I received a telephone call recently from the CEO of a dot-com start-up (yes, they are still starting them up, despite the recent carnage). He said that his new venture would generate thousands of satisfied Web consumers who would gladly provide permission for resale of their contact information. He asked what the value of these names would be so he could plug this number into the business plan required by his investors. He called because he had been told that I had written several books and articles on the subject and could probably provide the answer over the phone.
The question had me stammering. I had never thought about the value of a name in the abstract like this. Many facts must 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 these answers, but assumed that I did.
So I examined the question in detail. Let’s visualize an ideal situation. Suppose you had the names of 500 Boeing executives earning $100,000 or more, who have to relocate from Seattle to Chicago within 60 days. What is the value of these names? To a real estate chain in Chicago, these names could be very valuable. (See Chart 1.)
Assuming that the Chicago real estate chain could sell homes to only 10 percent of these executives (a not unreasonable assumption), then each of the 500 names is worth $1,200. The Chicago chain might be induced to offer as much as $600 per name, and still make $600.
But this is assuming that the names can be sold only to a real estate dealer. The executives will buy many new services in Chicago when they move, including moving services, doctor and dentist, bank and insurance. These names are valuable to many different businesses. Their value certainly exceeds $1,200 when factoring in all these potential buyers. Clever and aggressive marketing could yield a substantial profit from selling the names.
Is such a list of names of moving executives unique to the Boeing situation? Not at all. Companies shift their executives around all the time. If California has rolling blackouts this summer and for several years to come, there probably will be hundreds of California firms that will want to move to another state. Anyone who can find the relocation directors at each of these firms could make a fortune selling these names.
But my CEO’s list of names was not of high-income executives. It was people ages 15 to 35 who have purchased music over the Web. What would be the value of these names? Here there is no forced relocation. You have to ask, “Who will want to buy these names?” The Chicago buyers already listed probably would be uninterested. 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.
The right buyer could expect to receive 8 cents of profit from a name. But the offering price could be much higher than the initial profit. Most retail merchants make their profit not from the initial sale, but from the lifetime value of their customers. To determine the possible name offering price, you have to determine the lifetime value of a satisfied e-commerce customer.
Of the 2,000 customers who might make a purchase, the average person might buy twice a year. Forty percent of them would still be customers in year two making three larger purchases per year. Fifty percent of those would last to a third year buying even more.
The costs of servicing customers tends to go down each year. (See Chart 2.) The discount rate is needed to convert future profits into net present value profit so that these profits can be added together to get the cumulative profit. The lifetime value is determined by dividing the cumulative NPV profit by the original 2,000 customers to determine the value of a newly acquired customer. In this case, the newly acquired customers are worth $12 in the third year. This value is used to determine the name offering price.
The lifetime value sets an upper bound for the offering price. Anyone who offers to pay the full lifetime value for a name would never make a profit. As a rule of thumb, you can assume that buyers will never offer more than half the lifetime value to acquire a name. So the offering price of a name with an LTV of 24 cents could not be higher than 12 cents.
So, if the offering price of an e-commerce consumer buyer is 12 cents, what is a name worth to the seller? Here you have to consider marketing costs. Buyers do not materialize from nowhere once names are acquired. To get names sold, 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, his names can be sold several times per year. So you end up with the value of a name looking something like this:
Offering price: 12 cents
Marketing costs: 25%
Net revenue: 9 cents
Sales per year: 3
Value of a name: 27 cents
So you have an answer for the CEO of the new dot-com. His names are worth 27 cents each if everything goes well.
This type of analysis is not difficult. It should be done before any business is created. Had it been done two years ago by the thousands of dot-coms set up then, we would not have had the present 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.