It’s time to fess up to your dirty little secret — that you don’t calculate lifetime value. Embarrassing, isn’t it? But you’re not alone.
Some merchants lack the capability. Others have decided they can’t wait 20 years for a payback on new customers. So they’re using a new metric — near-term value, or NTV.
How is that different from determining lifetime value?
LTV is calculated by projecting the profit from a customer over a long period of time. You subtract the marketing costs from the anticipated revenue.
But it’s hardly an exact science — with LTV the result can be thrown off by interest rates, dollar valuation, and other variables.
On the other hand, calculating NTV does not require an economic degree. You simply look carefully at the history of a new customer to predict if the person can be converted into a multibuyer.
This is usually done in six-month snapshots over a two- to three-year period.
The benefits are immediate. For one, marketers learn how much they can spend to acquire a new customer based on that person’s spending potential.
And NTV can guide the entire online and offline marketing budget and the timing of communications, says Elisa Krause, vice president of analytical services for Epsilon’s Abacus Data Services division.
But there are other factors driving this turn from lifetime value. One is the Internet. Online shoppers are disloyal — they Google to find the product they want at a price point they find acceptable.
And even some offline customers have fairly short lifetime values. Depending on the product, they could be as little as five years, says Loyalty Lab president Michael Greenberg.
Finally, there’s the need to recoup postal costs. And some merchants have stopped using LTV for none of the above reasons.
Tools cataloger GarretWade closed its Manhattan distribution center in 2006 and went with an outside contractor. At that point it lost control of its order database, says Pete Segal, senior vice president of GarrettWade.
The company is now rebuilding its house file and getting back to tracking LTV, Segal adds. But GarrettWade may also measure NTV.
“It’s basically a shorter-term LTV,” Segal says. “The problem is how to identify characteristics of a first-time buyer that indicate whether or not he is likely to purchase again. It could be the source, the product category purchased, or anything. But RFM will usually be the most significant indicator.”
Let’s say you agree with this old-time direct marketing wisdom. How do you measure NTV?
The first step is to isolate new buyers acquired during a one-year time frame. Use the date of first purchase instead of the prospect key code — it’s more accurate and will allow measurement of customers acquired through other media than direct mail, Krause says.
The next step in the process is to determine the acquisition source. This can be achieved by doing a matchback, she continues.
If direct mail was the source, you will have a better grasp of the cost to acquire customers through your list sources, Krause adds. And you will be able to tell if online buyers are new or existing customers.
The actual calculation of NTV begins with the initial contribution per new customer, or CPC.
For direct mail, this figure should be based on the original matchback so that the full cost of mailing to each list is represented. The computation is different for search and affiliate marketing.
Next you need to figure out the buyer’s subsequent activity, not including the first purchase. If you’re measuring the first six months, you should do it based on the original purchase date.
Then track the net number of repeat buyers and dollar value, cost of goods, total number of purchases, and re-marketing costs. This would include direct mail and e-mail promotion history or business rules and associated costs needed to compute the margin.
Subsequent activity is then added to the initial CPC to determine the NTV of a customer at various times.
Will NTV replace LTV as the matketing metric of choice? Krause says that every cataloger she serves it up to is buying into it.
And Greenberg argues that merchants are looking for customers who will help them in the short term.
But LTV has its defenders. It’s especially useful when evaluating repeat buyers, says Arthur Middleton Hughes, senior strategist at e-mail marketing firm e-Dialog. Hughes says marketers can use LTV to segment customers into categories, and decide how often and in what ways they should be contacted.
“When you have identified your best customers, you do whatever you can to retain them,” he says.
For instance, “You offer them free shipping. You send them thank-you messages. You let them know that you value their business in ways that you obviously cannot afford to do for one-time buyers,” Hughes explains.
But sometimes your best customers are the ones who indicate they don’t like you. And that’s why marketers need to keep an eye on either metric.
For one client, Hughes examined buyers who unsubscribed from their promotional e-mails. He found something interesting: That the LTV of those who unsubscribed was, in many cases, higher than the LTV of those who remained.
The company has started asking valuable buyers why they want to unsubscribe.
Their reasons? Some said they received too much promotional e-mail.
“Since these were platinum customers, the company should offer to reduce the frequency of delivery to whatever level the customer was happy with — thus saving some really good buyers,” Hughes says.
Drawing them back
“E-mails should be designed to provide each customer with news and products that they are interested in buying, rather than those products that the company is interested in selling,” Hughes says.
Yes, it pays to take the long view. A customer may look very good based on NTV analysis. But they just may hang around for 20 years.
It’s like Mickey Mantle said: “If I knew I was going to live this long, I would have taken better care of myself.”