LTV Case Study

This case involves a company sellingseasonal food products (Florida fruit)by catalog, retail store, and face-to-face sales.Most (85%+) of their sales occur during the holidays from mid-November through January.

Most buyers are consumers, purchasing either as a gift to be sent by the company, or for a family gathering.Businesses are not the bulk of thecustomers butmake up a very large part of the sales.Salespeople contact the larger businesses (those with 50 or more employees).The smaller businesses are treated like consumers.

Converting prospects into customers is currently being done at or near break-even level.The best source to acquire new customers above break-even is by marketing to the gift recipients.As recipients are mainly people at their home address, most new customers gained this way are consumers.

Converting a business prospect into a buyer is generally done below break-even.That is, acquisition cost tends to be higher than with consumers.However, they tend to be much more loyal, place larger orders, and send to more recipients (who can then be acquired.)

Recently, the company began acquiring new customers through"remnant space"newspaper advertising.They did this by offering a low-priced selection for $19.95.Their typical average orderfrom catalogsis $65.While these new buyersfrom newspapersare marginally profitable to acquire, they tend to continue to make small orders in thefuture andare less loyal thancatalogbuyers that made a larger first order.

Because the business isseasonal,and food is perishable, they will at times use whatever methods are necessary to move inventory, even if it means acquiring customers with a lower Lifetime Value than would otherwise be possible.Up to now, however, they have not considered Lifetime Value, only acquisition cost.

Compare acquisition cost to Lifetime Value using the following input numbers.Also consider value after 1 year.The company spends most of its prospecting dollars on space advertising, much less reaching consumers, and has virtually discontinued reaching businesses.

Use the LTV Case Study Sample input numbersbelowto compare consumer, business, and space ad acquisition methods.

Consumer Figures:

Business Figures:

Space Ad Figures:

Cost to reach a prospect

$0.60

$0.70

$0.01

Average response

1.10%

0.90%

0.51%

Average initial order

$70.00

$80.00

$19.95

Average COGS

50.00%

50.00%

70.00%

Initial Fulfillment Cost

$7

$8

$4

Cost to reach a customer

$0.50

$0.50

$0.50

Number of customer mailings/year

4

4

4

Response per mailing year one

16.00%

24.00%

8.00%

Response per mailing year two

13.00%

16.00%

6.00%

Response per mailing year three

11.00%

12.00%

4.00%

Time Value of Money Discount

20.00%

20.00%

20.00%

Average repeat order

$75.00

$150.00

$30.00

Average repeat COGS

50.00%

50.00%

55.00%

Repeat Order fulfillment Cost

$6

$7

$5

Given the success of acquiring new customers at a very low cost, the company has spent nearlyits entireprospecting budget on space ads, very little on consumercatalog, and recently eliminated marketing to business prospects.

Consider:Which method has the lowest advertising cost to acquire a customer?

Consider:Which method has the lowest initial investment per customer?

Consider:Which method has the highest profit per customer per year in year one?

Consider:Which method has the highest profit per customer per year in year one MINUS initial investment per customer?

Consider:Would you re-allocate their prospecting dollars? Why or why not? What would recommend?