Two things are common to many database marketers. First, they can measure acquisition cost well (what it takes to turn a prospect into a customer), but they don’t employ a sound method of judging lifetime value (LTV). Second, they emphasize prospecting rather than retention/cross-selling/upselling.
The combination of these two traits, measuring acquisition but not LTV and concentrating on prospecting rather than retention, often leads to profitability problems when testing new media.
For a “traditional” cataloger, who sells only through direct mail and prospects only with rented lists, there can be a major difference in the long-term profitability of buyers from different sources. For a database marketing company prospecting through many different media, the long-term differences in profitability are even greater.
Marketers who emphasize prospecting over retention often fail to generate the profits from retention they need to cover the costs of prospecting. As a result, they are actually forced to grow more slowly by emphasizing prospecting than if they concentrated on generating profits from existing customers. The logic is simple—if existing customers return greater profits, spend more time on them to generate more profit, which then can be spent to convert new prospects, thereby growing your customer base and profit margin faster.
Planning for Retention
Without a successful retention program, there cannot be a successful prospecting effort. Why attract new customers that aren’t going to be profitable? Yet that is exactly what many database marketers risk doing when trying new media.
Many of the Web-based efforts, particularly those funded by OPM (other people’s money), spend huge amounts on advertising to drive prospects to their Web sites. Despite the investment they are making on prospecting, some don’t have a coherent retention strategy at all.
On a smaller scale, catalogers are treating other media in a similar fashion. They assume that customers acquired through newspaper ads or radio spots will behave like their “traditional” catalog customers do and buy from the catalog.