Do Business Well

An appreciation of lifetime value (LTV) is key to the theory and practice of marketing and customer relationship management. However, while the term is often used loosely, calculation of LTV is not straightforward, so many organizations do not in fact do it. Lifetime value is defined as the total net benefit that a customer or group of customers will provide a company over their total relationship with that company. Modelling is based on estimating the income and costs associated with each customer over a period of time and then calculating the net present value in current monetary terms using a discount rate value applied over the period.

There are different degrees of sophistication in calculating LTV. Option 1 is a practical way or approximate proxy for future LTV, but the true LTV is the future value of the customer at an individual level.

Lifetime value modelling at a segment level (4) is vital within marketing, since it answers the question: how much can I afford to invest in acquiring a new customer?

If online marketers try to answer this from a short-term perspective, as is often the case – i.e. by judging it based on the profit from a single sale on an e-commerce site — there are two problems:

1. We become very focused on short-term return on investment (ROI) and so may not invest sufficiently to grow our business
2. We assume that each new customer is worth precisely the same to us and we ignore differentials in loyalty and profitability between differing types of customer.

Lifetime value analysis enables e-mail marketers to:

• plan and measure investment in customer acquisition programmes
• identify and compare critical target segments — strategies usually involve preferentially targeting the most profitable customers and minimizing communications with the least profitable customers
• measure the effectiveness of alternative customer retention strategies
• establish the true value of a company’s customer base
• make decisions about products and offers
• make decisions about the value of introducing new E-CRM technologies.

To illustrate another application of LTV and give an example of how it is calculated, consider the e-mail marketing challenge in Case study 5.2.

Touch (contact) strategy

Another key aspect of retention planning closely related to targeting is to think about your options for the range of e-mail and traditional communications, and the frequency that you plan to use. To deliver relevance also requires a plan specifying the number, frequency and type of online and offline communications and offers. This is a contact or touch strategy. Getting the frequency right is particular important, since if you get it too low you will miss out on your maximum potential for sales or leads but if you get it too high the recipient will stop paying attention to your communications or, worse still, will perceive them as spam. Spam is in the eye of beholder, and this is also suggested by the Doubleclick Sixth Annual Consumer E-mail Survey (Doubleclick, 2005) where Doubleclick asked consumers what they rated as spam. Table 5.4 lists the results of the survey.

The e-mail contact strategy should combine communications that coincide with different customer lifecycle stages, and also planned campaign activities and e-newsletters.

We also have to discover at which frequency the customer will become annoyed. Clearly if e-mail communications are too frequent, then the customer is less likely to have the time or inclination to open them. One approach is therefore to monitor the response for e-mail communications. However, higher frequencies will likely lead to higher response — which helps to explain the high volume of e-mails sent by Tesco.com to its consumers, although Tesco.com has recently been exposed by the BBC as ‘bombarding UK consumers with a massive e-mail marketing campaign’ (BBC, 2005). Based on the e-mail tracking service E-mail Monitor (www.e-mailmonitor.co.uk), from Interactive Prospect Targeting Services, the BBC said that Tesco was blitzing the nation with 16-20 million e-mails per month and reported that in September 2005 it issued 44 separate e-mail campaigns — more than Sainsbury’s, Asda, Waitrose and Somerfield put together. Part of this activity can be explained by Tesco’s market share. A Tesco spokesman was reported as saying:

More people shop with us online than with anyone else and we do communicate with a lot of them by e-mail. We know that customers hate junk mail so we try to target them as much as possible and make it easy for them to stop receiving e-mails if they don’t want them.

In 2005 Tesco was dealing with about 170 000 orders per week, compared with its nearest rival, Sainsburys.co.uk, which was receiving about 38000.

The alternatives to a high touch frequency, particularly for non-retail brands, are to research customer preferences or to offer a choice of frequencies at the point of initial opt-in. This may well suit the customer better, although it will probably lead to reduced sales compared to when the company has the choice of frequency.

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