How Mathsoft calculates the value of a customer.

What's the future revenue potential of a typical software customer? The answer, of course, varies from publisher to publisher and depends on such variables as registration rate, upgrade frequency, cross-selling opportunities, and the aggressiveness of competitors. Nevertheless, says MathSoft marketing director Julie Sail, it's possible to construct a relatively simple formula for calculating "the long-term value of a customer"--and the numbers that emerge can have a "very significant impact" on how a company decides to invest its marketing dollars.

Sall recently showed us a set of calculations she developed to track the three-year value of buyers of MathCad, a $495 mathematics program used primarily by engineers and scientists- MathSoft generates a substantial amount of revenue from annual upgrades and follow-on products--in particular, $99-$249 industry-specific templates and electronic handbooks--so Sall wasn't surprised to find that many of her customers end up spending more on MathSoft add-ons than on MathCad itself.

The real eye-opener, however, was how much MathSoft's add-on revenue varies by sales channel. Customers who purchase MathCad through dealers, she found, spend very little on upgrades and follow-on products, while those who purchase copies through direct mail tend to be far more responsive to future offers. But the most valuable customers of all, Sall found, are those who buy MathCad through the company's outbound telesales department (Soft.letter, 9/24/91).

To estimate the revenue potential for each of these channels, Sall started by calculating the amount of revenue the company nets from initial sales through each channel. For every sale made through retail distribution, MathSoft picks up about $310 in revenue, minus $84 in "customer acquisition costs"--the pro-rated cost of advertising and other lead-generating efforts. Copies sold through telesales have the same acquisition costs, Sall says, but generate an average of $540 in revenue, largely because MathSoft's phone reps are skilled at selling add-ons as part of the initial sale. Direct mail sales are the least lucrative: MathSoft offers deep discounts that push the company's average sale down to just $119 (though the average acquisition cost is also lower, about $24).

But the revenue contribution of these three groups shifts dramatically for sales of upgrades and add-ons. To calculate this follow-on revenue, Sall uses two simple formulas--three-year upgrade revenue per customer (equal to the registration rate for each sales channel multiplied by the upgrade rate, the upgrade price, and the number of years) and add-on revenue per customer (equal to each sales channel's registration rate multiplied by the average response rate for mailings, the number of mailings per year, the average revenue per sale, and the number of years).

When Sall added the three-year revenue contribution from initial sales, upgrades, and add-ons, minus direct mail and telesales commission costs, she discovered that MathSoft's retail customers spend an average of $120 for follow-on products, telesales customers spend $143, and direct mail customers ("who are more attuned to buying through the mail") spend a whopping $338.

Thus, a typical telesales buyer ends up spending almost $600 for MathSoft products over three years, 73% more than a retail buyer's $346 contribution. During the same three years, an average direct mail customer spends $432, 25% more than the company's retail customers.

These numbers, Sall points out, have obvious implications for MathSoft's long-term marketing strategies. Rather than invest heavily in retail distribution, the company's goal now is to "make tons of money:' by "generating a lot of leads and building a really large direct telesales operation."

Sall also says her calculations suggest that direct mail campaigns, even though they generate relatively modest revenue from initial sales, make sense in the long run if a company can create enough follow-on products. "We've decided to go after a razor and blade strategy and build a larger installed base," she says. "And the reality is that you can get a lot of customers a lot faster at $99 than at $300 or $400."

Julie Sail, director of marketing, MathSoft Inc., 201 Broadway, Cambridge, Mass. 02139; 617/577-1017.