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• What is the value of your customer list—today and projected for the next three years?
• What does it cost to recruit or acquire a new customer? and
• What is your “payback” period—that is the time it takes for a new customer to become profitable?
These are critical measurements of the financial health of a company.
Let’s look at ways to value your customer list, and home in on the specific customer metric of lifetime value (LTV)—how to calculate it and use it in the day-to-day management of your business.
Putting a Value on Your Housefile
Most direct marketers will tell you their customer list is their most important asset. In this time of frequent mergers and acquisitions, understanding what assets a company has and putting a value on them is very important. Typically, a multichannel marketer has dollars tied up in inventory, equipment, furnishings, real estate and certainly the people who run the business. However, the real equity the investment community values is the housefile. Appraising your list of customers helps financial people estimate the overall value of your company.
If your housefile is such an important asset, how does your accountant put a value on it? Here are three methods of appraising the customer list.
The cost-replacement method.
Every catalog or Internet seller should know what it costs and what it can afford to spend to get a new customer—from rental lists, various Internet marketing efforts, space advertising, trade shows or a friend-get-a-friend referral campaign. By looking at the annual average cost to get a customer across all media, it’s simple to multiply that cost times the number of buyers and arrive at one method of putting a value on the customer list.
Example: Your company has 130,000 buyers and it costs you an average of $20 to acquire a customer. Therefore: 130,000 x $20 = $2.6 million customer list value.
To fine-tune this calculation, discount buyers who are more than a year old. (See the chart below.)
You also can calculate the cost to acquire customers by media. For example, you can summarize the cost of all the names coming from list rentals. Repeat the same process for buyers who came from space ads or search engines. This will produce a true, weighted average of what it costs to obtain a new customer. Incidentally, most marketers are looking for a “payback” from customers within 12 months.
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The Business of Database Marketing