Typically a catalog has dollars invested in inventory, equipment, furnishings, buildings, and certainly labor. But a cataloger’s most-prized asset in the eyes of the investment community is its house file. Appraising your customer list helps financial experts estimate the overall value of your company. Yet many catalogers do not assess the value of their list properly. And when catalogers are in the market for a merger or acquisition, incorrectly valuating their own assets or those of a potential acquisition can cost them money in both the short term and the long run.
Remember the buyer hierarchy
The first step in assigning value to your customer list is to look at the big picture, keeping in mind the difference between customers and prospects. A house file will generally outperform rental names by a factor of two to 10 times (see chart, bottom right).
Customers can often be likened to a staircase, since buyers have varying steps of loyalty. The top segment are multiple buyers who have a history of repeat orders, have spent more than your other customers in the past, and have made a purchase in the past six months. These multibuyers are the most apt to make further purchases from your catalog or Website, so you can expect higher response rates and higher average order values (AOVs) from them overall.
The next-best customer segment consists of multiple buyers who have spent less than the first-tier customers and have made a purchase in a less recent time frame — say, seven to 12 months. The third customer segment is one-time buyers who have spent relatively high dollar amounts but are less recent, having made a purchase in the past 13-24 months. The lowest buyer segment consists of one-time purchasers who didn’t spend much and made that purchase within the past 36 months.
We frequently see this staircase phenomenon among successful catalogers’ customer mailings. Understanding this principle is critical to working your buyer list harder. In essence, it simply means that to increase profitability you should expand mailings to your better-performing segments and reduce mailings to poorer-responding segments.
Three methods of valuating your house file
After segmenting your buyers and gaining an overview of your file, you can determine the overall value of the customer list. There are three key methods of doing so:
1) The cost replacement method. In the February column (“The Cost of Acquiring a Customer”), we discussed the technique of determining the cost of getting a new name. Every cataloger should know what it costs to get a new customer — be it from specific rental lists, the Internet, space advertising, trade shows or a friend-get-a-friend referral campaign.
Once you determine the annual average cost to get a customer across all media, it is simple to multiply that average cost by the number of buyers to put a value on your customer list.
Example: Your company has 100,000 buyers, and it costs you $10 on average to get a customer. Therefore: 100,000 * $10 = $1 million customer list value.
But keep in mind that value tends to be concentrated in the most recent segment of the buyer file — that your most recent buyers are the ones most likely to buy again. So to fine-tune this calculation, you can discount the value of buyers who are more than a year old, relative to the performance to other customers. This discount factor varies with each house file. For example:
50,000 12-month buyers * $10 = $500,000
30,000 13- to 24-month buyers * $7.50 = $225,000
20,000 25-month and older buyers * $4.50 = $90,000
$500,000 + $225,000 + $90,000 = $815,000 customer list value.
To be even more precise, you can assess customer value by medium — for example, all names coming from list rentals vs. all names from space ads — and summarize their cost. In this way you can build a true weighted average of what it costs to obtain a customer.
2) Buying-potential method. In this alternative method, you’ll look at a customer’s lifetime value (LTV), or the future propensity of existing buyers to buy additional products from your catalog. This calculation assumes that you are tracking customers by original source code and maintaining buyer purchase history during a period of time, typically three years.
Let’s say your customers’ average 36-month value is $70:
100,000 buyers * $70 = $7 million customer list value.
You can also fine-tune this calculation to allow for the decreasing value of customers as they become more inactive. For instance:
50,000 12-month buyers * $70 = $3,500,000
30,000 13- to 24-month buyers * $50 = $1,500,000
20,000 25-month and older buyers * $25 = $500,000
$3,500,000 + $1,500,000 + $500,000 = $5.5 million customer list value.
The buying-potential method is the popular method of putting a value on a company for acquisition or merger activity. (For more on lifetime value, see my column “How Much Are Your Customers Worth?” in the March 1 issue.)
3) List-rental value method. A third method of valuing the customer list is to look at the list rental potential during a two- or three-year period. Since the list rental business today is extremely hotline-oriented, names older than 12 months have little list-rental potential. On the other hand, if you maintain your list while adding new buyers, the rental value can be considerable.
The calculation is quite simple. Take all of the 12-month buyers from your house file and multiply them by an average list rental fee (let’s say $100/M, or $0.10 a name), and then multiply that figure by the number of times that your list manager can rent the names (often referred to as annual list turns or annual turnover). Generally, strong rental lists will turn or rent out their last 12-month buyers file 20-30 times a year.
So if we start with a total buyer list of 100,000, of which 50,000 are 12-month buyers:
50,000 12-month buyers * $0.10 * 20 list turns = $100,000.
Only about 60% of the gross list rental income will become net profit contribution to the catalog’s bottom line, after deducting 20% for the list broker, 10% for the list manager promoting your file, and another 10% to cover list fulfillment costs.
The buyer list is perishable
Using any combination of these three methods will give a cataloger or Internet marketer a sense of what the buyer list is worth. Each method may produce a different valuation of the same file, but so long as you use the same method on all the customer lists you are valuating, you will be able to make appropriate comparisons.
Regardless of which method you use, recency of customer names is critical. As you can see from the above examples, if a mailing list is more than 12 months old, it deteriorates dramatically in value. So customer records must be maintained and updated with recent purchase history and have current names and addresses.
Next month in this column we will shift gears to begin a series of articles about merchandise analysis, including all the areas related to planning, tracking, and analyzing buying, rebuying, and inventory management. Stay tuned!
Jack Schmid is president of J. Schmid & Associates, a Shawnee Mission, KS-based catalog consulting firm.