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How Much Is A Customer Worth?

We’ve talked a lot about return on marketing investment in this blog.  It’s critical to business profitability.   But there are gaps in the formula for calculating this that many businesses have simply not closed.  For example, when you giveaway an item as an incentive to close a sale, or gain a subscriber to you email list, there is obviously some cost to you.  If it’s only a downloadable file, that cost is minimal, but still there is some number that needs to be factored in to determine its impact on your profit.

We’re going to list five steps here to help you calculate the lifetime value of a subscriber to your email list.

  1. How many subscribers do you have?
    • When you total your list, do not include those that have previously bounced or unsubscribed
  2. Get an estimate on sales generated in the past year
    • Examine clickthrough direct sales (this is usually the default figure used and likely will be very underestimated)
    • Use promotion codes to track sales not directly generated
    • Overall sales increases, including those from forwarded emails, sharing in social networks, and other less obvious ways
  3. Set Your Time Frame
    • Is your business seasonal, or does it make sense for you to calculate this annually?
  4. Calculate the value of the subscriber (V)
    Here’s an example from one of our online retailer sites:
     

    • Active email subscribers: 4,500 (X)
    • Sales attributed to direct clicks in email over past year: $275,000 (Y)
    • Apply the equation V=Y/X
    • Value of the subscriber = $61 per yearTo estimate the lifetime value of your subscriber, examine the average time between the first and most recent purchases in your database. We’ll assume that 1/3 buy from you just once, another 1/3 buy for two years, and the others for three years.
      • 1,500 subscribers x $61 = $91,500
      • 1,500 subscribers x $122 = $183,000
      • 1,500 subscribers x $183 = $$274,500
      • Total value is $384,300
      • Divide this by the number of subscribers (4500)
      • Estimated value per subscriber is $85.40 per subscriber
  5. Results Analysis
    We have to admit there are a lot of weaknesses to this method. It only calculates direct clicks, not peripheral action sales, it only views three years, etc.  But it does give us a rough idea of the lifetime value of that subscription.  So you can see that a promotion campaign costing $100 per subscriber is too expensive to  make sense, but $10 per subscriber would be much more likely to net a positive result. 

    All online merchants have unique circumstances, with differing characteristics to their databases. This system is meant to serve as a guideline to help you start down the path of ROI analysis and profitability.

Over the life span of your relationship with your customer, you may do many thousands of dollars worth of business.  In a future post we will discuss calculating this lifetime value so that you have a better sense of what you should be willing to spend to attract and keep that customer.