What's the Lifetime Value of a Reader?
Posted on Wednesday, September 26, 2012 at 11:53 AM
Don't obsess over the wrong numbers to calculate reader worth.
By
William Dunkerley
Have you ever calculated the lifetime value
of a new reader? That may sound like just an academic question with no
practical application. But in a pragmatic sense, it is really important
to find out the answer. Otherwise, how will you know how much is wise to
spend in acquiring new readers? How will you know the price at which you
can profitably sell a subscription?
The short-term profit/loss
results from an acquisition effort alone can lead you astray. They don't
tell the whole story. Yet these are the numbers some publishers base
their decisions on.
Don't Rely on Instant Results
One
client I worked with had fallen victim to looking only at the instant
results. She was relatively new to the publishing business. To her,
subscription sales was one profit center; advertising sales was another.
She wanted to maximize the profits for each center. For subscription
sales, that meant trying to maximize the profitability of each
subscription acquisition effort. This one-dimensional focus was actually
working against the publication's overall profitability in the long term.
Established
practice shows that with traditional direct mail efforts, it often costs
as much to acquire a new subscriber as you receive in revenue from that
new acquisition. That means, for example, if you do a $50,000 promotion
selling $50 subscriptions, you realistically could expect to acquire
1,000 subscribers.
To my neophyte client, that sounded like a bad
deal. Why spend $50 only to get no more than the $50 in return? Not only
are you not making any money from the new subscription, you'll have the
expense of fulfilling that subscription. Some publishers take their
total cost of editorial and fulfillment, divide it by the total number
of subscribers, and consider that's what it will cost to service a new
subscriber. That's a fallacious calculation, of course. What you really
need to consider is the incremental cost of the new subscriber -- i.e.
how much it will actually cost to add one more subscriber to your list.
That should be a relatively nominal amount.
Take a Closer Look
at Renewal Rates
The profit in subscription sales comes in
after a year has transpired, when you renew the subscriber. While it may
have cost $50 to acquire the subscriber, you can probably renew the
subscriber for $5 or less.
Your renewal rate and the average
total duration of a subscription (in years) should also figure into the
equation.
But, if you put too great a burden of profitability on
an acquisition effort, you may end up ruling out many possibilities for
acquiring new subscribers that will indeed be profitable in the long run.
Determine
Reader Worth in Ad Revenue
What's more, if your publication
carries advertising, you may well be able to afford to lose money in
getting new subscribers. Indeed, that's what publishers of free
publications do. There's no revenue from subscription -- only expense.
But it's worth the price, because having qualified readers to whom you
expose the advertiser's ads can be very profitable in itself.
Understanding
how much a reader is worth to you in terms of ad revenue is an important
part of your lifetime reader value calculation.
Avoid the CLV
Formula
Beware, however, that calculating lifetime value can
become too much of an obsession. In retail businesses unrelated to
publishing, it is a hot topic among some. A rather precise-looking
formula is even offered in a Wikipedia article for CLV (Customer
Lifetime Value). It is,
I
advise you not to use this formula, even if you understand it! The key
point to the lifetime value issue is to get a good general
understanding, a close approximation, of what that value is. And use
that understanding in your decision making regarding reader acquisition.
Don't
get bogged down in trying to split hairs.
William Dunkerley is
principal of William Dunkerley Publishing Consultants, www.publishinghelp.com.
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