The Crutchfield Corporation
5 Pages Posted: 21 Oct 2008
Crutchfield, a large U.S. mail-order firm specializing in consumer electronics and personal computers, must evaluate the results of a recent "prospecting" mailing to a rented list of names. A determination of the mailing requires the calculation of the lifetime value of the new customers acquired. Case data on repurchase probabilities (broken out by recency and frequency) support such a calculation. The case can also be used to introduce the RFM (recency, frequency, monetary value) framework for valuing customers.
Rev. Apr. 12, 2013
THE CRUTCHFIELD CORPORATION
On Monday morning at 8 a.m., Mark Lee, vice president of marketing at the Crutchfield Corporation, sat down with his staff to sort through the results of the most recent prospecting effort. The list of Car magazine subscribers was typical of the 50-odd rented lists that were tested as part of the most recent catalog mailing. Crutchfield was a mail-order firm specializing in consumer electronics and personal computers. Despite the early hour, Lee was in a good mood having won first place at a regional go-kart race that weekend. He knew that he would need his good humor for the work ahead of him; the previous Friday his staff had finished tabulating the most recent catalog mailing results, and it was now up to them to evaluate those results.
Lee, like most catalogers, felt that customers were his company's most important asset. Prospecting for new customers—one of the most delicate operations for any catalog house—was necessary to gain new customers, but few customers' first orders were large enough to cover all of the costs involved. New customers had to be “bought” in much the same way that manufacturers acquired new machinery. To help decide whether to abandon or to increase mailings to Car subscribers, Lee intended to compare the acquisition cost for each new buyer from the Car subscription list to the present value of the income each customer would generate.
The 20,000 names rented from Car magazine had cost only $ 85 per 1,000 names, an amount substantially less than what the company regularly spent for the rental of a good, high-yielding list. The response rate from the Car list of subscribers had not been all that bad; 182 individuals had ordered. Rental rates for lists varied according to the list owners' typical customer profile and how the list had been sorted. Crutchfield's own house list was particularly valuable to selected direct marketers; a significant majority of habitual catalog shoppers were female baby boomers who bought apparel and domestic wares, and most of Crutchfield's customers were men—a group typically more difficult to reach. Crutchfield was able to rent its list of 0-to-12-month buyers for $ 120 per 1,000 names about 18 times per year with 30% of the fees going to the list management company and brokers. List owners also charged additional fees for sorting names by variables such as income or age—under the premise that carefully targeted names were expected to generate higher response rates. The Car subscriber list had been rented without any further sortation.
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Keywords: Direct marketing, mail-order retailing, lifetime value of customer
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The Crutchfield Corporation
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