Marketing ROI or DIE! » Lead Generation

How to Calculate and Increase Lifetime Customer Value

Rebekah — Mon, 09 Nov 2009 05:21:40 +0000

Understanding Lifetime Customer Value is a key factor in evaluating the health of a business. In this post, I look at how to calculate and increase LCV.

Yesterday I was helping a friend work on a marketing plan for her business. While she is an excellent hair stylist, she has not put any effort so far into monitoring metrics in her business so she can determine how to affect them, nor has she yet conducted any formal advertising, having relied exclusively on word of mouth. We’re working on changing that.

The first thing I suggested is that she build a simple spreadsheet to log, backwards and forwards, who are her clients, when they are coming in by month/date and how much they are spending. When completed, she can then make some important calculations.

I have been her client for nearly 14 years, but I don’t know if this is common for her. In fact, my devotion to her talents may be an outlier that skews her average. Therefore, we want to first calculate the mean (average) and median (middle figure) in the number of months that her customers have been with her. Excel makes it really easy using the formulas: =average(starting_cell:ending_cell) and =median(starting_cell:ending_cell). If the average is much higher than the median, then we know that the results are being skewed. For a more visual representation, we can create a scatterplot by using Excel’s Chart Wizard tool. Highlight all the months, click the Chart Wizard, select Scatter, hit Finish and voila! A helpful chart that lets you see outliers at a glance.

Let’s say that the results of her analysis shows that the majority of her customers are with her for 20 months. We then have to connect that value with the amount they are spending. By adding a second column next to the months for dollars spent, we can do similar calculations to derive average and median dollar values. Taking a look at my own spending with her, on average I’m seeing her every 6 weeks and spending $60 each time. I’m getting my hair done about 9 times per year, which means over nearly 14 years, I’ve spent $7,560. So for every new customer that spends $60 a visit, she now knows that’s $540 over a year’s time.

However, that’s not entirely true. Another thing she has to look at is how much she’s spending to acquire and keep her customers. If she spends $200 a month on advertising, she has to deduct those costs of $2,400 in the first year towards those clients’ acquisition costs. Additional monies in subsequent years spent on mailings to encourage those clients to come back will also reduce her profit per customer in those years. Then there’s the product costs – color, gels, hairsprays, shampoos and conditioners, scissors, scissor sharpening, brushes, blow dryers – which adds up. Those costs have to also be applied to each client. Some of those costs can be spread out over all clients using an average and some she may want to do on a more granular level, e.g. color products she may want to apply on a per-person basis since longer/thicker hair requires more product.

Then there’s the cost of inflation to consider. My $60 paid today is worth less than the $60 given to her nearly 14 years ago. Using the inflation rate calculator I can see from January 1996 to September 2009 (the most recent month provided), inflation rose 39.88%. So therefore, my $60 can buy $23.93 less than it did in January 1996 (=60 x 0.3988). For each of her current customers, she can calculate on an annual basis how much to adjust for inflation.

A really nifty spreadsheet from Harvard Business School makes doing all this pretty easy: Download the Lifetime Customer Value Calculator tool. Clicking on the “Basic Model-Assumptions” tab, I can input:

Time between purchases. Every six weeks would be =1.5/12.
Retention Rate or likelihood that a customer will buy again in the next period. Let’s use a guesstimate of 80%.
Average Purchase value. Let’s use $70.
Net Profit Margin. Assuming product costs of $15 per visit and 9.25% taxes, Net Profit After Taxes = $48.53 ($70 – $15 – ($70 x .0925)). $48.53 divided by Revenue of $70 x 100 = 69.33% Net Profit Margin.
Profit Per Purchase is calculated for you at $48.53.
Discount Rate is currently 0.75% as of November 8, 2009 (it rounds to 1%) – think of the discount rate as a forward-looking inflation rate.
Product (or Service) Inflation Per Year. Using the inflation rate calculator again, we can see the inflation rate from September 2008 to 2009 has actually decreased -1.29% (it rounds to -1%).
Cost of Reaching a Potential Customer. As she plans to spend $2400 a year to reach potential customers, targeting 10,000 customers, her cost per potential customer is $0.24 ($2,400 / 10,000).
Response Rate. This is the percentage of respondents to her advertising efforts. Let’s say 2% until we know for sure.
Cost of Attracting a Customer is calculated for you at $12.
Coupon or Other One-Off Costs. This is the cost to obtain that particular customer, for example, a 10% off coupon for first visit. The cost to her would be $7 ($70 x 0.10).
Total Customer Acquisition Cost is calculated for you at $19.

Having inputted these values, I now click over to the “Basic Model-Calculations” tab and see that the Net Present Value of Acquiring a Customer (taking into consideration the stream of a customer’s income, ongoing costs, and cost of acquisition) is $221.

Now I click over to another handy Harvard Business Screen tool, the Customer Lifetime Value Calculator, which does something a bit different than the downloaded one. First, I clicked in the top right side Reset Inputs to Zero. I then entered my inputs:

Average Spend Per Purchase = $70
Average Number of Purchases Per Year = 9
Direct Marketing Costs Per Customer Per Year = $0.24 ($2,400 / 10,000 mailing) + $7 coupon = $7.24.
Average Gross Margin = 69%
Average Customer Retention Rate = 80%
Annual Discount Rate = 1% (rounded from 0.75%).

In summary of the below grid:

The cost of acquiring a new customer is $362 = (cost of mailing / response rate) = $7.24 / 0.02. What this doesn’t allow me to do is change the mailing costs where in the first year they receive the 10% coupon and in subsequent years they don’t, so I will assume they receive an annual coupon.
Expected Net Present Value in the 6th year is only $132 because it looks at the value of a dollar today compared to the value of that same dollar in the future, taking inflation (based on the discount rate) and returns into account. If the NPV is positive, it should be accepted.
The cumulative Net Present Value (taking into consideration expected inflation, based on the discount rate) of a new customer in the 6th year is $1,171.
The cumulative Retention Rate shows that in the 6th year, with an 80% retention rate, there is only a 33% chance of making another appointment. The longer they are a customer the more likely they are to “expire.”

Lastly, those things that she can affect to increase Lifetime Customer Value:

Work to improve retention rate above 80%. Be on top of how often her customers come in. Call customers a week in advance of their normal scheduling to ask if they are ready to make an appointment.
Send welcome and thank you cards.
If a customer leaves, be sure to find out why and work to improve those areas she can (if someone moves away, there’s not much that can be done).
If a customer is not coming in due to financial reasons, make a discount offer for their next session to keep them on schedule. The longer someone is away the more likely they are to look for someone else to do their hair next time. They will appreciate her understanding their situation and become a more loyal customer.
Get creative in her approach in obtaining new customers. For example, she could evaluate the least she could charge someone and still maintain profitability. She could then offer this discounted rate to the unemployed as a “get back to work” special. As long as they show her evidence of unemployment, such as a recent pink slip or unemployment income receipt, they can receive their discount. When they do get back to work, she can then raise her rates to normal and have a new loyal customer.
Offer a loyalty card, such as buy 9 get the 10th haircut free (color, highlights and other services not included).
Ask for referrals, which eliminates much of her acquisition costs.
Offer a discount for purchasing several sessions in advance.
Survey her customers to better understand who they are, what’s important to them, how satisfied they are, and areas she can improve. Follow up with calls and letters.
Segment her customers by lifetime value group. Conduct different marketing programs designed for each segment.
Monitor inflation and adjust prices accordingly.
Reduce product costs where she can, and charge more for people who require more products.
Offer additional services that bring in higher-paying customers.
Sell products that will increase her revenue per customer.
Improve response rate on mailings with messaging that better resonates with potential customers.
Test mailings’ response rate with and without the 10% coupon. If she receives a similar response rate without the coupon, eliminate it for cost savings.
Test different advertising vehicles to determine which provides a better response rate, then focus on those with the highest return and provide unique audiences.
Determine if other promotions instead of a 10% coupon would yield a better response rate, such as bring a friend with your first booking and receive half off (on the cheaper service of the two). The LCV of the friend would cover the upfront cost on the other person.
Don’t just focus on the response rate, but also on the return received (number of new customers times lifetime value) for the advertising investment made. Suddenly she may find she can justify a much greater promotion investment when looking at returns in this way.
Advertise in higher-income neighborhoods where she can command a better price. If this is outside where she works, she can make an arrangement with another salon to rent a chair on an as-needed basis when she obtains customers in that area. She can schedule appointments in that area together to minimize travel and chair-rental costs.
Use as many free advertising vehicles as she can, such as LinkedIn, Facebook and Myspace.
Conduct co-operative advertising with related businesses such as spas and nail shops in her area, to reduce advertising costs.

Anyone else have suggestions I can pass on to my friend to improve her LCV? And if you’re in the Venice Beach, California area and are looking for a great stylist, please call Sondra at 310.780.0290 to make an appointment.

Segmentation of the customer base by lifetime value groups, and different marketing programs designed for each segment.

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New Marketing Program May Increase ROI for Retailers

Rebekah — Thu, 10 Sep 2009 23:14:53 +0000

I learned today of a new marketing program targeted to retailers called CREDITZ (using “Z” in your name seems to be the “new black” these days). They claim their program increases marketing ROI because it is a trackable method to “increase sales, enhance brand loyalty, acquire new customers and strengthen customer relationships.” In a nutshell, they are trying to entice consumers to change their shopping habits so that they use a CREDITZ card, instead of a debit/credit card, with registered online and brick-and-morter merchants who have signed up for the rewards program. The consumer gets points for the amount of money spent on their purchases, which translates into CREDITZ-back that can be then spent on those same merchants.

The upside for consumers:

Earn 100 CREDITZ points for signing up, 100 points for taking their survey, and an unknown amount for referring friends and family.
Manufacturers may provide digital coupons for their products.
CREDITZ contributes 15% of their transactional revenue to widows and orphans because of aids, and micro-loans to entrepreneurs in developing countries.
Purchase gift cards from retailers.
Send CREDITZ to friends and family, even if they don’t have an account.
Combine household member purchases into one account for a one-time $10 fee, as long as you have more than 10,000 points combined.
At brick-and-morter retailers, look for the “GET PAID HERE” CREDITZ sticker on site.
“CREDITZ Digital Currency may be inherited through a valid legal will.”

The downside for consumers:

If you don’t read the below carefully, you may think that you earn 10 CREDITZ for every 10 cents that you spend, but that is not the case.

How long before I can start spending my CREDITZ?
Your initial redemption of CREDITZ is a minimum of 500 or more. Thereafter, you can spend any amount of your CREDITZ on goods or services at participating merchants and online sites.
10 CREDITZ = 10 Cents ––100 CREDITZ = $1.00 – – 1,000 CREDITZ = $10.00 ––10,000 CREDITZ= $100.00

The Ts&Cs state, “Merchants will typically pay you one (1) unit of CREDITZ Digital Currency for every one or two dollars that you spend with them, after discounts and before taxes.” Not only that but, “Each unit of CREDITZ® Digital Currency has a digital currency value of 0.01 of a US Dollar when you spend them.”

So what does this mean? If you spend $100 before taxes, you may earn 50-100 CREDITZ according to the Ts&Cs. Taking the conservative figure, 50 CREDITZ, if you try to spend them right away you can’t. You have to have earned a minimum of 500 points (for your first spend only) to start using CREDITZ points to shop…meaning that you have to spend $1,000 before taxes to use your first $5 in CREDITZ. That’s conservatively a 0.5% return for your money and effort.

When registering, they ask for all kinds of personal information: the kind of phone you own, who your carrier is, who your Internet provider is, what kind of pets you have, do you give your pets Christmas gifts (?!), what kind of music you listen to, what types of movies you like, where you buy books, what is your favorite color (seriously!), and it goes on and on.
There are spelling errors all over the site, which irks me.

Tracking Return Conversions

Rebekah — Fri, 04 Sep 2009 21:11:15 +0000

I read a white paper recently geared to online marketers from the company FetchBack, a retargeting company. In a nutshell, they state that online marketers often track the metric “conversions,” which can be different for each marketer depending on their business, for their website and from specific campaigns. What people often fail to take into consideration, however, is what percentage of conversions are from people who absorb information and then come back later to purchase.

Why is this important? Because it’s so expensive to find a new potential customer that it is of value to invest in retargeting that customer who now knows about you. Of course, the company offers a solution to this problem which is to somehow tag that person and no matter where they go online, they will show your ad to them. Pretty nifty for a marketer.

As a strategist, I like to see what companies are doing in one area of business and think through how I might apply it to another area of business. It’s good mind exercise. I have a friend who is considering taking over a hair salon and running it, so while they could use this for their online marketing, how could this work in a real-life scenario?

Say that she successfully takes control of this business, and decides to throw an “open house” to invite as many people as she can to visit. Some are current customers, some are their friends, and some are other people that she meets or who see her ad/press release. She could have a sign-in book which requests name, phone and email. After the event, she then has to sort through to categorize them as either current or potential clients. Now, how to retarget?

Some ideas:

See if they are on LinkedIn, Facebook or Myspace and connect to them, thanking them for attending and offer an incentive to schedule an appointment. A larger incentive within the next 30 days, a smaller one for the next 60 days, another smaller still for next 90 days.
If, after 30 days, they do not take her up on the offer remind them again of the smaller incentive for the next 30 days. Same for 60 days.
If, after 90 days, she still has not received a response, follow up again with another offer, say a free haircut if they refer 2 friends who make appointments or a free haircut and color if they refer 5 friends who make appointments.
Send them an email asking if she can add them to an email update list that shares specials, or possibly an e-newsletter, no more than once a month.
For those she connects with on social media, she could send them a note saying that she’d like to offer THEIR friends a “2nd degree discount,” meaning that if they forward her offer to all their friends, the friends will will receive a discount on a service within 30, 60 and 90 days plus get a free [trial sized bottle of a hair product or whatever]. They just have to connect with her via one of the social sites (give the profile address) and provide the name of the person referring, which can be verified through their friend listing on their profile, unless they have hidden this view.
Those new first degree friends can then be provided the same opportunities as the previous.

Of course, it is important for her to track metrics for her business that would be applicable:

Number of customers who have made second appointments.
Number of customers who did not make second appointments.
Number of return conversions (those who did not initially make appointments, but later returned and did).
Number of customers who have been customers longer than one year.
Number of customers who have referred someone else.
Number of customers who purchased hair products but did not make appointments.
And so on

Does anyone have any other thoughts on how she could “follow” a potential customer around to retarget?

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Email Marketing Provides BEST Marketing ROI?

Rebekah — Thu, 27 Aug 2009 23:53:23 +0000

Two separate articles today point to the same conclusion – that email marketing provides the best opportunity to evaluate marketing ROI. Is this coincidence or is the Direct Marketing Association conspiring to convince marketers of this? Hmmm. Let’s take a closer look.In Marketing Budgets are Up – and Email Marketing is the Number one Area of Spend a study from Econsultancy, commissioned by Clash-Media, reports that:

“53% of marketing budgets for US companies have increased in the past year, in the face of slow economic conditions. This extra budget is being used to fund high-return Online Lead Generation campaigns, with Email Marketing the top area of spend, with 75% of organizations using it.”

Furthermore, they share a few open-ended responses, one of which is:

“Better comparability between online and offline Cost per Lead has enabled us to shift budgets from off- to online.”

In Email – the most accountable marketing going? the author claims that out of all the marketing channels available, PPC and email are the best to evaluate ROI. Their reasoning is that other channels only show you the good – when someone takes an action to buy – but with PPC and email you can see who clicked but did or did not buy. Furthermore, they say with email you can re-target those who did not open, who opened but did not buy, etc., which the author claims gives it an edge over PPC.

Here is the problem I have with these articles’ claims – both were authored by companies who stand to profit from their statements. This is an important point.

The first article, a press release, includes research from two companies who specialize in and profit from eMarketing. What is their relationship? A search reveals that Econsultancy pays Clash-Media nearly $2,500 a year for a Platinum Level listing in their online vendor directory. Furthermore, they are the ONLY marketing consultant/supplier with expertise in email marketing who is at that paid level. Does this mean that Econsultancy might be able to be strong-armed by Clash-Media into publishing the parts of the study that best supports their position? It’s not unheard of for a client to try that sort of tactic, but it’s not something that the company I work with, C.A. Walker, would ever allow. We certainly welcome companies to commission studies that could be used for press, but facts are facts. If study results do not support the client’s desired outcome, they know going into the study that this could happen and we will not change or tweak results to suit their intended purpose.

I’m not saying that the research in the first article isn’t accurate, however, the relationship of the two companies raises a red flag. The other issue I have with this particular study is their statement that “Email Marketing the top area of spend, with 75% of organizations using it.” The implication is that the most amount of money is being spent on email marketing, which is not what 75% using it means. 75% of the people in my office may be wearing sneakers right now with shoelaces in them, but that doesn’t mean that shoelaces are a top area of spend for any of us.

Lastly, regarding this study, I found online the results from their same study from last year, 2008, which states that “over 50% of marketers’ budgets now spent online.” That would mean that online marketing is now equal to the size of ALL the money spent combined for broadcast and cable TV, outdoor advertising, direct marketing, magazines and newspaper, specialty advertising, events, and sports sponsorships. Logically, it doesn’t make sense. Once again, it seems they used a figure where 50% of the companies checked off that they are participating in online marketing, and they extrapolated that to mean that 50% of their budget is spend online. Unless the survey asked respondents to share their BUDGET SIZE with them and how that was broken out, which is highly unlikely that marketers would share, this claim does not hold up.

The second article was written by Pure360 who sells email and mobile marketing solutions. I thought it in poor taste for the author to say that TV advertising is his “pet peeve” because of its lack of accountability. Television advertising is still one of the most successful marketing channels that there is. More people *still* watch TV than are online. The fact that it is difficult to evaluate ROI in no way diminishes the power of television advertising. Granted, with the increase in use of DVRs the effectiveness of TV ads drops, but advertisers simply have to get more creative to overcome the desire to flip past a commercial. The problem is not DVRs – the problem has been, still is, and probably will continue to be – bad and overly repetitious TV advertising.

The author really needs to have a larger view of engagement metrics across all channels before he could possibly ever argue that email is the best. That’s actually why I put this blog together, because it takes a serious study of these matters, over a great deal of time, to be able to draw any conclusions about which is best and what metrics to use for what channel. What I plan to focus on next is exactly this – how do we best measure engagement across different channels? What is the latest thinking from the top thinkers (including the researchers who I work with) in these areas?