Beware the Deception of Averages

Beware the Deception of Averages

Issue: 

2010, December

Averages can be misleading—even dangerous— for direct marketers. Consider this: The average of 10, 13 and 100 is 41, right? Mathematically correct, but a functionally useless number for decision making. Why? Because 41 tells us nothing actionable about the 10, the 13 and the 100.

This problem can be especially harmful when calculating Lifetime Value (LTV), by which I mean Acquisition Cost (a negative number) plus Future Value. Using 41 to represent a set of values containing 10, 13 and 100 dramatically inflates the importance of 10 and 13, while depressing the importance of 100.

What if these numbers represented the future values of a set of new prospects? If we look at the average,we’d be bringing in two worthless new customers along with one profitable one.

So, at MeritDirect, we encourage our clients to dig deeper, using an “action-oriented” approach to LTV calculations. In short, we measure future value only by attributes that can be meaningfully applied to the next prospecting campaign.

Consider the following example: ABC Company, a niche marketer, solicits customers from SIC X and SIC Y. Their acquisition costs are ($35) in SIC X, and ($15) in SIC Y. The VP of Marketing believes that,on average, every prospect acquired will yield $50 in future value over their lifetime, so they have calculated their average lifetime value to be $25. ABC sees its business this way:

Segment Acquisition Cost Average FV LTV
New Customers from SIC X (35) $50 $15
New Customers from SIC Y ($15) $50 $35
New Customer Totals ($25) $50 $25

Digging deeper, action-oriented LTV tells us that future value in SIC X is $95, and in SIC Y it is only $5. This puts ABC’s business in a different light:

Segment Acquisition Cost Average FV LTV
New Customers from SIC X (35) $95 $60
New Customers from SIC Y ($15) $5 ($10)
New Customer Totals ($25) $0 $25

After slicing the future value portion of the LTV analysis by SIC—an actionable prospecting trait—our VP is realizes that care is required when acquiring customers from SIC Y. The average FV number had disguised the problem in the past. Now ABC Company must select prospects among SIC Y more tightly, or abandon it altogether. They also should look for incremental universe in SIC X and consider attempting to test out of their niche.

When tackling future value calculations it is never good enough to settle for one all-encompassing figure. Keep your analytics actionable. Measure future value based upon prospecting traits that can be applied productively on your next campaign.

Andy Joyce is a consultant in MeritDirect’s Strategic Services Group, translating ‘deep dive’ analytical projects into actionable circulation and database marketing strategies. He has a degreein Marketing and Theology from Saint Louis University.

Author: 

Andy Joyce
Andy Joyce's picture

Andy Joyce is a consultant in MeritDirect’s Strategic Services Group, translating ‘deep dive’ analytical projects into actionable circulation and database marketing strategies. He has a degreein Marketing and Theology from Saint Louis University.