Customer Lifetime Value:

The best foundation for your acquisition, retention and distribution model

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Financial success in the newspaper industry is determined in many ways by the efficiency and effectiveness of your customer acquisition, retention and distribution strategies. There are a number of performance metrics used by industry executives who track and monitor in these areas.

When evaluating an acquisition strategy, a company typically measures response rates, cost per order, cost per unit and total starts. For retention campaigns, they usually measure return on investment for dollars spent improving 13-, 26- or 52-week retention curves by sales channel or the total subscriber base. With distribution, examining cost to deliver versus the pre-print advertising impact in a given area of your market are the metrics of most interest. Tightly managing each of these areas on a consistent basis will keep a newspaper executive in the top 20 percent of their peers.

The rapid transition to digital platforms has shifted publishers' strategic focus to understanding the actual financial value of each household in a market.  Customer Lifetime Value (CLV) has become the basis for helping drive strategy and results across all areas of the business. For newspapers, managing limited resources well and applying a very practical approach to driving profitable results with subscriber acquisition campaign design, targeting and execution is more important than ever.

There are two ways to approach this effort. First, management can reduce spending to achieve the same financial result in these areas or, second, they can choose to increase spending and achieve a much higher revenue yield. Either way, it's essential to have the right tools and measurements in place to achieve these goals.

What is Customer Lifetime Value?
CLV represents the expected weekly operating margin of a subscriber over the course of multiple years. Each subscriber is assigned a weekly operating margin based on direct revenues less direct costs attributed to the subscriber. In general, direct revenues are made up of circulation revenue and preprint revenue, and direct costs are made up of delivery cost and print cost. Subscriber retention at the household level is then calculated to establish the probability of receiving future operating margins using a combination of analytics based on tenure, subscription history, demographics and other subscriber characteristics. Combining the weekly operating margin and expected retention gives expected future cash flows over multiple years. Summing up these discounted cash flows results in a Customer Lifetime Value.

Expected CLV for targeted nonsubscribers can also be determined by analyzing previous campaign history, acquisition probability, household demographics and offer characteristics. The probability of acquisition is then combined with the CLV of each potential subscriber to get to a true Customer Lifetime Value of each nonsubscriber.

Applying CLV to deliver short- and long-range results
An effective way to use the information provided by CLV scoring is to evaluate the results of past subscriber marketing campaigns to identify opportunities to improve targeting. Initial acquisition campaigns are strongly tied to longer term subscriber retention, so understanding how to maximize their impact is a cornerstone for future success. Household level CLV scores can be applied to the subscribers resulting from previously executed campaigns and used to quickly determine if the company was successfully marketing to its most desired former or never-before-subscribing targets and whether there is room to significantly improve campaign targeting efforts.

The following are important questions to ask when evaluating the elements of your customer acquisition campaigns and establishing your particular strategy:

  • What percent of campaign targets are from the top valued households?
  • Is the campaign marketing to the same group of former subscribers or actively approaching high value households that have never subscribed before and testing their response rates?
  • Are entry price points going to provide the maximum profit yield (combined audience and pre-print revenues versus fixed costs) in the short term and as they retain in the future?
  • Are entry price points that are too low, intended to gain higher response rates, undervaluing the product?
  • Will long-term revenue/profit opportunities be enhanced by adjusting acquisition cost per order to produce a greater ROI in the short and long term?
  • Is the sales channel mix not only impacting subscriber retention but also driving up total acquisition costs from reselling higher churning, lower profit households?
  • What is the net profit per subscriber acquired, and is it trending in the right direction?

Once previous strategies have been evaluated and areas for positive change identified, it is time to apply what you have learned and use CLV scoring in customer acquisition, retention and defining the distribution footprint.

Best practices for using CLV scoring:

  • Allocate your mix of sales resources based on market profitability. Build your sales strategy by applying response and cost per order budgets to the most profitable households in the market as scored by the CLV methodology.
  • Make sure your team understands that some subscribers are more valuable than others. While it is important to make a reasonable effort to retain each subscriber, it is critical to go above and beyond for your most profitable subscribers and provide greater concessions to retain your most profitable customers.
  • Set incentive levels to prevent stops based on the CLV of the subscriber household. Incentives are often used to prevent stops. This tactic can be very effective, but very costly if not executed in a strategic manner. For example, if household 'A' brings a $5 per week profit and it is offered a $20 gift card to continue, then there is a four-week break even point. Applying the same incentive tactic to a lower profit household 'B,' where weekly profit is only $1.50, necessitates at least another 13+ weeks of retention to break even. Vary incentive levels and apply the most resources where the highest ROI is possible.
  • Use CLV scoring to find out which subscriber households are not profitable. The number of unprofitable customers is often surprisingly large. By identifying and adjusting the rates of these subscribers, you will make a positive impact to revenues and profit, regardless of whether they stop service or continue on at a higher rate.
  • Re-evaluate distribution footprints based on market area profitability. Identify clustered households where distribution costs are high and/or pre-print revenues are low, which drive down your profits. Using CLV, make adjustments to the distribution footprint that will have the least impact on advertising revenues but drive the most immediate profit improvements.

Knowledge = Profit
Knowing the value of each household in the market helps you make better decisions. Stronger strategic planning upfront allows for more flexibility with resource allocation and can immediately impact weekly profits. Simply identifying the households with the highest propensity to subscribe is no longer sufficient for implementing effective sales and marketing campaigns. Being able to determine profitability by household gives you the keys to drive improved revenue, expense and profit targets.

Bob Terzotis is a vice president for Mather Economics, where he helps clients achieve revenue and subscriber acquisition needs. His deep circulation background makes Terzotis uniquely qualified to assist publishers, circulation directors and vice presidents in meeting market challenges.

Jack Curran is a manager at Mather Economics, building econometric models and designing optimal renewal pricing strategies for clients. He has worked extensively on CLV projects and continues to help clients apply this knowledge to their business operations.

Mather Economics, Terzotis, Curran
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