The Phone Call


A year after the dot com crash, I had a telephone call from the CEO of a dot com start-up (yes, they were still starting them up, despite the carnage). He told me that his new venture would generate thousands of satisfied Web consumers who would gladly provide permission for resale of their contact information. He asked me what the value of these names would be, so that he could plug this number into the business plan required by his investors. He called me because he had been told that I had written several books and articles on the subject and could probably provide the answers he sought, over the phone.

The question had me stammering. I had never thought about the value of a name in the abstract like this. There are many things that have to be pinned down before the value can be determined. In the first place, the questions are, “Of value to whom? What are these names, and who would want to buy them? What can these names do for a potential buyer?” The CEO did not have the answers to these questions, but he assumed that I did.

So I started to examine the question in detail. Let’s visualize an ideal situation. Suppose you had the names of 500 Boeing executives earning $100,000 a year or more who have to relocate from Seattle to Chicago within the next 60 days. What is the value of these names? To a large real estate chain in Chicago, these names could be very valuable indeed, as Table 5-1 shows.

Table 5-1 : Chicago Home Buyers

Amounts

Names

500

Home value

$300,000

Commission rate

6%

Commission revenue

$9,000,000

Success rate

5%

Net profit

$450,000

Name value

$900

Name offering price

$450

Assuming that the Chicago real estate chain can sell homes to 5 percent of these executives (a not unreasonable assumption), then each of the 500 names is worth $900. The Chicago chain might be induced to offer as much as $450 per name and could still make $450.

But this is assuming that the names can be sold only to a real estate dealer. The executives will be buying many new services in Chicago after they move, including

  • Moving services

  • Doctor and dentist

  • Bank and insurance services

  • Automobiles and furniture

These names are valuable to many different businesses. Their value certainly exceeds $450 when all these potential buyers are factored in. Clever and aggressive marketing could yield a substantial profit from selling the names.

Is such a list of names of executives who are moving unique to the Boeing situation? Not at all. Companies shift their executives around all the time. But my dot com CEO’s list of names was not a list of high-income executives. It was a list of young people between the ages of 15 and 35 who had purchased music over the Web. What would be the value of these names? This is a different proposition altogether. We have to ask ourselves, “Who will want to buy these names?” The Chicago buyers that we mentioned before would probably not be interested. Perhaps the names could be sold to other e-commerce sites. Amazon or CDNow might buy them. Some retailer or cataloger might want them. Here the value would be much lower. Let’s see how the marketer could go about calculating the value of a rented name.

We can begin with the lifetime value of the acquired customers. Table 5-2 computes the lifetime value to a retailer selling music CDs where the average sale is $20.00.

87

Table 5-2 : CD Buyers

Year 1

Year 2

Year 3

Retention rate

40%

50%

60%

Customers

200,000

80,000

40,000

Average sale

$20.00

$30.00

$40.00

Sales per year

3

4

5

Revenue

$12,000,000

$9,600,000

$8,000,000

Cost %

80%

75%

70%

Costs

$ 9,600,000

$7,200,000

$5,600,000

Marketing ($10/yr)

$ 2,000,000

$ 800,000

$ 400,000

Total cost

$11,600,000

$8,000,000

$6,000,000

Profit

$400,000

$1,600,000

$2,000,000

Discount rate

1

1.08

1.16

NPV of profit

$400,000

$1,485,608

$1,724,243

Cumulative NPV of profit

$400,000

$1,885,608

$3,609,852

Lifetime value

$2.00

$9.43

$18.05

What Table 5-2 tells us is that the average newly acquired customer of this company is worth $18 in the third year. The details of this chart are explained in Chapter 4, “Computing Lifetime Value.” For now, let’s just concentrate on what it tells us. The retention rate of customers tends to go up after the first year, as does the average order size. Of the 200,000 customers who might make a purchase, the average person might buy three times a year. Forty percent of these purchasers would still be customers in Year 2, making four larger purchases per year. Fifty percent of those would last to a third year, buying even more.

The costs of servicing customers typically tend to go down each year, as shown here. The discount rate is needed to convert future profits into net present value of profit so that these profits can be added together to get the cumulative profit. The lifetime value is determined by dividing the cumulative NPV of profit by the original 200,000 customers to determine the value of a newly acquired customer. In this case, the newly acquired customers are worth $18 in the third year. This is the value to a company selling CDs that has already acquired these customers.

So to the dot com the names are worth $18 to their owner. What would they be worth to a potential buyer? Let us assume that the potential buyer is selling a product of similar value, so that the buyer’s customer lifetime value once it has acquired the customers would be identical—$18. What is the value of these names to a new company that wants to sell products to these customers? The value of a name has to be related to the cost of acquiring the customer by using various media (see Table 5-3).

Table 5-3 : Sales by Medium

Budget

Reached

CPM

Sales rate

Sales

Cost per sale

TV

$400,000

74,074,074

$5.40

0.04%

29,630

$13.50

Radio

$400,000

71,428,571

$5.60

0.03%

21,429

$18.67

Print

$400,000

25,000,000

$16.00

0.07%

17,500

$22.86

Direct mail

$400,000

1,086,957

$368.00

1.80%

19,565

$20.44

An outside buyer renting the name from the original company has to consider the costs of acquiring these customers on its own. There are two methods the buyer could use: direct mail or email. Let’s consider both possibilities; the costs are given in Table 5-4.

Table 5-4 : Two Methods of Contact

Direct mail

Email

Names

200,000

200,000

Cost of message

$0.37

$0.04

Sending cost

$74,000

$8,000

Response rate

1.8%

1.0%

Responses

3,600

2,000

Customer lifetime value

$18.05

$18.05

Value of customers acquired

$64,977

$36,099

Value after sending cost

($9,023)

$28,099

Prospect lifetime value

($0.05)

$0.14

Offering price

0

$0.07

If the response rate for direct mail is 1.8 percent, any direct-mail offer would be a loser. This is proof of the assertion that database marketing does not work with packaged goods. But with email, profitable database marketing becomes a possibility. The response rate will be lower, at 1 percent, but the marketing costs are far lower. The value of a prospect’s name is 14 cents. A marketer might be willing to offer half that for a name.

The lifetime value sets an upper boundary for the offering price. Anyone who offers to pay the full lifetime value for a prospect’s name will never make a profit. As a rule of thumb, we can assume that buyers will never offer more than half the projected lifetime value to acquire a name. So the offering price of a name with a projected LTV of $0.14 could not be higher than $0.07.

So, if the offering price of a prospect name to an e-commerce consumer name buyer is $0.07, what is the name worth to the seller? Here we have to consider marketing costs. Buyers do not materialize from nowhere once names are acquired. To sell names, most companies need the services of list managers and brokers who must advertise and get fees. The list owner will be lucky to get 75 percent of the offering price from any one buyer. With luck, the names can be sold several times per year. So we end up with the value of a name looking something like Table 5-5.

Table 5-5 : Value of a Name

Amounts

Offering price

$0.07

Marketing costs

25%

Net revenue

$0.053

Sales per year

3

Value of a name

$0.158

So we have an answer for the CEO of the new dot com. His names are worth $0.16 each if he finds a good list manager and promotes the names, and if everything goes well.

As you can see, this type of analysis is not difficult to do. It should be done before any business is created. If it had been done by the thousands of dot coms that were set up during the boom, we might not have had the dot com wipeout and the stock market crash. Let’s hope we see some sharp-pencil accounting in the future when “cool ideas” are floated to venture capitalists.




The Customer Loyalty Solution. What Works (and What Doesn't in Customer Loyalty Programs)
The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs
ISBN: 0071363661
EAN: 2147483647
Year: 2002
Pages: 226

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