E-Mail : What's That Contact Worth?

Using e-mail to build lifetime customer value

November 2008 By Loren McDonald

singlepage

Today, smart marketers are beginning to tie their marketing activities to the lifetime customer value of various segments of their databases.

E-mail is a key ingredient in this approach and can be used to target marketing dollars more effectively by sending more relevant messages and offers.

Instead of blasting out a single message to an entire database, a marketer can tailor messages to customer segments based on their lifetime values, both to solidify the relationship with those customers and to try to build the value of lower-performing segments.

Targeting messages this way has other rewards, too: More relevant messaging means recipients are more likely to open and act on your e-mail and less likely to unsubscribe, go inactive or simply report your e-mail as spam.

First Step: Define and Calculate LCV
The basic definition of LCV is the amount of money a customer represents to your company, minus acquisition and retention costs, for the life of his relationship with you.

In order to calculate it, you need a basic set of data about your customers:

• How long is the typical period between purchases?
• What percentage of your customer base makes a repeat purchase?
• How much is the typical purchase?
• What are the profit margins and actual profits per purchase?
• What are the discount rates (price reductions, incentives, etc.) and product inflation rates?
• Calculate your acquisition rate:
  - Cost of reaching a customer
  - Response rate
  - Cost of attracting a customer
  - Coupon costs and other incentives

For more on calculating lifetime customer value, visit the Harvard Business Review's calculator.

Next Step: Use LCV to Create Customer Segments
How you define high- versus low-value customer segments depends on your business and objectives. While not based directly on LCV calculations, the following represents a simple approach to segmenting customers into four categories according to their values:

• Top Spenders: Those who ordered twice in a set period and spent more than $125.
• Moderate Spenders: Those who ordered in the past, but not on a regular basis.
• We Want You Back: Those who ordered in the past, but not in the last two years.
• Prospects: Those who opted in for e-mail, but never ordered.

Once you create segments, map them against your e-mail list to identify addresses associated with each of your criteria. Once you create these e-mail segments, you can start thinking about e-mail initiatives to help you reach each one more effectively.
E-mail's Role in the LCV Equation
Depending on your goals for each customer segment, e-mail can help build or strengthen a relationship and accomplish these goals for your segments:

• Increase the average or total purchase amount per order.
• Increase purchase frequency.
• Drive more purchases in other channels, such as related company divisions or sister companies.
• Reduce customer service costs.
• Cross-sell to sister brands or products.
• Upsell users to premium services.
• Upsell purchasers to higher-margin products or services.

For example, this is how the strategy might work in three different sectors:

Financial Services—The high-LCV segment of a bank might include customers with several high-balance deposit accounts, mortgage and home-equity loans, and bank-issued credit or debit cards.

Here, e-mail can be used to promote wealth management services through personal money management and investment consultation, typically higher-margin services supported by fees and other revenue sources.A low-LCV customer segment might include users with only a single checking account, but who are frequent users of human tellers at local branches. A targeted e-mail program could be developed to educate this segment on the benefits of online or telephone banking and to promote CDs and savings accounts. The goal for this segment becomes increasing share of wallet and reducing customer service costs.

Retail—Probably nobody understands better than a retailer about segmenting customers based on their LCVs. Macy's, for example, distributes benefits among its store credit card holders according to their previous year's purchases. The more they spend, the more rewards (specialized promotions, free gift wrap, private sales and discount days, etc.) they receive. In this example, e-mails can be used to promote these benefits to customers at reward threshold levels and to reduce the costs of fulfilling the program.

Online Publishing—Many online publishers have free and paid versions of their services. Moving low-value free users into basic or premium paid services is a common goal.

These initiatives can help target that lower-LCV segment and move them into a higher-value segment:

• Solo offers for free samples of paid issues, free demonstrations or trial subscriptions.
• Free excerpts of paid whitepapers.
• Free versions of paid newsletters, including a list of the extra content in the paid version.
• Incentives including downloads, as well as publication and convention discounts available only to paid users.

How LCV and E-mail Segments Can Diverge
Be careful not to assume that the customers who are your most active e-mail users are also your highest-value customers. Those who open and click most frequently are not necessarily those who convert from e-mail. For example, if your e-mail program relies heavily on discounts and free shipping to drive sales, you may be reducing the profitability of high-value customers who are more likely to purchase without incentives than are their lower-value counterparts.An e-mail program that includes sending messages triggered by customer actions, such as links clicked and shopping cart abandonment, can instead generate higher-value orders because the e-mails you send are based on the specific behaviors of individual customers. You likely won't need to sweeten the deal as frequently with incentives that cut into your profit margin and reduce LCV.

8-Step Action Plan to Implement LCV-Based E-mail
Improve the lifetime value of your customers with the following steps:

1. Determine your LCV segments. Remember, this is highly proprietary to your company, not something that you can benchmark using industry averages or statistics.
2. Determine goals for each LCV segment. As noted above, these can be moving customers toward higher-margin products and services, converting free users to paid, reducing costs, and the like.
3. Analyze the current impact of e-mail on each segment. Track metrics such as click and conversion rates to see if e-mail activity relates to customer value.
   Note: Be careful about using the open rate, the percentage of users who open the e-mail message in a set time period, because it is notoriously inaccurate. Users who read only part of an e-mail, don't download images or read e-mail on hand-held devices might not have their opens recorded, giving you an artificially low open rate.
   If you really do want to use the open rate, use it only to compare segments with each other rather than an absolute or target rate, or to compare it over time within a specific segment to see if it rises or falls.
4. Determine how e-mail can help achieve the goals you outline in step two. The initiatives outlined above for a financial institution aiming to cut costs by moving more low-LCV customers into online banking also can apply to retailers who want to reduce postage and increase on-time bill payments by making it easier for customers to pay their bills or file service requests online.
5. Test the program thoroughly in each segment. Use a limited random sample, study results and watch carefully for customer sentiment. Be ready to refine your goals and strategies. And, if one initiative fails, learn from it and move on.
6. Acquire and implement the tools you will need to measure your progress and results. Solicit management input before, during and after testing, and throughout implementation, to assure buy-in.
7. Roll out initiatives across your segments.
8. Monitor LCV continuously, assessing whether enough customers are moving up within their segments, or from one segment to the next, to justify your time and expense.

Retooling E-mail for LCV
Leveraging e-mail to build LCV requires you to rethink how and why you e-mail your customers, and possibly remake your program from top to bottom. However, this retooling strengthens your e-mail program and, ultimately, your bottom line by driving higher customer engagement and value from each of your LCV segments.

Loren McDonald is vice president of industry relations for Silverpop, an Atlanta-based e-mail marketing services and solutions firm. McDonald has 24 years of experience in marketing, consulting and strategic planning. He can be reached at (678) 247-0500.

• MORE ON
• DATABASE & CRM
• ONLINE MARKETING