Life-Time-Value Catalog vs. Web

by Stephen Lett

Life-Time-Value (L-T-V) is the value of all of the purchases a given customer has made to-date plus the value of the purchases this same customer is likely to make (discounted for present value) over time. L-T-V helps determine how much you can afford to invest for a new buyer looking beyond their initial purchase. For example, you can afford to investment spend for a new buyer as long as it is less than the average lifetime profit per customer (including your buyer acquisition cost). This assumes, of course, that your cash flow is sufficient to handle a given level of spending. You are making a financial investment to acquire a new catalog buyer in hopes the payback will come in the future. How long you can afford to wait for the investment to payback depends on your financial situation and the payback opportunity itself; generally one year or less is what I recommend.

All buyers are not created equal even if they reside in the same R-F-M cell. The Web has caused us to look at buyers and the way they shop, i.e., their preferred channel, differently. The channel of origin does make a difference. The L-T-V of a web buyer is often not as great as that of a catalog buyer. That’s because buyers who came onto the file from organic or paid search are “item” buyers, not necessarily catalog shoppers. They were looking for a specific item and they found it. Mailing these buyers catalogs because they are in a most recent R-F-M cell will not stimulate them to make a repeat purchase no matter how many catalogs they receive. So again, the channel of origin does make a difference and affords the cataloger an opportunity to maximize contribution to profit & overhead by learning to deviate from traditional R-F-M segmentation.

The chart below provides an example of the 12-month value of non-web vs. web buyers driven by the catalog vs. web buyers driven, web driven. This shows what happens when we mail these buyers over a 12-month period. The cost to acquire the buyer originally is not part of our analysis. This chart is based on already having these buyers on the housefile. It shows which type of buyers is more value over a 12-month period. The weakest group is the web buyers who were web driven. Again, these buyers are item purchasers, not shoppers. This means they were looking for a specific item, they found it and mailing them repeated times will not alter their life-time-value. It will only increase direct selling expenses. The biggest weakness of this group is their low repeat purchase rate.

ABC Company - 12 Month Value Analysis
LETT Direct, Inc.
3/3/2009
   
Non Web Buyers
 
Web Buyers/Catalog Driven
 
Web Buyers/Web Driven
 
Results              
Circulation   50,000   50,000   50,000  
Response rate  
0.81%
 
0.88%
 
0.67%
 
A/O  
$160.14
 
$147.33
 
$135.54
 
$/Book  
$1.30
 
$1.29
 
$0.91
 
Profit  
$9,993
 
$9,746
 
($1,933)
 
Profit per order  
$24.67
 
$22.28
 
($5.75)
 
               
Repeat Results              
Repeat Circulation   3,240   3,500   2,688  
Response rate  
1.61%
 
1.88%
 
1.47%
 
Average order  
$180.03
 
$162.35
 
$146.12
 
$/Book  
$2.90
 
$3.04
 
$2.15
 
Profit  
$3,846
 
$4,474
 
$1,949
 
Profit per order  
$73.79
 
$68.18
 
$49.33
 
   
 
 
 
 
 
 
Profit Initial + Repeat  
$13,839
 
$14,220
 
$16
 
Profit per order  
$30.27
 
$28.26
 
$0.04
 

The web buyers that are catalog driven show the highest value over time. That’s because they have a higher repeat purchase factor (and, there are more of them to repeat). This group includes the most recent “hot-line” buyers which is also a factor. These are buyers who receive a catalog and go to the web to place their order. The non-web buyers also have a higher repeat factor and a higher 12-month value.

BEST STRATEGY FOR WEB BUYERS

Identify customers with only one purchase who found your firm looking for an item through paid search or affiliate programs. Be careful not to eliminate web driven buyers who searched using your company name. Flag your web driven buyers in the merge and reduce or eliminate mailings to them when older or lower performing segments are selected. Mailing them catalogs will only increase your marketing costs with very little in return. Instead, e-mail them on a regular and on-going basis. Give this group a strong promotional offer to encourage them to buy again. Caution: There can be exceptions for niche companies. If you have concerns about not mailing catalogs to your web only buyers, split them into two equal groups. One group you mail (and e-mail), the other group you only e-mail. At the end of the test period, determine the contribution to profit & overhead from both groups and base your mail vs. no mail decision on actual results. You may even want to test mailing post cards to the web only buyers as a way to drive them to the web as a less expensive alternative than mailing catalogs.

Circulation strategy is more complex today. Traditional R-F-M is not so easy to apply today. The channel does make a difference. Know that there are differences between catalog, web and multi-channel buyers. Adjusting your circulation planning to fit the channel will help you control costs while maximizing your results.