Many businesses calculate the lifetime value (LTV) of their customers. This calculation is important because it lets a business know how much it can spend on marketing to acquire each customer. For example, if a company determines that an average customer is worth $200 over her entire relationship with the company, then that company can spend somewhere up to $200 in order to gain her business. Stated another way, it is not sustainable for a company to spend more than the average customer's LTV in order to acquire a new customer.
So should authors try to calculate LTVs for their readers? In other words, can an author figure out how much an individual reader is worth so that she knows how much she can spend on marketing to acquire that reader?
There are several factors that go into calculating LTV but the two primary ones are how much the average customer spends in a certain time period (revenue) and how many customers leave during that same time period (churn). For an author, revenue consists of the average amount a reader spends on each new book times the number of readers who bought that book while churn is the percentage of previous readers who don't buy future books.
How to increase LTV
One secret that successful businesses understand is that it is much less expensive to sell new products to previous customers than it is to try to acquire new customers. It is also important to note that when a business is able to sell more products to existing customers, the LTV for these customers goes up.
Most authors, however, are limited in their ability to sell more books to their previous readers because they are simply unable to directly reach these readers. The reason for this is that booksellers claim to own the relationship with the customer and so won't reveal any details about these customers other than perhaps some aggregated demographic data.
Part of this reluctance to share customer data is understandable since retailers need to protect the privacy of their customers. However, what if those readers actually want to create relationships with authors so that they may be contacted directly by them in the future? There currently aren't very many good options for solving this "post-discovery problem".
Acquiring new readers
Established authors have a big advantage over debut authors in terms of inexpensive reader acquisition methods. Since these authors have a back catalog of books, they can try discounting an early work in the hopes of attracting readers who will go on to buy future works. When this is successful, a reader can be acquired for the difference in cost between the retail price of the book and the discounted price. Be careful, though, because the average customer acquisition cost needs to calculate all of the readers who took advantage of the discount even if they didn't go on to become loyal readers.
Some debut authors also try the discounting strategy. In their case, they hope that the readers they acquire will share the work with other readers via word of mouth. They also hope that strong sales at discounted prices will vault their books up the sales charts so as to gain more attention when the book goes back to full retail price.
Increasing LTV + Large Audience = Success
The best way to increase the LTV of your readers is to write more good books and connect directly with your previous readers so you can let them know when new books are available.
And while a growing LTV is great, it really begins to pay dividends once you've developed a large audience. Therefore, it is also important to discover and develop the most cost-effective ways for getting your books into the hands of new readers.