The Importance of Measuring Lifetime Value

All too often, companies measure the success of leaflet distribution, and other promotional and marketing campaigns, on the outcomes that result from those campaigns.

In order to understand the impact of your direct marketing campaigns you must be able to accurately track the results of these campaigns over time.

This article discusses the importance of measuring the total value of the customers you acquire as a result of your marketing campaigns and not just the value of the sales that result directly from the marketing campaign.  The best way to achieve this is through measuring Lifetime Value – the total turnover and/or profit that a company obtains from each of their customers over the time that they remain as customers.

Worked Example

The concept of lifetime value is best explained by way of an example:

Let’s take two Opticians, both of whom distributed a special offer to 5,000 homes in their local area.  The total cost of each campaign was £800, including design, print and distribution.  They wisely used a professional distribution company who delivered all of their leaflets to the relevant homes.

Because the special offers were exclusive to the leaflets that were distributed, both companies were able to measure the results they obtained from their direct marketing campaign.

Let’s say that both opticians attracted 10 new customers and made £500 profit as a direct result of the direct marketing campaign.

Optician A does not understand the concept of lifetime value so takes the view that they have effectively lost £300 in their direct marketing campaign so they decide not to do it again.

Optician B, on the other hand, understands the concept of lifetime value and, based on information obtained from their research, they know that on average every new customer they acquire spends £250 each year and that each customer will continue to buy from them for a period of 5 years. The lifetime value of their each customer is, therefore, £250 * 5 which is £1,250.

So Optician B knows that the 10 new customers that they acquired will, on average, spend £12,500 with them over the next five years for an investment of £800.  They realise that this is a fantastic return so they not only continue to run their leaflet campaigns but they increase it.

Optician A thinks Optician B is mad but, at the same time can’t figure out how they are so much more successful than them!

Action Steps:

1) Calculate the lifetime value of your customers using the information that you should have in your accounting systems.

2) Ensure that you are able to measure the results of all of your direct response marketing campaigns.

3) Use the information from (1) and (2) to evaluate the effectiveness of the campaigns and repeat those that are successful and stop those that are not.

If you do not have appropriate tracking systems in place then read my article entitled “How to Measure Responses to Your Leaflet Distribution Campaigns“.