November 28, 2010

Dear Catalog CEOs: Lifetime Value of a New Item

Dear Catalog CEOs:

You occasionally ask me to analyze the merchandise life cycle.  In other words, you want to know what the lifetime value is of a new product, and you want to know what impact new product development has on the growth potential of your business.

A new product faces a daunting challenge.  In one instance, I demonstrated to a CEO that a new product has an 8% chance of surviving five years after introduction.  For this business, here's what the life cycle looks like:

In other words, a new item is expected to generate $8,000 total demand in the year it is introduced (known as the 'stub year', or 'year zero').  In the next ten years, the item will achieve a total of $35,000 demand ... or $35,000 - $8,000 = $27,000 of future demand.

The marketing literature is littered with lifetime value stories ... newly acquired customers generate $17 of lifetime value, for instance.

You'll be hard pressed to find a single story in the marketing literature about the lifetime value of a product.

It turns out that knowing the lifetime value of a new item is one of the key metrics to determine the success of your business.  Your product assortment is being transformed each year in a highly Darwinistic process of survival.  

In this case, only 8% of new items survive five years.  This means that your merchants are in a constant hunt for the 'next big thing'.  Your merchants must identify 100 new products, expecting only 8 of the items to still be offered five years later.  

Imagine what happens if your merchants fail to identify new products that meet acceptable productivity levels?

Yes, when you fail to identify great new items, your business struggles in the future.

We'll address that topic next week.

1 comment:

  1. Before online existed I worked at a mail order specialist running their acquisition campaigns for a collectibles company and LTV was the key measure.

    We'd look a 1 yr, 2 yr and 5 yr values as well as the cost per new client (for the 1st sale achieved through a display ad) and cost per client (looking at orders from new clients and existing clients).

    It’s odd that in the digital day and age, I’m yet to work with - or meet - a client who analyses data in as much detail, and most don’t even have a robust ROI measure.

    It’s not that there is insufficient data to crunch, far from it, but that most business have too little time because (as you put it in another post) they’re too busy “chasing returns”.


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