Simple Ways to Calculate and Measure Your Marketing Continued…
Last blog I delved into some simple metrics to help demonstrate the value of direct marketing. But one question I always get asked is how do you measure the value of a customer well beyond their initial purchase?
This value in direct marketing is called the Lifetime Value (LTV) of a customer, and is based on all activity of customers subsequent to their first acquisition. In other words, it is the net present value of all future contributions to profit.
When Should You Calculate the Lifetime Value (LTV) of a Customer?
Continuing Programs typically form the basis for calculating a customer’s lifetime value.
For example, if the initial purchase is quite low or perhaps the first in a series of transactions (e.g. credit card payments, insurance premiums), then each payment may be small, but the total revenues from each customer may be high.
This means you can justify spending larger amounts in acquisition.
Example
Using the following assumptions for one customer over a 5 year period:
- Average income per customer = $75 per year
- Average Retention = 60% per year (i.e. 40% Attrition per year)
- Lifetime Value (LTV) will be calculated at 5 years
By referring to the lifetime-value-calculator it reveals the total LTV of this customer is $389 over a 5 year period when you take into account direct and indirect income, direct and indirect costs, and any loss of money over the period.
One point to note is that the combination of customer attrition and discounting of money makes it difficult to calculate lifetime value effectively beyond 5-7 years.
Plus you always face your highest risk with a customer early on in a relationship, as you may fall prey to bad debts, product returns, cancellations etc. This is why you should always include a decline in value (loss in money) during the course of the relationship.
Final Note
All small business should by now understand that existing customers are always more valuable in the long run than new customers.
This is why it is essential to plot monthly costs and responses to measure long term profit flow.
By comparing the effectiveness and predictability of each marketing channel used will ultimately allow you to pursue one or several different strategic directions to gain the best return of investment and increase the overall lifetime value of a customer.
Obviously every industry is different. So if you need any help with calculating the Lifetime Value (LTV) of your customer then contact us any time.
I hope you found this interesting and helpful. Let me know anything about Direct Marketing that interests you.
Craig
