By: Matt Lindsay
President Mather Economics
The customer lifetime value (CLV) is a metric often used by publishers. It is the expected net operating margin for a specific customer over a period of time, usually three to five years.
For a typical print newspaper customer, operating margin per week is the sum of subscription revenue plus variable advertising revenue less direct costs, such as production and delivery costs. For customers who have access to content across both print and digital platforms, the CLV calculation also includes incremental digital subscription revenue and digital advertising revenue from their online activity.
So, what is the CLV of a digital subscriber. And why is it important?
When publishers use metered or premium content strategies for growing digital subscription revenue, they are trading audience reach — and the associated advertising revenue — for expected subscription revenue. Put another way, for customers who are served a paywall limiting their access to free content, the publisher is betting potential subscription revenue for that customer is greater than the digital advertising revenue it would likely receive from that customer’s unrestricted consumption of articles.
Knowing the odds that a customer will subscribe, and the expected digital advertising revenue, can dramatically help that publisher win the bet.
As you would expect, the amount of free content that maximises the expected total digital revenue by customer varies considerably across a publisher’s digital audience. Some customers have a high propensity to subscribe and relatively little advertising revenue. These highly engaged customers may be using adblockers or come to the site from outside the core market of the publisher. They should be given relatively little free content before receiving a subscription offer.
Other customers may have a low propensity to subscribe and high advertising value. These customers may only view slideshows, check movie listings, or watch videos of the local weather report. They should never encounter a paywall.
Just the facts, ma’am
During a recent project, we worked with a publisher to measure CLV for its digital customers. This publisher had three types of digital customers:
- Known but non-paying registered customers.
- Partial-week print customers who paid an extra amount for digital access.
- Digital-only subscribers.
This publisher also gave digital access to full-week print subscribers, but we will not include them in this discussion.
The CLV for these three types of digital customers were found to be (these numbers have been modified to protect client data):
- Registered/non-paying: US$6.50.
- Partial-week print/digital access: US$165.
- Digital-only subscribers: US$650.
The CLV of registered/non-paying customers is only due to their digital advertising revenue, which is about US$0.07 per week. The CLV of partial-week print subscribers paying an extra amount for digital access includes the additional subscription revenue (about US$1.65 per week) and the digital advertising revenue (about US$0.27 per week). The digital-only subscriber’s CLV includes all the subscription revenue (about US$4.50 per week) plus digital advertising revenue (about US$0.21 per week).
A few notes about this analysis:
- There was considerable variation of CLV value within these groups depending on their engagement levels.
- We are only focused on incremental digital revenues for this analysis, so print-related costs and revenues for partial-week print subscribers are not included here. However, we do calculate an “all-in” CLV for subscribers who have both print and digital access.
- Future revenues were discounted using forecasted churn rates, which was about 50% annual retention for digital-only subscribers in this case.
What is the right amount of free content for each customer?
To determine the optimal amount of content for each subscriber, we can determine a conversion rate (the percentage of subscription offers accepted) necessary for the publisher to “break even” on a customer. This is where the expected revenue from the customer — including both reader revenue and advertising revenue — is equal to the expected advertising revenue from that customer under the “no paywall” case.
This breakeven conversion rate is compared to an estimate of his propensity to subscribe to determine if a subscription offer at a point in time is a good bet or a bad one. If the conversion rate is higher than the breakeven rate, then the subscription offer should be made. Otherwise, the reader should continue to be served free content.
A lot of mathematics supports this decision, and there are many factors that change the outcome — factors that are particularly important in the analysis are:
- The customer’s propensity to subscribe.
- The customer’s existing advertising revenue stream.
- The forecasted lifetime of the customer after he subscribes (retention).
- The advertising revenue stream if the customer does not subscribe.
- The pricing of the digital subscription product (or other type of product/service.)
Another important factor in the decision, not related to a customer, is the amount of advertising inventory needed to fulfill the publisher’s guaranteed advertising commitments.
Change the product, too
Another important factor to consider is the nature of the digital product. Placing a paywall on a site that was designed to maximise advertising revenue will most likely not capture a meaningful number of subscribers. The very loyal customers will subscribe, but other reader segments will need a more compelling value proposition to make the commitment.
Changing the user experience, often by reducing the advertising impressions per page for paying customers, also changes the calculus of how to optimise the relationship with an individual reader. Two-site strategies are one way to serve different customer segments with alternative digital products. Adjusting the user experience on one site is another tactic used by several publishers.
Using all the information at your disposal to maximize the CLV of an online reader is an important step for growing digital audience revenue. A “one-size-fits-all” digital offering is not likely to be optimal for many of your audience members. The state of the art for digital customer acquisition, engagement, and retention is to understand an individual’s preferences, the economics of the relationship, and bet that you can offer him a product or service he will buy.
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