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DETERMINING THE LIFETIME VALUE OF YOUR CUSTOMERS, Cont.
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Determining the Lifetime Value of a Subscriber to a Publication
| Goal: |
To ascertain the value of a subscriber over 5 years |
| Assumption: |
A monthly newsletter with a trial (short-term) offer of 3 months for $12.50 and a $100 yearly subscription renewal rate |
| Mailing: |
100,000 pieces at $450/M |
| Results: |
Assume a 1% response
100,000 @ 1% = 1,000 trials |
Figure 1
In the example above (figure 1), our goal is to find out what the value of this customer is over a five-year period if he subscribes to our publication after the trial offer ends. We use an example of 100,000 in order to simplify the equation (in fact, your list may be much smaller or much larger than 100,000 -- it all depends on your industry, your market, and/or your budgetary constraints). For now, let's assume that 1% of our list responds to our trial subscription offer (one thousand people).
The next step is to look at what it costs to obtain these new trial subscribers.
Cost to Obtain a Trial Subscriber
Cost of mailing
100,000 mailed at $450/M = |
$45,000 |
Less revenues from trial subscriptions
100,000 @1% = 1,000 trials @$12.50 each = |
-$12,500
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| Loss on promotion |
-$32,500 |
| Cost per trial subscriber (loss) |
$45.00 |
| Return on Investment: |
36% |
Figure 2
In the example above (figure 2), we see that it cost us a total of $45,000 to run this direct mail campaign. However, the new trial customers will bring in $12.50 each in trial subscription revenues for a total of $12,500. We then substract this revenue from our initial promotion investment of $45,000 to arrive at a net program loss of $32,500. The result is a return on investment (ROI) of 36%.
So when your boss sees this, he will probably say “Wow. Direct mail is clearly not for us.” But when the CPA sees it, he should say “Do more, do more!” Now you might be thinking, “What are you, crazy? Look how much money we lost!” But the CPA is right. Because he knows that we did not really lose money on our mailing. Not when we consider what the customers that we acquired are worth to us over time (figure 3).
5-Year Income From Trial Subscribers
| Promotion: |
100,000 @ 1% response = $1,000 @ $12.50 |
= $12,500 |
| Conversion: |
1st year 1,000 trials convert @ 50% = 500 1 year subs @ $100 |
= $50,000 |
| Renewals: |
2nd year 500 subs @ 70% = 350 1 year subs @ $100 |
= $35,000 |
| 3rd year 350 subs @ 80% = 280 1 year subs @ $100 |
= $28,000 |
| 4th year 280 subs @ 80% = 224 1 year subs @ $100 |
= $22,400 |
| 5th year 224 subs @ 80% = 179 1 year subs @ $100 |
= $17,900
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| Total gross income: |
$165,800 |
Figure 3
As you can see in the example above, we now have acquired a thousand new trial subscribers. Our goal will be to get these trial subscribers to subscribe to our publication for a whole year at normal list price. Of course we have to assume that only a percentage of the trial subscribers will renew the subscription each year. However, we can also assume that the longer a customer stays with us, the more apt he will be to continue to buy from us. This is why we show higher renewal rates from year to year.
The final step in determing the lifetime value of these new customers is to look at the 5-Year fullfillment cost (figure 4). Then we can calculate a profit per customer and use that number to set our budget.
5-Year Expenses For Trial Subscribers
| Promotion: |
100,000 @ $450/M |
= $45,000 |
| Conversion: |
1,000 trials x 3 issues = 3,000 @ 3.33 each per issue fulfillment cost |
= $9,990 |
| Renewals: |
1st year 500 x 12 issues = 6,000 @ 3.33 each |
= $19,998 |
| 2nd year 350 x 12 issues = 4,200 @ 3.33 each |
= $13,986 |
| 3rd year 280 x 12 issues = 3,360 @ 3.33 each |
= $11,188 |
| 4th year 224 x 12 issues = 2,688 @ 3.33 each |
= $8,951 |
| 5th year 179 x 12 issues = 2,148 @ 3.33 each |
= $7,153
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| Total gross income: |
$116,266 |
Figure 4
Now we can look at the profits that we plan to generate with this program over a 5-year period (figure 5).
Profit (or Loss) from Trial Subscriber Program
| Total Income |
$165,800 |
| Total Expenses |
$116,266 |
| Total Profit |
$49,534 |
| $49,534 divided by 1,000 trials |
$49.53 profit on each trial |
Figure 5*
Obviously, we will want to do much more of this type of program going forward, since we estimate that these 1,000 new customers will generate a profit of approximately $50,000 over a five-year period. And we haven't even factored in the 500 trial subscribers who will not subscribe in the first year. There is still a chance they will subscribe later.
The 500 subscribers that do not convert should get filtered into our house file for monthly promotions. Note that the income from these mailings and the income from renting or exchanging these names is not included in our calculations.
OK. Now that we have them in our file, how do we build a longterm relationship with
these new customers and prospects? |
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