Let’s go back to our fishing gear site. You’ve already determined that $45 is the average first time order. However, you’ve also figured out that if you can keep just one customer loyal and can get him to continue to buy from you, that customer becomes worth much more than $45. Over five years, he may be worth $300 or more. Over ten years, that figure could jump to more than $1,000. And those rev- enues come from pure retention efforts. If they’re through e-mail, the costs can be relatively low, compared to acquisitions e-mail marketing. In order to do it right, a professional e-mail solutions provider is recommended. This type of company’s main job is to help companies test, deploy, segment, and communicate with their customers in a variety of optimized ways. Now I say “optimized” because that is the key to building lifelong relationships with your customers through e-mail. You need to market to them individually, rather than en masse. They have to feel as if what you are sending them has value. A lot of it has to do with your offers, but a lot of it has to do with frequency of communication as well as content.
To calculate lifetime value, you need to know how much your best customers spend with your business. You also need to know or make assumptions about your customer retention rate.
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Permission-Based E-mail Marketing That WorksSuppose your new customer retention rate is 50 percent—meaning that for every two new customers that buy from you, one of them will continue to buy, or will buy again, and one of them will go away. Now suppose that during one e-mail promotion, you bring in 100 new paying customers. At a $50 average order, you’ve got $5,000 in revenue. However, between opt-in acquisitions lists and cre- ative costs, it cost you $7,500 to bring in those 100 new customers. If you can re- tain half of them, and they continue to spend $50 per year with you at no marketing cost to you, it would take one year for you to make your money back.
Obviously, you’ll have to spend money in order to get them to continue to buy from you. But keep in mind that your costs will go down after that first hefty ac- quisitions cost of $7,500. In-house e-mail programs are much less expensive, even if you use an outside solutions provider. Instead of $.15 to $.35 per e-mail address, and depending on whether you use a professional provider or a software solution, costs can range from a penny to a dime. (See solutions providers and software so- lutions in the Resources section at the back of the book.)
Given the acquisitions lists costs that you do not have to pay, you figure you are cutting out the majority of your costs when marketing to that list of 100. Sup- pose—worst case scenario—you spend $10 per customer each time you send out a promotion. This includes deployment costs and any creative costs you might have. And you send out five promotions per year. That is $50 per customer for that year. During the first year, half of these customers were those that were going to spend $50 per year, anyway. Because of your marketing efforts, half of your house file members’ yearly expenditure with you jumps to $150 per year. That’s $7,500 in revenue. The other 50 members of the list of buyers, remember, were not going to spend a dime. However, based on your first year’s marketing efforts, suppose you’ve managed to retain another 10 percent who will continue to spend $50 per year with you as long as you market to them. That is an additional $500 per year.
Your revenue from your first year’s efforts is now $8,000 at a cost of $5,000. You are now in the positive—you’ve managed to increase revenues, while at the same time marketing to your house list and defraying your upfront acquisitions costs.
Figure 11.1 charts your costs and revenues for one year.
Now let us take it a step further to see how we can calculate lifetime value of these customers. In a nutshell, your lifetime value is your customers’ average revenue over the term of their relationships with you. And although not every cus- tomer on your file will spend the same amount with you (and many, as we’ve seen, will only buy from you the first time), the average lifetime value of your actual buyers is spread out across all of your customers.
So, getting back to the last example, we saw that after the first year we were profitable. Every year thereafter, although we will continue to see customers fall off the file, our retention rate will increase. By the following year, we may have
11 / Promoting to Your House List: The Other Side of E-mail Marketing
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13760 percent who spend $150 and 10 percent who spend $50. Now keep in mind those percentages are based on the new quantity of the list. In other words, of that 60 percent from the last example of that original 100, or 60 people, a total of 70 percent will spend something. So 36 people will bring in $5,400 and six people will bring in $300. Grand total: $5,700 in revenue ($95 per customer, based on 60 customers) and $3,000 in costs ($50 per customer, based on 60 customers). So your profit per customer is now $45 per customer. And it goes on from there. You can continue this exercise for five, ten, or fifteen years . . . or however long you have customers. Once you’ve determined your profitability from these customers over a certain time, you then add up the profits over the years and divide by your original number of customers. See Figure 11.2 to see how these costs and revenues look over a five-year period.
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Permission-Based E-mail Marketing That WorksFIGURE 11.1 Marketing Costs and Returns. (Numbers in parentheses are negative)
Acquisitions Revenue/Customer $ (50 Acquisitions Cost/Customer $ (75)
$ (25) Revenue/Customer after acquisitions Year 1 Revenue/Customer $(133
Year 1 Cost/Customer $ (50) Revenue/Customer after one year
$ (83 Revenue/Customer because of customer buying after acquisition
FIGURE 11.2 A Five-Year Picture of Costs and Revenues
Total # of Retention Total Total
Year Customers Rate Revenue Cost Profit
Acquisitions 100 60% $ 5,000 $7,500 $ (2,500)
Year 1 60 70% $ 8,000 $3,000 $ 5,000)
Year 2 42 80% $ 5,586 $2,100 $ 3,486)
Year 3 34 85% $ 4,469 $1,700 $ 2,769)
Year 4 29 90% $ 3,857 $1,450 $ 2,407)
Year 5 26 95% $ 3,458 $1,300 $ 2,158)
291 $30,370 $17,500 $13,320)
133.20 LTV
This is a simplified example and does not take into account things such as fulfillment costs, nor any other fixed or variable costs, such as:
• Cost of goods. This usually is a fixed cost.
• Fulfillment costs. Includes order entry, shipping, and handling. It also is usually a fixed cost.
• Overhead. This is typically calculated as a percentage of sales.
This example is based only on the marketing costs, and is used only to demonstrate the lifetime value calculation, or in this case—long-term value. Once you’ve determined whether or not to include your other costs, as noted above, and you have that total costs number set, you can then determine how much you can spend on your retention marketing efforts.