You could be seriously underestimating the effectiveness of your advertising program.
How would you judge the results of a direct mail campaign? If you only look at your customers’ initial purchases, you are missing the big picture. An effective campaign brings in customers who remain customers.
What is Lifetime Value?
Over the years I’ve consulted with over 100 different businesses on their direct mail campaigns. I’ve helped them overcome a wide variety of errors – and I’ve seen them all! But I’ve found that when it comes to direct mail, there is one major flaw that most businesses make – especially when they are first starting out.
That mistake is that their thinking is directed 100% on short-term, self-liquidating offers, instead of focusing on the bigger picture of long-term customer relationships. They look at the dollar return (or possible loss) on the one mailing they’re assessing, and don’t look at the lifetime value of the customer.
Lifetime Value is the total amount of money you make from a customer over the entire course of your relationship with him or her. The best way to explain why it is so important to know this when judging whether a campaign worked, or didn’t work, is to give several examples.
Example 1: The Novice/Trainer Marketer Has a Limited View
Suppose that a health club wants to promote a new location. They’re planning to mail to 10,000 people, offering a one-month trial membership for $39.95 and no commitment, and they want to estimate the pro¬jected profit/loss of their campaign.
Unfortunately, the marketing person at the club is really just one of the trainers, with no marketing background, and he doesn’t understand the concept of lifetime value. Here are the figures he’s working with:
Number of pieces mailed: 10,000
Cost of one-month trial membership: $39.95
No Lifetime Value has been calculated.
Cost of Mailing (Printing, Postage, List Rental, Computer Processing, Mail Processing): $6,000
Estimated Response Rate: 1% or 100 Customers
The estimated profit/loss without calculating the Lifetime Value into the mail campaign would be:
100 Customers
x $39.95 One-month trial membership
———————————
$3,995 Gross
– $6,000 Mail cost
———————————
$2,005 Loss
Without lifetime value calculated into the campaign, this health club would not want to proceed with the mailing. The projections show that this campaign would be a huge loss.
So instead they send a teenager around town putting flyers on car windshields in the rain. And the results are miserable.
Example #2: The Veteran Marketer Has the Big Picture
In this example, the same health club is promoting a new location. BUT this time the manager of the club has some marketing experience, and knows how to use lifetime value to help project the outcome of the campaign.
The manager knows that people who take the trial, on average, will pay for a total of six months of membership in the club. So let’s look at the figures now:
Number of pieces mailed: 10,000
Cost of one-month trial membership: $39.95
Average dues paid over 6 Months: $239.70
Cost of Mailing: $6,000
Estimated Response Rate: 1% or 100 Customers
Your estimated profit/loss with calculating the lifetime value would be:
100 Customers
x $239.70 LTV
———————————
$23,970 Gross
– $6,000 Mail cost
———————————
$17,970 Profit
Adding lifetime value into the equation makes it clear that this can be a highly profitable campaign. If the health club had followed Example #1, they probably would not have run the mail campaign and they would have missed out on $17,970!
I don’t think any of you want to miss out on that kind of profit. So, keep in mind that you should always look at lifetime value, not just the immediate results of the mailing. That way, you won’t be setting your campaign to fail before it even starts.