (there are more of them to repeat). This group includes the most recent “hotline” buyers, which is also a factor. These are buyers who receive a catalog and go to the Web to place their order. The non-Web buyers also have a higher repeat factor and a higher 12-month value.
Best Strategy For Web Buyers
Identify customers with only one purchase who found your firm looking for an item through paid search or affiliate programs. Be careful not to eliminate Web-driven buyers who searched using your company name. Flag your Web driven buyers in the merge and reduce or eliminate mailings to them when older or lower performing segments are selected.
Mailing them catalogs will only increase your marketing costs with very little in return. Instead, e-mail them on a regular and ongoing basis. Give this group a strong promotional offer to encourage them to buy again. Caution: There can be exceptions for niche companies. If you have concerns about not mailing catalogs to your Web-only buyers, split them into two equal groups. One group you mail (and e-mail), the other group you only e-mail. 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 actual results. You may even want to test mailing post cards to the Web only buyers as a way to drive them to the Web as a less expensive alternative than mailing catalogs.
Circulation strategy is more complex than it once was. Traditional RFM is not so easy to apply today. The channel does make a difference. Know that there are differences between catalog, Web and multi-channel buyers. Adjusting your circulation planning to fit the channel will help you control costs while maximizing your results.
Stephen R. Lett ([email protected]) is president of Lett Direct Inc., a catalog consulting firm.
Network
