Customer Lifetime-Value Equation

The Data Are Key

The actual calculation of LTV usually is done at the individual customer level and summarized to the original source-code level. It can just as easily be summarized to other variables such as age, gender or products purchased.

We prefer taking all the orders and revenue accumulated from each customer and subtracting the first order and revenue value. This usually involves a significant amount of data, and in theory, the more data the better, right?

In practice, massive amounts of data can be a problem. Of course, none of our legacy order-fulfillment systems have perfect data-collection features. Unknowns often are quite high in some seasons, books or years. Web orders aren’t always tracked back to their true original sources. Source codes aren’t always captured accurately by order-takers. Frequently, computer fulfillment operating systems have been changed or upgraded, and the data may be in multiple formats. Although LTV calculations are easy to conceptualize, they can be hard to do. The key is the data.

Even if your data are in shambles, you still can calculate an average LTV for a book, offer or promotion. This is better than not doing it at all, but it’s not the best way to determine your acquisition budget or the best use of available funds.

You can improve your overall LTV by selecting programs and lists that have higher LTVs. You also can implement programs and procedures to improve your customers’ LTV rates. For example, an increase can come from treating customers better in some way, such as sending them letters, birthday cards and/or newsletters. Give them gold cards and gold-card treatment. Of course, all these things cost money, so don’t forget to factor those extra costs into your equations.

Most catalogers agree with the theory of LTV, but in practice only some are applying its principle to their businesses. For example, some catalogers insist on being at break-even or better for the first order. Others know they can absorb some loss, but they’re not sure how much, so they assign an arbitrary value, say $10, for each customer. They do this because they haven’t systematically determined the real value.