• by Arend Henderson , October 22, 2008

The success of most e-mail programs is judged based on either campaign-level metrics like open, click and unsubscribe rates, or list growth. Under this situation, goals such as "increase list size by X%" and "improve relevancy by increasing click rates" are often used as default key performance indicators. The problem is, list growth and campaign performance metrics are good diagnostic tools, but don't fully capture what should be the central focus of any email marketing program: maximizing the ROI from your list.

For example, is it really a worthy goal to double the size of your list if it delivers half the value? What if you're successful in increasing opens/clicks by 50%, but then the opt-out rate doubles? There is also a lot of (mostly good) advice out there encouraging you to "improve relevance," "decrease opt-outs/list churn," and "Don't email too frequently," but how do you measure your success in balancing these sometimes conflicting strategies?

These questions expose the inherent weakness in using detailed diagnostic measures as overall goals. There is no way to accurately measure the impact of inevitable trade-offs in attempting to maximize one aspect of your email program.

A far better method to evaluate the success of your e-mail program is by looking at the Lifetime Value (LTV) of your consumers. Lifetime Value is the measure of business value -- usually revenue -- attributed to an individual email address and measured over time. Ideally this business value will be comparable to other advertising media and your overall businesses objectives.

There are two primary benefits to creating this type of metric. First, the value of your email program becomes much easier to understand for senior executives and others not fully immersed in the complexities of the email channel. They no longer need to interpret the meaning of an open or click rate, for example, as performance can now be measured in a language common to the rest of the business. Second, you now have a central metric that can tell you the combined impact of your list acquisition, list management and campaign strategies. For example, you'd be able to determine the net impact of the strategy that increased both response and opt-outs, which will also open up new insights into existing list segmentations and develop new ones.

So which LTV metrics do you measure, and how do you integrate them into your email strategy? The answers will be different for all companies. However, it may be instructive to review an example of how my company increased our overall email revenue by 30% by employing LTV metrics:

Prior to using a LTV goal approach to optimizing our email program, we used a typical campaign-centered approach. Success was measured by how much revenue was generated for each email sent, i.e. by the effective cost-per-thousand (eCPM). This eCPM performance goal was successful in making sure we did a good job in sending only relevant content to only our most engaged list members. What we found after running our initial analyses of LTV, however, was that there were valuable segments of our list that were either not being mailed or were being removed prematurely due to "low responsiveness." More specifically, less responsive but still engaged and valuable list members were being overlooked simply because they weren't responsive enough to meet our campaign-centered eCPM goals. Essentially, we were leaving money on the table with every campaign.

When we shifted our strategy to an LTV-centered approach, eCPM suddenly didn't matter any longer (heresy!). Every email marketing decision was now judged against how it would contribute/detract from the LTV of our list members. Instead of determining the targeting and frequency of a campaign by the expected yield, we turned the strategy around and focused on the list members. We determined the optimal frequency (through testing) for each member on the list and then decided which campaign(s) to target based on the expected contribution to LTV.

This approach resulted in a sudden decline in eCPM, since we were now mailing previously untapped "less responsive" members and had stopped over-mailing more responsive members. It also led to a decline in short-term revenue of around 20% over the first 30 to 60 days, which definitely created some nail-biting.

However, there were also some encouraging stats emerging from the LTV data. High value members were staying on the list longer, and previously lower value members were showing a healthy and sustained increase in value. By the 120-day mark, revenue roughly broke even with our previous campaign-centered approach. After that it steadily grew to a 30% increase in revenue at the 360-day mark, and it's likely still growing and paying dividends today.

I recognize that Lifetime Value may be a radical departure for most companies and not something you can just jump into right away. So the lesson I offer from my own experience is to take an analytical approach and have patience to see it through. To get started, I suggest a simple two-step plan. First, continue on your current campaign-focused path but begin to look at some of these LTV metrics to evaluate which will be most meaningful to your business. Then, begin discussing LTV with senior management to provide a new perspective and get your organization comfortable with the concept. The end goal is getting to the point where Lifetime Value is helping guide your day-to-day strategy, and ultimately providing additional value to your bottom line --something all organizations are comfortable with.