When you are evaluating list acquisition methods for your email program an important factor to the success of your program to measure is your list’s financial performance. We should look not only at the quantity of our list, but also the quality of our list. There are two metrics that are important to understanding the quality of your list – Cost per Response (CPR), often-called Cost to Acquire and Lifetime Value (LTV). These two metrics are the key to understanding the value of the list you are building and help you to acquire high quality customers in the email channel. You may find that using List Rentals gives you a good conversion rate, but the corresponding cost to acquire them does not allow you to recoup those expenses in a short enough time frame to make it pay out. Lifetime Value calculations tell you how much each of your subscribers is worth. When totaled they will show you what your list is worth.

There is more pressure on marketers than ever to increase revenues and drive ROI out of their email program, these metrics will help you tell which list acquisition method gives you the highest value customers at the lowest cost so you can drive the highest ROI out of your email program. Tracking these metrics, in addition to your list acquisition rates, allows you to project the cost to grow our list to a specific goal (i.e. 20% growth). CPR and LTV can also be used to find the list size you would need to reach a specific financial objective. For those looking to make a case for additional resources for the email program being able to show the full value of the program as an asset is very effective argument.

Typically, we evaluate the list’s cost per response vs. the lifetime value of that customer to determine whether we will continue to use that list acquisition method and if it is a viable acquisition tool for us. Calculating Lifetime Value for a list source is easy for periods of a year or less. Often when we are comparing CPR to LTV, we use the first year’s revenues as the period then see if our acquisition cost exceeds our expected revenue from subscribers based on that list source’s historical data. If you use a multi-year period, you will need to apply a depreciation factor to later years that increases with time to account for the time value of money. You might recall those large series of charts that show the time value of money in some of your business textbooks used to calculate the depreciation factor, thankfully today we can simply look online. Also be sure to account for churn on your list. Research sources from the industry report this to typically be around 30%

Knowing the Lifetime Value of a participant of your email program is an important metric and calculating it is worth the time it takes to setup the tracking using source codes for long-term measurement. This number is a powerful tool to the email marketer. Demonstrating the LTV of your customers email address is a good way to justify increases in email’s share of the marketing budget or to justify for additional resources for an existing email program. It shows the real value of your email program and list.

To calculate the Cost per Response follow these steps:
First, you will need to determine your Response per Thousand (RPM) and Cost per Thousand (CPM) to setup the formula.

Cost per Response (Initial) or CPRI is CPM/RPM – if you have a once step signup process you can stop there, however if there is a second step, such as in a confirmed opt in setup, you need to do one more step to determine CPR (Final) or CPRF. To calculate CPRF Take your CPRI and divide it by the conversation rate.

Let’s do an example:

We determine we would like to test a list rental from a trade publisher. The list renter has agreed to send an email on our behalf to the list at a cost of $100 CPM. The campaign yields a 3% CTR, and of those that click, a conversion rate of 40% for sign up form completion. Cased on the data we find:

CPM = $100
RPM = 30
Click through rate = 3%
Conversion = 40%
CPRI = 100/30 = $3.33
CPRF = 3.33/.4 = $8.33

Next compare your CPR to your Lifetime Value score for you email subscriber segments.
To calculate your lifetime value, track back all your sales by subscriber to a specific list source, typically done using a key source or key code field. Make sure that every sale during the period that is made by that subscriber is tagged to track back to your original list source’s key code, or you will most likely underestimate the value of that address. Next, add up all the sales for that particular key code and divide it by the number of email addresses that are tagged to that key code. That gives us the average value of that list source per subscriber.

Since we are typically evaluating a test campaign or new acquisition method, we’ll use a short period for LTV, either 6 or 12 months. We compare that list acquisition vehicle’s cost per response (acquisition) to the average lifetime value of the subscribers for that list source. If you are making a profit for the subscribers whose key codes match a particular list within your chosen time frame, then you have found a good list source – in financial terms. If you are losing money at the end of time period, you will want to either test another list acquisition method or you can try testing to see if that cost is recouped in 18 months or 24 months, if that is a viable option for your business. Remember that if you go beyond a single year in the time frame you will need to account for the time value of money, by depreciating the later years’ sales value. Alternately you can create a cross tabulation of response rates to see if you can isolate more targeted list selects to make your spends more effective.

Calculating these two metrics, Cost per Response (CPR) and Lifetime Value (LTV) can help you manage your email program more effectively, increasing your return on investment. Understanding which sources provide you with the best customers , financially, will allow you to focus your attention and resources where you will receive the most efficient spends, maximizing your acquisition budget. Moreover, you can use these two metrics with any type of list acquisition method and other response actions taken by your subscribers, not just list rentals. Try it the next time you test new list acquisition method to find the most effective technique for your list growth techniques.