Segment to Determine LifeTime Value
Drilling Down
Newsletter
# 59: 8/2005
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
*************************
Customer Valuation, Retention,
Loyalty, Defection
Get the Drilling Down Book!
http://www.booklocker.com/jimnovo
Prior Newsletters:
http://www.jimnovo.com/newsletters.htm
========================
In This Issue:
# Topics Overview
# Best Customer Retention Articles
# Segment to Determine LifeTime Value
--------------------
Topics Overview
Hi again folks, Jim Novo here.
This month, we've got LifeTime Value on the plate again.
That's a good thing, because 5 years ago, nobody ever asked about
it. Heck, 5 years ago, people kept asking me why I thought
tracking source of the click to behavior on the web site was so
important...
My, we have come a long way, haven't we?
We also have a couple of great customer marketing article links.
The first talks about a predicted upswing in customer loyalty programs
online. As the person who created the first "points for
page views" financial model and live program back in 1997, I bet
you right here most of these programs will fail to be profitable,
because people will not build these programs based
on behavioral analysis. The second article is really about
10 mini case studies on what is going on in the world of web
analytics. In a phrase, large increases in profit.
To the Drillin'...
Best Customer Marketing Articles
====================
Loyalty
programs on upswing among online retailers, study finds
August 19, 2005 Internet Retailer
Jupiter says a lot of loyalty programs are going to be launched in the next
year. I'd guess most of them will be a big mistake; you can really damage
your business if you don't know what you are
doing. Above all, make sure your program isn't constructed in a way
that will drive subsidy costs among best
customers.
Web
Analytics Special Report: Various
August 31, 2005 DM News
When the "bible" of the Direct Marketing industry finally does a
Special Report on Web Analytics you have to take notice. Guess we're legit
now! Clicking this link should execute a search of the DM News site and
present you with all the articles which tend to be short and contain concrete
numbers - like mini case studies. If the link doesn't work for you, go to
the DM News site and search "Web
Analytics".
Questions from Fellow Drillers
=====================
Segment to Determine LifeTime Value
Q: I have just been reading your article on Calculating
Lifetime Value (LTV) or Lifetime Customer Value (LCV). I am having
trouble calculating the lifetime value of our customers.
A: Yes, well, everybody does for some reason! Often
the problem is too much
focus on trying to look at the "average customer" as opposed
to segmenting
customers. By segmenting first, it's both easier to get to LTV
*and* more useful since it's easier to take action on a segment
than the "average customer".
Q: Our company provide accounting software solutions
to small to medium sized owner operated businesses.
Because of what we sell and who we sell to, a lot of our customers are
most likely to just buy one or two of our software products and unless
they sign up for support (only around 15% do), we may never here from
them again. It is therefore very difficult to determine an
average / standard lifetime that customers use our product.
A: Sure. First, the 15% segment that does sign
up for support sound like good customers to me. So that's one
segment. How long do they typically stay signed up? That's
the average life for this segment.
Then there are probably people who upgrade over time, right?
I can't imagine an accounting product that people would not upgrade -
perhaps not every cycle, but every 2nd or 3rd cycle. That's
another segment. Then there are probably some who both
follow the upgrade cycle and pay for support. These are probably
the "best customers" and they are a unique segment as well.
And finally, you have the buyer who makes one purchase and you
never see again. These people are also a segment.
Q: What should I base it on, how long our customers
use our products (which would be almost impossible to determine), or
how long they spend money with us? So I measure on average the
time between the first and last transaction of customers who have the
highest Recency???
A: LTV is based on profit, not how long they use the
product. But here we get to the other common problem with
determining LTV - what is the "life"? The answer can
be found in your data, or you use your knowledge of the business to
approximate.
For example, using your data and looking at best customers, how
long have the best ones stayed with you? That's the maximum
life, but you can use it as the "standard" life, if you
wish. A more critical look would be to look at defected best
customers - how long did they stay before they left you?
Which begs the question - how do you know when they have left?
Well, if you don't feel comfortable / can't look to the data for this
answer, use your knowledge of the business.
For example, does it make sense to you that someone who bought one
of these packages 5 years ago and has not upgraded is likely to ever
purchase from you again? They must be on a different platform by
now, right? And if they are not, they are continuing to run the
package on an old machine, is this the kind of person / company that
is likely to be a future buyer? I think not. So call the
LifeTime 5 years and work from there. Is it 3 years?
Perhaps; simply get agreement internally on what the "right"
length is and use that.
Or, go to the customers for the answer.
Survey customers who have not purchased in 2 years, 3 years, 4
years, 5 years etc. and ask them how likely they are to buy from you
again. If you try to contact people who bought 5 years ago and
you can't - phone number incorrect, e-mail bounces, etc. - well, you
have your answer, don't you?
If you can't contact the customer, you can't market to them.
If you can't market to them, there is no opportunity to increase
their value.
If you can't increase their value, their LifeTime has ended, by
definition.
If this same person was to come back and order again, from a
marketing perspective, they would really be a new customer, wouldn't
they? With a new company and in a new situation? Probably,
and that is probably how you would treat them anyway, right?
So, a lot of the LTV issue comes down to this: it has to be
actionable. If you can't take action on the information,
it's not relevant anyway. So find the easiest way you can
justify one way or the other to do the calculations, and move into
action on the information. Some segments will be easier to
figure out, some harder.
And remember, what you are really after in the end is to find some
way to rank these segments by source and value. The actionable
part of LTV analysis is this: what is the value of customers we
acquire through different marketing efforts? Once you line up
cost to acquire with customer value, then you are on the way to
optimizing marketing to drive the highest profitability possible.
Hope that helps!
Jim
-------------------------------
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
here
-------------------------------
That's it for this month's edition of the Drilling Down newsletter.
If you like the newsletter, please forward it to a friend! Subscription instructions are top and bottom of this page.
Any comments on the newsletter (it's too long, too short, topic
suggestions, etc.) please send them right along to me, along with any
other questions on customer Valuation, Retention, Loyalty, and
Defection here.
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2005, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
newsletter in whole or in part as long as you include complete
credits, including live web site link and e-mail link. Please
tell me where the material will appear.
| 
