Direct Marketing

The Lifetime Value of a Customer

I went to a home show at our local fairgrounds this past weekend and watched for a few minutes as a husband and wife team sold bright yellow chamois at a very busy booth. As fast as buyers pulled $20's out of their pockets, the sellers took the money and handed over the coveted chamois as quickly as they could. They couldn’t sell them fast enough to satisfy the crowd. It turns out the things sold for an even $20 including sales tax, so there was no change to mess with, no stopping to fill in order forms, and no credit card forms to slow them down. A friend of ours bought one of the cleverly packaged chamois (it was tightly rolled up into a cylinder the size of a tall soda can and guaranteed to soak up twelve times its weight in water). But, once we opened it, I was surprised to find out what was NOT inside--- Let me explain:

There was no contact information for the chamois sellers included in the package! No phone number, street address, or web site URL. After the show closed that night, there was no way for the chamois vendor to ever sell another chamois to any of those happy customers. Granted, this is not uncommon for traveling fair vendors, but it does illustrate an extreme example of the lifetime value of a customer. In this case it was easy to determine--- An even $20. No more and no less.

Knowing and understanding the lifetime revenue value of a customer (or more accurately their value over a defined period of time, like 1, 2, or more years) is one key to actively managing the flow of profits in your business. Here’s example from the world of direct mail that shows how critical it is in that particular industry. Many operators are willing make the first sale at little or no profit to tap into the ongoing lifetime value of a customer. One of their trade secrets is that a two-time buyer is TWICE as likely to buy as a one time buyer. So the strategy is to generate a house list with as many two-time buyers on it as possible, even if they have to sacrifice some profit on the first sale or two.

What this Means for Direct Marketers
I’m not suggesting that you sell things at cost just to generate a customer list. What I am saying is that well-run businesses know the lifetime revenue value of a customer. A few years ago, I was working with a jewelry retailer that kept an up-to-date house list. An analysis of that list showed that if a couple bought their wedding set at their store, they were likely to buy at least $690 worth of other items at their store over the next 2 years and another $550 worth in the next 3 years after that. This group represented the store’s most profitable customers. Their "lifetime revenue value" was over $4500 over that 5 year period.

Armed with that knowledge, we actively promoted wedding sets as part of their direct marketing strategy to build the business over the longer term. A similar analysis showed that 70% of all wedding set buyers had purchased an item in the store in the 16 months previous to that purchase. We put into effect a direct mail campaign that targeted local high school and college students to encourage purchases (trial) of smaller, affordable items like pendants, pins, and watches to get them into the customer pipeline!

Knowing the lifetime value of your average customer also gives you critical intelligence that will help you determine how much you can spend to acquire that customer’s business. For example, if lifetime revenue value of your average customer is $5600 over three years, and you have an average 10% gross margin over that time, then that customer is worth $560 in gross profit. Then it becomes a lot easier determine what it is worth to you to acquire that new buyer--- If you can tie those new customers to specific coded responses you can begin to calculate how well your direct marketing and promotion pays for itself over the long run!

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