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What's the Lifetime Value of a Reader?

Posted on Wednesday, September 26, 2012 at 11:53 AM

Don't obsess over the wrong numbers to calculate reader worth.

By William Dunkerley

Have you ever calculated the lifetime value of a new reader? That may sound like just an academic question with no practical application. But in a pragmatic sense, it is really important to find out the answer. Otherwise, how will you know how much is wise to spend in acquiring new readers? How will you know the price at which you can profitably sell a subscription?

The short-term profit/loss results from an acquisition effort alone can lead you astray. They don't tell the whole story. Yet these are the numbers some publishers base their decisions on.

Don't Rely on Instant Results

One client I worked with had fallen victim to looking only at the instant results. She was relatively new to the publishing business. To her, subscription sales was one profit center; advertising sales was another. She wanted to maximize the profits for each center. For subscription sales, that meant trying to maximize the profitability of each subscription acquisition effort. This one-dimensional focus was actually working against the publication's overall profitability in the long term.

Established practice shows that with traditional direct mail efforts, it often costs as much to acquire a new subscriber as you receive in revenue from that new acquisition. That means, for example, if you do a $50,000 promotion selling $50 subscriptions, you realistically could expect to acquire 1,000 subscribers.

To my neophyte client, that sounded like a bad deal. Why spend $50 only to get no more than the $50 in return? Not only are you not making any money from the new subscription, you'll have the expense of fulfilling that subscription. Some publishers take their total cost of editorial and fulfillment, divide it by the total number of subscribers, and consider that's what it will cost to service a new subscriber. That's a fallacious calculation, of course. What you really need to consider is the incremental cost of the new subscriber -- i.e. how much it will actually cost to add one more subscriber to your list. That should be a relatively nominal amount.

Take a Closer Look at Renewal Rates

The profit in subscription sales comes in after a year has transpired, when you renew the subscriber. While it may have cost $50 to acquire the subscriber, you can probably renew the subscriber for $5 or less.

Your renewal rate and the average total duration of a subscription (in years) should also figure into the equation.

But, if you put too great a burden of profitability on an acquisition effort, you may end up ruling out many possibilities for acquiring new subscribers that will indeed be profitable in the long run.

Determine Reader Worth in Ad Revenue

What's more, if your publication carries advertising, you may well be able to afford to lose money in getting new subscribers. Indeed, that's what publishers of free publications do. There's no revenue from subscription -- only expense. But it's worth the price, because having qualified readers to whom you expose the advertiser's ads can be very profitable in itself.

Understanding how much a reader is worth to you in terms of ad revenue is an important part of your lifetime reader value calculation.

Avoid the CLV Formula

Beware, however, that calculating lifetime value can become too much of an obsession. In retail businesses unrelated to publishing, it is a hot topic among some. A rather precise-looking formula is even offered in a Wikipedia article for CLV (Customer Lifetime Value). It is,

I advise you not to use this formula, even if you understand it! The key point to the lifetime value issue is to get a good general understanding, a close approximation, of what that value is. And use that understanding in your decision making regarding reader acquisition.

Don't get bogged down in trying to split hairs.

William Dunkerley is principal of William Dunkerley Publishing Consultants, www.publishinghelp.com.

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