Customer Lifetime Value Calculation in Email Marketing
Published on 10 November 2015 | Author Sebastian Pieper0
“How much can I invest to win a new newsletter subscriber?” How much profit does each new subscriber give me on average?” In order to answer these and similar questions, you can use a customer lifetime value calculation. The individual steps of this calculation will be explained in this article.
The customer lifetime value describes the value a customer generates in the course of his customer relation with a company. Value here refers to the contribution margin (turnover – variable costs). The customer lifetime value can be calculated individually for each customer. Usually, the average values for the entire customer base or segments of it are identified. With the customer lifetime value in email marketing, only values generated by an email subscriber during his subscription period which can be assigned to email marketing measures are taken into consideration.
In the best case scenario, marketers have at their disposal an intelligent CRM system which autonomously outputs the customer lifetime value. If this is not the case, the manual calculation is necessary. The following information is needed:
- contribution margin through email marketing,
- number of active subscribers,
- average duration of the subscription.
Contribution Margin Through Email Marketing
In order to determine the contribution margin through email, you first need to list all sales from the last 12 months (exemplary, flexible time period) which can be traced back to email marketing measures. Disputed attribute models such as “last click wins” may be even more justified in email marketing then e.g., in display advertising. However, users who click on an offer in an email and purchase directly, may have been influenced previously by other measures. On the other hand, users may not buy directly from an email but may be influenced towards a future purchase at a different touchpoint (“assisted conversion”). A “one size fits all” solution has not been found, yet, but the detailed identification of users at all touchpoints, as well as a good understanding of the customer journey help to approach a correct attribution.
Assigning the variable costs is easier. These are e.g., costs for sent emails (most email service providers offer packages which are billed according to the number of sent emails). The contribution margin for the past 12 months can be derived from this simple calculation: Turnover – variable costs
Average Number of Active Subscribers
Only active subscribers generate sales. Inactive users are users who have unsubscribed or have been unsubscribed from the newsletter (e.g. due to bounces). Furthermore, subscribers can be classified as inactive if they have not responded to emails in a certain period. There is no fixed guide value for the duration of this period. It depends on the targets of the individual companies which time period to consider as sensible. How do I calculate the average number of active subscribers within the last 12 months? We will show you a brief example calculation. Let’s assume there are 100,000 subscribers who were active for the complete 12 months, 50,000 were active for 6 months and another 50,000 were only active for 3 months. This results in:
+ 50,000 / 12 * 6
+ 50,000 / 12 * 3
Average Subscription Duration
In the next step we will add up the period from the subscription day until the day of the calculation with all active subscribers, with inactive subscribers we add the period from the subscription day until the unsubscription or start of inactivity. This period is now divided by the total number of subscribers. This will make the average duration of a subscription
Calculating Customer Lifetime Values in Email Marketing
Now we will divide the average number of subscribers of the past 12 months by the contribution margin achieved this year. The result will show how much of the contribution margin each active subscriber has generated on average in the past 12 months. Assuming that the total contribution margin was € 1,000,000, the calculation would look like this:
€ 1,000,000 total contribution margin
/ 137,500 active subscribers
= € 7.27 profit margin per active subscriber
When you multiply this value with the average duration of a subscription, you will get the customer lifetime value in email marketing. Assuming that the average duration is 3 years, the customer lifetime value would look like this:
€ 7.27 contribution margin per active subscriber
* 3 years
= € 21.81 customer lifetime value per email subscriber
Since the calculation of the customer lifetime value is only based on historical figures, the customer lifetime value in email marketing only represents a snap-shot and no forecast for the future. Email marketers should always strive towards optimising their measures and with it the customer life value. The value can be very helpful e.g., in the case of investment decisions.