If every item you sell and every list you use produces results that are break-even or better, then you don’t have to worry about lifetime value, according to Jim Coogan, president of Sante Fe, NM-based consultancy Catalog Marketing Economics. Then again, if every item you sell and every list you use hits break-even or better, you should write a book, tour the nation touting your secrets, and spend the rest of your time tallying your fortune.
In reality, just about every direct marketer needs to calculate lifetime value (LTV). It’s the formula for circulation below breakeven. Finding the right formula for LTV and contribution per customer allows for aggressive house file growth while enabling you to maintain midterm profits and provides a basis for decisions on prospect list continuation. It provides an understanding of the short-term cash flow required to prospect below breakeven.
Sometimes it makes sense to invest in circulation when it is not possible to grow the business by only prospecting above breakeven. Knowing the arithmetic of calculating LTV is critical to managing the strategy of mailing below breakeven.
The issues with prospecting below breakeven and using LTV to measure the ultimate profitability of the prospect acquired below breakeven include:
* Prospecting below breakeven requires cash, and prospecting below breakeven is done at a negative cash flow. So even lists that prove profitable in the medium term are unprofitable and cash flow negative in the short term. Can you invest in prospecting given that it requires a cash infusion?
* How long should you be willing to wait before a prospect list investment becomes profitable? One mailing? Five mailings? Most mailers are reluctant to acquire buyers when it means waiting more than a year before that initial prospecting shows a profit.
* What portion of your prospecting can you afford to conduct below breakeven?
* Will the buyers acquired from lists that are below breakeven be as high a quality of buyers as those acquired from lists that perform above breakeven?
* Are the measurement metrics in place to manage a prospecting strategy with a large portion of the prospecting being done below breakeven?
* How long can the buyer file be mailed before it falls below breakeven? If your buyer file segments over 36 months are at or below breakeven, don’t accept an LTV prospecting strategy that needs 36 months to break even.
* Have you really exhausted all the potential list universes that will respond above breakeven? Do you need to grow the business by prospecting below breakeven? Or should the circulation strategy focus on maximizing profitability rather than focusing on increased growth of the house file?
Prospecting below breakeven is a slippery slope because profits and cash are both gone until you’ve had enough buyer mailings to make up the initial loss.