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Monday, January 21, 2008

Valuation of an E-Commerce Relationship

Recently we've been working on an e-commerce project for a client. The client's project involves a major Web play. And so lately I have been scouring the Internet and reaching out to smart friends to find the answer to these questions:

1- What is the monetary value of a registered member (i.e., an opted-in community member) on a retail Web site? This person has purchased a product or content from you.

2- What is the monetary value of an opt-in, e-mail address for an e-commerce prospect. This is someone who has not yet become a customer but who has granted you permission to add their contact information to your database.

The answer of course is: "It depends." But thanks to good friend and marketing guru Jeff James (a Microsoft alumnus), we can all refer to the following primer.

Customer Lifetime Value (CLV) is the dollar value of a customer relationship based on the present value of the projected future cash flows from the customer relationship:

Customer Lifetime Value ($) =
Margin ($) X (Retention Rate (%)/1+Discount Rate(%) – Retention Rate (%)

In a web ecommerce scenario, that should be relatively easy to figure out based on the average dollar amount of a sale, average frequency of sale, etc. On a site where ad revenue is generated, it can be more complicated, but still doable.


Prospect Lifetime Value is the expected value of a prospect minus the cost of prospecting:

Prospect Lifetime Value ($) =
Acquisition Rate (%) X [Initial Margin($) + CLV ($)] – Acquisition Spending ($)


Acquisition rate above refers to your closing percentage, i.e., the percentage of prospects who will actually buy. In the case you reference below, the firm should have some idea of what percentage of prospects come to the site and registers, and what percentage of the registered prospects turn into buyers before they could factor this value.

Finally, here are a couple of other good sources for this topic and related ones (e-commerce, e-mail marketing, search engine strategies, etc.):

Marketing Sherpa
Silverpop

If any of our marketing genius readers have relevant info and would like to contribute to the knowledge base, please leave us a comment.

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2 Comments:

Anonymous Dan Ider said...

Value of a customer is more than just an equation. They are people. Are you producing value to them? I learned from James Brausch to ask what they want and then create the product. This way it is sold before the product is made.

2:43 PM

 
Blogger Skip Lineberg said...

Dan-

Thanks for sharing your valuable perspective. Indeed, I share your view wholeheartedly! I understand that customers are "more than just an equation." Sometimes, however, one does need to determine the value of certain customer parameters to look for opportunities, to gauge profitability and ultimately to improve. This is much like an accountant's perspective or that of an operations manager.

You've piqued my curiousity about James Brausch. So I'm off to see what I can learn about him.

Skip

9:25 AM

 

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