Short-Term Behavior, Long-Term Value

Jan 24, 2005 10:30 PM  By

Direct marketers put a huge amount of time and money into examining, testing, analyzing, and fine-tuning their marketing on a campaign-by-campaign basis. The results of a single campaign are judged by response rates, average spend amounts, and often, the ROI generated by that campaign.

But less attention has been given to the long-term behavior of customers, says Don Austin, Ph.D., director of client strategy at Greenwich, CT-based list services firm Direct Media. In general, the amount of the first transaction predicts the amount of subsequent transactions. But Austin a variety of other variables can be used to segment customers into low long-term value and high long-term value groups.

Austin cites the example of a seasonal, highly promotional catalog that mails heavily in the last part of the third quarter and the early fourth quarter. “We found that the long-term value of those customers who spent just the amount necessary to achieve the promotion–free shipping–was less than those who spent somewhat less but were more apt to purchase again within the same season,” he says. “We were able to conclude that the free shipping offer was not productive for this cataloger in terms of long-term value.”

Or take the case of a nonprofit organization that uses a sweepstakes to acquire new donors. “We found that the long-term value of respondents who did not make a monetary contribution to the organization within four months was extremely low,” Austin says. “This segment of customers subsequently made few contributions and had a very high rate of attrition. Therefore, reducing appeals to this segment could reduce expenses significantly.”

Sometimes the correlation between short-term behaviors and long-term customer values is unexpected. Take the case of a theme park that sells annual passes. Several years ago a program was put in place to allow customers to pay for their passes over a period of months rather than in a single payment. “Examining the long-term value of customers, we found that those who purchased passes through the deferred payment plan had a much higher retention over three years as well as more frequent visits to the park,” Austin says.

The rental lists used to prospect for customers can also predict long-term behavior. “This is not simply due to upfront response rates and spend amounts, but also because the lists will vary in the proportion of second-time, and greater, buyers they provide,” Austin explains. “Therefore, list evaluation should consider more than net income per piece mailed.”

The lesson: Long-term behavior and value can often be related to information gathered early in the life cycle of the customer. The challenge is to segment the customers early into high- and low-value segments, and then to determine how to most effectively market to each segment.