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