How Do You Value Your House File?
by Stephen Lett
A buyer file, (i.e., house file), is clearly your company’s #1 asset. It’s the gold at the end of the rainbow. The house file is what makes it possible to purchase inventory, make payroll and pay the bills. Yet banks and other lending institutions place little or no value on your house file. Secured creditors are looking for “hard assets” such as inventory, furniture & fixtures, equipment, building & property, etc., to loan against. Some catalog businesses do carry their house file on the balance sheet but for most, it is considered an off-balance sheet asset and it is not valued as it should be. Regardless, the value of your house file should be established for this prized gem. This becomes especially important if you sell your business or merge with another company. When clients want to sell or purchase another catalog business, the first thing they do is ask us to establish a value for the house file. There are two different approaches. One is to value the house file as an on-going concern (preferred method). Another method is liquidation value which assumes future mailings will not occur. In this case, the value of the house file will drop rapidly. To start, we separate the actual buyers from the non-buyers (inquiries). Customers who have actually made one or more purchases are worth more than prospects who simply requested a catalog, i.e., catalog inquiries. In addition, the value of the house file increases or decreases based on the R-F-M (Recency, Frequency and Monetary Value) of the house file. Next, we need to determine the number of buyers by recency of last purchase. For example, the 0-12 month buyers have a greater value than the 13-24 month buyers and so on. Depending on the size of the house file, we must look at the amount spent and multi vs. single purchase buyers. More recently we have started to separate print catalog buyers from Internet only buyers since there is often a difference in the value of these two types of buyers. Once the number of buyers is known by category, we are ready to begin establishing a value for the house file.
There are two or three common methods. One method is based on the replacement value. Meaning how much it would cost to completely replace the house file. For instance, if you have 50,000 last 12-month customers and you invest $10 to acquire a new buyer, the value of the house file would be $500,000 (50,000 x $10 = $500,000). Another method is based on the amount of list rental revenue that the house file generates (this method is outdated since most prospect names today are selected from a cooperative database). I prefer to use a method that is based on actual historical results of the house file by recency using response and average order size data. The value of the house file decreases the older the buyers. As previously mentioned, the 0-6 or 0-12-month file is more valuable than the 13-24-month file and so on down the line. After 48 to 60 months little or no value is placed on the house file. I then take the average response rates and average order sizes by recency for a year. These results are multiplied by the number of buyers by segment. Using a reasonable customer retention factor, I carry the value over the next two years. This assumes no investment is made in growing or maintaining the house file counts. Obviously, the value of the house file decreases over time as the file becomes smaller. Basing the value of the house file on actual historical results is a much more creditable method of assigning a dollar amount to this prized asset. Regardless of which method you use, it is good to know the value of your house file even if you do not carry it on your balance sheet.
Stephen R. Lett is the Founder and Chairman of Lett Direct, Inc., and a catalog consulting firm specializing in circulation planning, forecasting, digital marketing and analysis since 1995. Mr. Lett spent the first 25 years of his career with leading catalog companies; both business-to-business and consumer. He is the author of a book, Strategic Catalog Marketing. He can be reached at 302-539-7257 or by e-mail at firstname.lastname@example.org.