October 21, 2009

OMS: Compound Interest

Please send me an e-mail message if you'd like a copy of the spreadsheet to follow along with.

Old-school direct marketers like to explore the concept of Lifetime Value.

In online marketing, however, the focus is generally on conversion rate, on getting customers to purchase something today, now!

So go ahead and obtain every single conversion you can. You can't argue that it generates sales today!

Now that you have a bunch of new customers, let's try something. Enter "0.00" in cells D6 - G6. Then enter "0.00" in cells B101 - B340. In this situation, you are acquiring new customers in year one, and then you're following them (and only them) for the next four years.

What did you learn?

Well, these customers generated $13.3 million in the year you acquired the customer.

But now take a look at the compound interest you earned ... $6.7 million in year two, $5.9 million in year three, $4.8 million in year four, and $3.9 million in year five.

You could roll this out into infinity if you wanted to.

In the subsequent four years, these customers generated $21.3 million.

Customers acquired in one year don't act like compound interest. But when you keep acquiring new customers, year after year after year, the result is like compound interest.

You think about your conversion activities differently when you realize that the customers you acquire today will spend 1.6 times as much over the next four years. By balancing short-term and long-term profit, you optimize your online business for long-term success.

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