Startups are inherently strapped for cash, but they’re also resourceful. Many have assets they aren’t even aware of that they should be valuing. Those assets may be more esoteric (brand equity, customer sentiment) or more tactical (email lists, Twitter followers, Facebook likes).
In an era where intangible assets constitute an increasing percentage of a company’s balance sheet value, it’s puzzling that standards still haven’t evolved to value those sorts of assets. As William Edwards Deming says, “You can’t manage what you don’t measure," and without valuing the information assets within a startup, it’s nearly impossible to optimize the value and show proof of progress.
Proof Of Progress
One asset that most startups and established companies alike own is a customer email list. While it may not seem like a list of email addresses is a valuable asset, it is. Each customer on your list has volunteered his or her information so your startup can provide updates, promotions and other interesting content on a regular basis. When done right, each message should create brand loyalty and ambassadors for your product or service. For instance, if startup A and B are otherwise identical, but startup A has an email list with 5 million opt-in addresses, surely it's worth more than startup B.
But how much more? How do you value that asset?
The first way to look at the question is using “replacement cost.” How much does it cost to get each subscriber on the list? Let’s say in this instance that a company on average needs to spend about $10 per subscriber through Adwords or other PPC advertising tool to develop a list of that size—that would value the list at approximately $50 million.
That’s a beginning, and puts a stake in the ground. However, this formula assumes that all email addresses are created equal (they aren’t) and that campaigns are generally comparable in their effectiveness (they're not). So, what's the true value of your email assets?
Model your information assets the same way bankers model the value of a financial asset: the discount cash flow you can expect to generate. For each send, track:
Open Rate: annotated as ‘O’
Click Rate: annotated as ‘C’
Purchase Rate: annotated as ‘P’
Total Revenue Generated: annotated as ‘TR’
Profit Margin from Revenue: ‘PM’
Unsubscribe Rate: annotated as ‘U’
When you multiply these together, you can get the total contribution to profit from an email.
O x C x P x TR x PM = Pc (Profit contribution per email)
The next step is modeling how much money you can expect from an individual before they unsubscribe. The easiest way to do this is measuring your unsubscribe rate. If you divide your purchase rate by the unsubscribe rate, you’ll be able to approximate the number of purchases expected before someone unsubscribes.
P/U = Pe (Purchases expected)
Multiply that by your profit contribution, and you have the profit expectation per email address.
Pe x Pc = PE (Profit per email)
A Deeper Dive
Discerning readers will note that different email addresses may have different values, and that some people (who open and click a lot) are far less likely to unsubscribe than others. Because of that, it doesn’t make sense to email everyone at the same frequency when you can make more money by segmenting.
Using specialized tools, you can easily calculate these metrics. You can also easily affect the numbers by using technology like personalization to improve open, click and purchase rates. Armed with nothing but Excel and some basic email metrics, you can use these methods to get at least a basic idea of the value of your list, which you can then refine over time.
As marketers, we’re constantly tasked with proving value and providing metrics for intangible resources. Armed with the value of your list and cost of lost contacts, evaluating the worth of an optimized email strategy is simple.
Erik Severinghaus is the founder & CEO of SimpleRelevance, a Chicago-based company focused on digital marketing personalization. Prior to that he received a patent while in IBM‘s IT Optimization organization, and helped co-found iContact. He is a member of the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs.
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