Few catalogs make money on first-time buyers. Ultimately, the profitability of a new buyer depends on his or her lifetime value (LTV) to your company.
Catalogers tend to evaluate lists based on the first sale. You compare the results against an incremental break-even point and determine if that particular list will be mailed again. That is, some catalogers take a short-term view to a long-term opportunity. It’s the value of a new name over time that’s important.
LTV helps you determine how much you can afford to invest in a new buyer, looking beyond his or her initial purchase. For example, you can afford to invest in a new buyer as long as it’s less than the average lifetime profit per customer (including your buyer-acquisition cost). This assumes your cash flow is sufficient to handle that level of spending. You’re making a financial investment to acquire a new buyer in hopes of future payback. How long you can afford to wait for the payback depends on your financial situation and the payback opportunity. I think the payback should come within one year.
Most likely, you’ll find new buyers’ LTV depends on how they were acquired. For example, people who buy as a result of an event (e.g., sale, promotional offer) probably don’t have the LTV of new buyers who convert from catalog requests or from rented lists.
You’ll also find LTV differences among the types of prospect lists you use (e.g., direct response, subscriber, compiled). This also could be true for first-time Internet buyers. For all of these reasons, calculate the LTV of a buyer garnered from different media, lists and offers.
Contact History is Crucial
Determine what your contact history has been with the group of customers you’re analyzing. This history often is needed when analyzing LTV — and it can create an obstacle.