Working out the lifetime value of a new customer
When calculating the return on investment (ROI) of a direct marketing campaign it’s important to bear in mind the lifetime value of a client, not just the initial order value.
Let’s assume you are an accountant, and your average fee income is maybe ??700 per year per client. That’s the average of sole traders just needing self assessment tax returns up to limited companies needing full annual returns and VAT.
Then assume that a client stays with your accountancy practice for 3 years (in reality most accountants probably keep their clients for far longer as the accountancy sector isn’t generally known for a high turnover of clients).
So this gives an average new client lifetime value of ??2100. Looking at this figure a business can decide how much is an acceptable sales or marketing cost to gain this client.
For example a cost of sales of 10% means that the business can afford to spend ??210 to gain each new client.
Then let’s look at the cost of sending a mailing to gain these new clients. If an accountant mailed 500 prospects from our Prospect Download Business database the campaign might cost about ??375 (75p each for postage, data costs, printing and so on).
On a conservative conversion rate of just 1% (although direct mail can achieve up to 5% or more) this would generate 5 new clients at an acquisition cost of ??75 each, well under the allowance of ??210.
Put another way the mailing to 500 prospects only needs to gain just 1.5 new clients to cover its costs!
It just demonstrates that you sometimes need to look beyond the initial acquisition cost to determine the longer term profitability of a new client.