Measure With Both LTV and ROI
Accurate projections are crucial to indicate in what direction a mailer should move. The 1990s saw the rising popularity of long-term-value analysis. This tool identified the value of a buyer or donor to an organization over her lifetime. The object was to identify individuals who would contribute significant sums of money to the organization through sales or donations over a long period of time. LTV is defined as net income from test and renewal mailings divided by the number of newly acquired names.
Some organizations have grown dependent on this one model for predicting the success of their direct mail campaigns. LTV is a strong indicator but it favors mailings that have lower response rates and higher average purchases. Direct mail executives often are in positions where they are given a fixed budget and need to earn their company a certain amount of money. LTV calculations do not identify target goals as easily as other forms of analysis.
To gain an overall view of a mailing's success, another calculation can be used: return on investment. ROI is defined as net income from test and renewal mailings divided by the total costs from test and renewal mailings.
ROI identifies the total net income from newly acquired names and compares it to the cost associated with acquiring the names and maintaining them.
This calculation shows the strength of campaigns targeted to larger audiences with higher response rates but lower purchases/donations.
Rather than relying on one tool, LTV and ROI analyses can be used together to give an im-proved evaluation of a mailing's success. When performing LTV and ROI calculations, include certain adjustments so the projections will be as accurate as possible.
Things to include in both LTV and ROI calculations:
· Results and costs from the initial test or acquisition campaign. Neglecting to include a test cost inflates LTV and ROI projections.
· Factor inflation into the costs of conducting the mailing. Costs rise every year. If your organization hopes to run renewal campaigns for years to come, expect the costs to increase. Likewise, if your organization orders in bulk, lower your costs accordingly.
· Use house file averages from your particular organization during the renewal projections. Once acquired names are added to your house file, conduct calculations using house file averages.
· Include appropriate attrition rates. House files built on straight letter appeals typically have an annual attrition rate around 25 percent while premium-based appeals are around 35 percent. While 75 percent of all mailing lists have been built on premiums of some kind, they have the characteristic of higher response rates, lower average contributions and higher attrition rates compared with straight letter mailings.
· The projections should be run for at least six years, which is when attrition rates tend to taper off.
The following sample calculation illustrates how LTV and ROI are calculated. In this example, a company conducted an acquisition mailing of 150,000 pieces, which earned 7,335 new names but lost $4,661. Through six years of renewal campaigns, those 7,335 people earned the organization a net of $119,076. The total cost of the test mailing and six years of subsequent renewal mailings was $211,690.
After calculating LTV and ROI for these newly acquired donors, it can be said:
· The LTV of each purchaser or donor is $16.23 ($119,076 divided by 7,335).
· The ROI is 56.25 percent ($119,076 divided by $211,690).
With these numbers a direct mail executive can determine whether continuing with this type of mailing is the best course for her group. When compared with another acquisition test, it may be possible to have a different mailing earn a higher LTV or ROI. These tools, when used together, give a more precise indication of the success of a mail program.