Speaking Directly

In the design of a database marketing program, and its subsequent evaluation, LifeTime Value (ltv) is a cornerstone concept.Simply put, if you do not buy ltv, you will not buy database marketing either. Both require a long-term view.LifeTime Value asserts that,...

In the design of a database marketing program, and its subsequent evaluation, LifeTime Value (ltv) is a cornerstone concept.

Simply put, if you do not buy ltv, you will not buy database marketing either. Both require a long-term view.

LifeTime Value asserts that, based on history or reasonable estimate and over a specified period of time, a customer should buy your product or service ‘X’ times and, through those transactions, provide your company with ‘Y’ dollars in gross margin.

Any migration of your customers to a competitor will reduce or eliminate this profit.

ltv calculations are used extensively in direct-to-user businesses as they form the basis for many business decision models.

In the next few years, the use of ltv, and related concepts such as database marketing, will become widespread among ‘traditional marketers’ as the need for ‘effectiveness’ yardsticks grows.

Packaged business software offers a good business case in favor of ltv and database marketing. Here is why:

One category

First, the industry is largely comprised of companies that have their dominant brand in one software product category.

(Microsoft is the notable exception, with its dos and Windows operating system software and broad range of business software products.)

Second, packaged business software is a highly competitive business; the early glamor is gone, and today, it is as toe-to-toe as Coke versus Pepsi.

Third, the industry, which has been the beneficiary of significant retail price reductions for computer hardware, is facing questions relating to its pricing strategies.

Historically, the makers of business software have adopted a two-in-one strategy. By continuously improving the product, they try to defend their existing customer base and attract new users simultaneously.

They reason that enhanced functionality and improved ease-of-use offer a competitive edge that will win new customers and keep current users in the flock.

However, all customers are neither equal in their purchase behavior nor their value.

The present-day lifespan of one version of a software product is about a year; therefore, over five years, customers could buy as few as one or as many as five copies of one software product, and, consequently, the ltv for a specific end-user varies wildly.

Top end

At the top end are those who bought a full-price retail package first and then upgraded each time a new release was introduced. At the other end, there are those who bought, once, on a highly discounted ‘competitive upgrade’ basis.

It is probable that the ‘value’ of the first hypothetical customer group is 10 times greater than the second.

Admittedly, most customers will likely fall between these extremes, however, without a marketing database – to gather names and track buying behavior, among other things – it is impossible to know.

Working the average is double jeopardy: the best users are underserved (or inadequately defended) while money is wasted on the unproductive ones.

Estimating the ltv of your customers, whether you are in software or almost any other product category or service, is the first task of the prospective database marketer.

The second involves thinking about lies.

The 1-800 customer

centre

How and why you compile information are important considerations in the creation of a marketing database.

It is prudent to keep your first data ‘wish list’ tight by planning to obtain only the information that you are certain you will use in the short term.

A marketing database can always be made more complete, as time and experience dictate.

However, for many companies, just knowing the customer’s name, address, phone number, product ownership/service use and place of purchase is challenging enough.

Never mind media preferences, competitive data, and buying behavior. All in good time, friends.

A number of forward-thinking, non-direct marketers have established 1-800 numbers that customers use to register their product purchases and that the companies use to gather basic customer information.

These companies understand the importance and value of establishing a dialogue with their customers. The process is evolutionary.

After the initial customer call, a ‘welcome’ letter can be sent, together with a brief research questionnaire and related product or service offering (either fulfilled direct or through the retailer.)

Customized

The letter, the questions and the product offering can all be customized to match the customer’s profile.

Prospects call the same number to request product information, and by so doing, become part of the database.

Sources are recorded, and conversion rates tracked, to establish the knowledge base that can influence future media selection, promotional offerings, and so on.

LifeTime Value and relationship marketing are just two elements of a successful database marketing program.

We will explore others in future columns, and report on what Canadian firms are doing in the database marketing arena.

David Foley Associates, based in Unionville, Ont., specializes in design implementation and evaluation of database marketing programs. Please direct comments and questions to David Foley, David Foley Associates, 48 Woodman’s Chart, Unionville, Ont., L3R 6K7, or call or fax (416) 940-8784.