I trust that everyone reading this article is already very familiar with the concept of Lifetime Value; but to avoid any doubt, customer lifetime value (also referred to as lifetime customer value or just lifetime value, and abbreviated LCV, or LTV) is a marketing metric that projects the value of a customer over the entire history of that customer's relationship with a company. LTROI is therefore the return on investment obtained from customers throughout the length of their commercial relationship with that company.
Calculating LTV
There are many models that can be used to calculate LTV; however, they are only as good as the metrics you feed into them. Most of the models I have seen in the subscriptions publishing industry look at a 5 year life time.
The key metrics include:
* Acquisition yield and cost
* Renewal rate, yield and cost
* Cost of fulfilling the subscription (including postage, wrapping etc) – some publishers only take the incremental costs of fulfilling a subscription compared to a controlled circulation copy
* Rate of return – or the discount rate that you use to calculate the value today of money received in the future
* Additional revenues that you can attribute to the subscription, including advertising, cross-sales and list revenues
Some of these metrics could be significantly different across channels, and therefore I would strongly advise you to calculate different life time metrics for each channel / campaign.
When to use LTV analysis
One long running debate in the subscriptions industry is whether we should measure our results and effectiveness in the first year or over the life time of the subscription.
In my view, the answer is simple: you should always use LTV.
Subscriptions, by definition, are long-term relationships. Our products attract fantastic renewal rates and the average length of subscriptions goes way beyond a year. For example, at IPC, our average life time across all products is above 4 years, and for one of our products is actually over 10 years!
I have captured in the examples below the return obtained in year 1 and in a 5 year life time for a new subscription for two products; one represents a consumer magazine and the other one a business title:
| - | Title 1: Consumer | Title 2: Business |
| Average price | 38 | 200 |
| Renewal rate | 72% | 68% |
| Acquisition cost | 13 | 150 |
| Renewal cost | 3 | 30 |
| Cost of fulfilment | 20.00 | 23.33 |
| Year 1 profit | 5.00 | 26.67 |
| Year 1 return | 1.15 | 1.15 |
| 5 year profit | 29.51 | 238.59 |
| 5 year return | 1.45 | 2.08 |
If the businesses above had objectives of achieving a 15% return on their money in the first year, they would stop investing in marketing channels that secured an acquisition cost above £13 in the consumer title or £150 in the B2B case.
So now imagine, that both businesses have found a new channel that can secure them a significant amount of new business; for this example, I’m going to assume 2,000 subscriptions for the consumer title and 300 for the business title. However, the cost per order is higher as it involves direct mail and face to face sales respectively. The results per order for that channel would be:
| - | Title 1 | Title 2 |
| Average price | 38 | 200 |
| Renewal rate | 72% | 68% |
| Acquisition cost | 18 | 190 |
| Renewal cost | 3 | 30 |
| Cost of fulfilment | 20.00 | 23.33 |
| Year 1 profit | 0.00 | -13.33 |
| Year 1 return | 1.00 | 0.94 |
| 5 year profit | 24.51 | 198.59 |
| 5 year return | 1.36 | 1.82 |
The budget holder of those businesses may not allow the marketer to invest in these channels as they failed to meet their benchmarks. However, from the 2,000 orders that the consumer title would generate, £49k profit would be secured in the life of the subscriptions and the business title would generate £60k just from 300 orders. This excludes any other revenues that those names can generate: cross sales of other products, advertising revenue, list rental revenue etc.
Making the right choices
Measuring your results using year one returns can also lead you to back the wrong horse. This is the year one profit per subscriber analysis for the highest volume generating channels for one IPC title:
| - | Year 1 profit |
| In title ad | 14 |
| Inserts | 8 |
| Retail Affiliate | 7 |
| 6 | |
| Telemarketing | 4 |
If you were just looking at this information and, for financial reasons, you had to reduce investment in that specific title, you would stop telemarketing activity and even email if your budget cutbacks were severe.
However, now take a look at this other table, which includes life time value profit per subscription and is sorted in descending order by this indicator:
| - | Year 1 profit | Life time profit |
| In title ad | 14 | 40 |
| Inserts | 8 | 34 |
| 6 | 32 | |
| Telemarketing | 4 | 30 |
| Retail affiliate | 7 | 9 |
Would it make you think differently? Retail affiliate orders renew at a significantly lower rate and this is the channel you should cut if your budgets are reduced.
These two examples illustrate the importance of looking at LTV as part of your long term title strategies. We have to be smart with our money – we have to ensure we invest every single precious pound we have intelligently, and LTV analysis is critical for doing this.
Once you have calculated all your results per channel, you need to work with the budget holders in your business to set benchmarks – agree the lowest return you should get for each title, which will vary depending on the strategy set for the magazine. Then use the table you have created per title to make decisions on how to spend your money.
Of course, if you are thinking of selling / closing / changing a specific title and just want to maximise your profit in the current year… stick to year one analysis and frontload as much spend as you can in the first quarter.
Increasing the life time value of your customers
Now that I have hopefully convinced you of the importance of measuring your results over the life time, let’s review the areas that can actually improve your results; some of them may not be so obvious to everyone.
Below compares the effect of making various changes to your bottom line. All the profit increases, referred to below, have been calculated against our Title 1 case above:
1. Reduce acquisition costs
This is the first thing to look at for most of us: can you renegotiate with your printers? Can you bulk buy your paper? Do you have a number of preferred suppliers that give you better rates? A 10% reduction in cost would increase the life time profit by £1.3 (4%).
2. Reduce cost of renewals
Do you have the right supplier? Have you tested replacing one of your paper efforts by an email effort where email addresses are available? Have you tested delaying your telemarketing effort so that you get more renewals through cheaper channels first? A 10% reduction in cost would increase the life time profit by £0.49 (2%).
3. Increase your renewal rates
This is a never ending task. From improving the product, customer service and adding value to the subscription, to improving your renewal marketing efforts and payment methods and terms, what you can do on renewals is endless. So I would advise you to set up a testing plan having looked at all your analysis so that you can decide what to test first. A 3% increase in your overall rate would increase the life time profit by £2.34 (8%).
4. Yields
Any improvement you can make in yields will go directly to your bottom line – you may have room for slight price increases particularly if you have focused on improving the value of the subscription, so test this. (Equally, do remember that reductions in yields will come straight off your bottom line, so be careful with significant discounts unless the title really needs the volume!)
5. Reduce the cost of fulfilling the magazine
This is slightly trickier, to say the least, particularly for those of us at the mercy of the only viable postal supplier we have in this country at the moment. But it’s worth looking at how you can save a few pennies – from renegotiating with printers and mailing houses to grouping back issue mailings to achieve presstream discounts. This is an area that could have a direct positive impact on your bottom line. A 3% reduction in cost would increase the life time profit by £1.58 (5%).
6. Increasing cross-selling and other revenues from your customers
Use your database more. You have a great asset in all your customers that like your brand and you know a lot about them; so sell them other products and partner with other reputable and brand-fitting companies that can sell to them. Obtaining an increase in revenue of 10% will increase the life time profit by £6.21 or 21% (assuming a £0 acquisition cost for the second purchase). Only a few publishers take into account additional revenues at the moment, but it’s likely the industry will move that way. Other industries have done it – banks, for instance, group their customers in overall spend levels and decide their marketing strategies based on this.
Top key points that I’d like you to take from this article
1. Measure your results over the life time – if you don’t do so already, get started this month.
2. Get your finance / senior management team on board in understanding the way you make financial decisions.
3. Set up benchmarks to determine how far you want to go and when you should stop spending.
4. Review all areas that may help you drive your return – every little change helps.
5. Up-sell and cross-sell: your customers love you – make the most of it.
Subscriptions have often been considered a cost rather than an investment. But competition is tighter than ever, and companies are now realising the potential of subscriptions to benefit their brand and business. Those that don’t, risk being left behind by rivals who do.
Used wisely, great subscriptions strategies can make a real difference to the performance of your business, and life time value measurements are crucial to drive this wise use.
