Lifetime Value: Acquisition Costs Across Different Media

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.

There is often no strategy in place to follow up with first-time buyers from different media, such as newspaper ads. This is in spite of the fact that the buyer may have responded to a very different offer than typically found in a catalog, and still hasn’t bought from the catalog, where they are expected to buy in the future.

It certainly stands to reason that database marketers should recognize, measure and respond to buyers from each medium in different ways. It also stands to reason that it may be appropriate to have a different follow-up strategy for first-time buyers from each medium, as well.

Testing New Media

The fact that a medium is different or that it has not been adequately tested in the past does not make it good or bad. Some catalogers wouldn’t be in business without their Web site. For others, there is little crossover from the Web site to the catalog. In at least two cases, we have seen DRTV (direct response TV) buyers generate higher repeat sales through a catalog than the average buyer acquired through direct mail.

Remnant space ads in city newspapers have widely varying LTV results. Depending on the offer, average order and other factors, results run from very low to very high LTV. For some direct sellers, card decks bring in the bulk of prospects and customers.

The importance of testing new media—whether Web-based, print-based or broadcast—is clear. The key to successful testing is making sure that each medium not only provides a reasonable acquisition cost but also brings in new buyers who will stick around and generate future sales and profits.

Front End vs. Back End

Acquisition cost, or front-end expense, is the investment it takes to turn a prospect into a customer. Back-end profits are earned by making repeat sales to existing customers.

For each medium, database marketers need to link the front-end and back-end strategies. For a marketer that has treated all buyers in the same manner (for example, all buyers are catalog buyers) this can be a difficult change. This is especially true when there is no sound method to judge LTV.

Assuming the front-end expense can be measured for each medium, how can marketers get a handle on the back end from each medium? Here is a simple but effective way of comparing buyers from different sources/media:

• Identify acquisition cost by source/medium (advertising expense, responses, initial sales);

• Determine typical back-end sales in the first 30 days, 90 days, six months, one year;

• Compare each source/medium to the “standard” at each interval;

• For media at or above the standard, continue testing and rollouts;

• For media at or below the standard, review follow-up strategy and test carefully;

• For media well below the standard, modify or discontinue efforts.

Sales Channel vs. Media

A sales channel is different from a medium. A sales channel could be retail stores, direct sales representatives or an in-bound call center.

Advertising supports the sales channels. For example, signage and in-store displays support retail stores. Rarely would one suggest that improving in-store displays will generate new buyers who will return and buy from a catalog. Yet marketers often expect as much when prospecting through new media.

Offer vs. Media

The medium is the messenger; the offer is the message. When you find a medium is not performing, either on the front end or back end, change the offer and re-test.

Most of the efforts with new media that fail do so because the offer was very different than successful offers used elsewhere, not because of the media. For example, a cataloger with an average order of over $100 ran ads in Sunday supplements for an under-$10 item. Back-end sales were miserable, as could be expected. However, by changing the offer repeatedly and continuing to test, a new offer is working very well on both the front and back ends.

Building Retention Strategies by Medium

For each medium that is used to attract new customers, there should be a front-end and back-end strategy in place. This strategy should be in place before any new medium is tested to be certain that each effort is watched, tracked and managed in such a way that the chances for finding success are maximized.

For Web-site buyers, a Web-based follow-up strategy should be in place. E-mails, electronic catalogs and other devices should be employed in an ongoing effort to retain these buyers. Special care should be taken to make sure buyers are not lost when they move from one medium to another, such as DRTV to catalogs, after their first sale.

Rewards

The rewards of testing new media are too great to justify avoiding the risks. It has become common to find companies that sell more through media they didn’t even use five years ago, than through traditional means.

The Web is certainly the most glamorous of today’s media portfolio, and catalog marketers should test it. But many profitable stories involve marketers succeeding in newspaper, radio, DRTV, card decks and other media, as well.

The same rules of testing, measurement and offers apply to all media. Your pot of gold might be hidden on the Web, or it might be hidden in the sports section. Either way, I hope you find it.

Alan Weber is CEO of DataPlus Millennium LLC, a provider of marketing database consulting and analytical services. He is co-author of “Desktop Database Marketing.” He can be reached at (913) 432-8311 or via e-mail at alan@marketinganalyticsgroup.com.