Prospect LTV

When you do acquisition, you want to know the LTV of the prospects that you are trying to acquire. But how can you know anything about them, since they have never bought anything from you?

Many companies have been quite successful at this kind of analysis. First, you develop the LTV of your existing customers. Segment them by demographics, and develop the LTV of each group. Next, you append the same demographics to your list of prospects. Experian, Donnelly, Acxiom, and other companies will be delighted to append demographics (age, income, presence of children, home value, ethnicity, years at present address—some 200 different pieces of data) to your prospect file. They will even find prospects for you that have the demographics that you are looking for. Then you make the assumption that prospects that look just like your best customers will behave like your best customers and will have a similar LTV.

Armed with this prospect file, your next step is to test your marketing skills. Can you develop the right approach through mass marketing ads, letters, phone calls, or emails to win a significant number of these prospects as customers? The final step will be to determine whether these prospect look-alikes really do act like the customers that they were modeled after. When your tests are completed, do a direct-mail or email marketing promotion. You can create a table for prospects that looks like Table 13-4.

Table 13-4 : Selling to Segments

	Customer 3-year LTV	Matching prospects mailed	Mailing cost	Sales to prospects	Prospect response rate	Cost per sale
Group A	$865	400,211	$244,129	6,804	1.70%	$35.88
Group B	$522	200,011	$122,007	5,800	2.90%	$21.03
Group C	$217	50,034	$ 30,521	1,601	3.20%	$19.06
Group D	$ 14	50,055	$ 30,534	1,802	3.60%	$16.94
Total		700,311	$427,190	16,007	2.29%	$26.69

To create this table, you divided your customer base into four segments based on lifetime value. You determined the demographics of these four segments: income, age, presence of children, home value, and other criteria. Using these criteria, you rented prospect names that matched the profile of each segment, and you did a mailing to them. Your results were interesting. The prospects that matched your best customers with the highest lifetime value had the lowest response rate. Why should that be? It is not at all unusual. Banks, for example, find that their best customers are the least responsive. Rich people get more mail than poor people. They throw it away. In some cases, poor people are more likely to respond. You have to decide whether you want responses (acquired customers) or valuable long-term customers.

Group D is very interesting. It is costing you $17 to acquire customers who are worth $14. That does not make much sense. However, that is what most companies are doing because they have not read this book and they have not done the analysis. There is also another reason why most companies are acquiring worthless customers: They are set up for acquisition. They have a sales vice president who is compensated on the basis of the number of customers acquired. He does not get blamed if these customers are worthless. “It’s marketing’s job to make money with these customers. I just find ’em and rope ’em in, and I do a great job of it,” he says. Is this true in your company? Of course it is, unless you have determined the lifetime value of your customers, divided them into segments, and figured out which segments are winners and which are losers.

That’s what this book is all about—doing a thorough job of creating a marketing database, and profiling it to find out important facts. Then you use those facts to draw valuable and important conclusions.

Suppose Table 13-4 is a correct picture of the situation in your company. Your sales force is working hard, succeeding in bringing in a lot of worthless customers, and getting bonuses for it. What can you do about it? You have to do your homework, determine the lifetime value of the various customer segments, and then put your findings on the desk of top management. Convince management that the company may be acquiring the wrong people as customers. You will have a battle on your hands. It may get rough, but if you have done the job right and you stick to your guns, someone will recognize it. Then you have to work to change the situation. After all, the purpose of an enterprise is to make a profit, not just to acquire customers. We all know that, but we don’t act on it.

In a previous book, I described the situation I found at a client that sold credit insurance for credit cards. A profiling exercise was conducted that divided the U.S. population into seven sectors. Analysis showed that only three of the seven sectors ever bought credit insurance. Armed with this information, the company went to several banks (its customers) and suggested to them that they stop telemarketing to these unresponsive segments, since the sales did not justify the expense. What did each bank’s vice president of insurance respond? “Nuts. Call them all.” You see, these vice presidents were compensated on the basis of the number of customers acquired, not the cost per acquisition or the profits from the insurance. So the insurance company went on calling everybody.