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.
Steve Lett graduated from Indiana University in 1970 and immediately began his 50-year career in Direct Marketing; mainly catalogs.
Steve spent the first 25 years of his career in executive level positions at both consumer and business-to-business companies. The next 25 years have been with Lett Direct, Inc., the company Steve founded in early 1995. Lett Direct, Inc., is a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis and digital marketing (Google Premier Partner).
Steve has served on the Ethics Committee of the Direct Marketing Association (DMA) and on a number of company boards, both public and private. He served on the Board of the ACMA. He has been the subject of two Harvard Business School case studies. He is the author of a book, Strategic Catalog Marketing. Steve is a past Chairman of both the Catalog Council and Business Mail Council of the DMA. He spent a few years teaching Direct Marketing at Indiana University in Bloomington, Indiana.
You can contact Steve at firstname.lastname@example.org.