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Wednesday
Sep302009

How much is a fan worth? - Part 1

Most aspiring artists intuitively understand that there’s value in building an audience for the long-term rather that focusing solely on short-term revenue.  Bands offer free downloads, play free shows, and spend countless hours on- and offline interacting with listeners in hopes of developing a fan base that will support them over their careers.

But how much is a fan actually worth?  How much should an artist be willing to sacrifice (or spend) today to acquire fans?  And how many fans are needed to be able to make a living as a musician?

These aren’t easy questions to answer, but I want to try anyway.  Or at least start.  That’s why I’ve created a spreadsheet model to help artists estimate the lifetime value of the average fan.

What is Lifetime Value?

In marketing, lifetime value is a framework that companies use to figure out how much a customer is worth.  A customer’s lifetime value is essentially the total expected income that he or she will generate for the company over time.  By calculating the present value of these future payments, the company can in theory determine exactly how much they can spend to acquire a customer and still be profitable in the long run.

For musicians, the lifetime value of a fan depends on several factors:

  • The products and services (recorded music, merch, etc.) that  they plan to offer over time, and the expected income from each
  • The probability that a fan will purchase each product offered (“conversion rate”)
  • The probability that a fan will remain a fan over time (“churn rate”)

Who is a “fan”?

How exactly we define “fan” is important.  In order for an analysis like this to be useful, the artist has to have some sort of direct communication channel with the fans we consider.  This could include email subscribers, Facebook fans, Twitter followers, or any other relationship that is observable.  It’s important to keep in mind that each of these segments is likely to have different conversion and churn rates.

To keep things simple, I’m restricting my analysis to an artist’s email list subscribers.  In general, email lists tend to be more valuable than other online marketing channels, so this seems like good segment to focus on as a starting point.   

How the model works

To use the model you need to:

  • Enter your product information - what you plan to sell, how often you plan to release new products, the expected income from each, and a few other inputs.
  • Enter your discount rate.  You can also change the default churn rate and sales conversion rates if you are so inclined.

The model then calculates the lifetime value for:

1. A hypothetical fan who purchases all direct-to-fan products that you offer over your career.  This represents the maximum potential lifetime value of a super fan.

2. The average email list subscriber.  This scenario considers the likelihood that someone would buy each of the artist’s products over time and calculates the average expected lifetime value per email signup.

Limitations

  • The model DOES NOT consider potential income from concerts, licensing, and other sources where it’s difficult to allocate or estimate income on a per-email-subscriber basis.  (If you can think of an elegant way to include something like live shows in this analysis, let me know!)  It only considers things like albums, merch, fan club subscriptions, and other items that can be sold direct-to-fan.
  • The model also makes a simplifying assumption that income per product will be flat over time.  Depending on the situation, this could be a conservative assumption (underestimates top/bottom-line growth) or an aggressive one (overestimates ability to sustain margin).

Please share your feedback

This is definitely a work in progress.  Like any model, I know this one isn’t perfect.  But I’m hoping to make it as useful and simple as possible for artists and their teams to use.

Download it here, experiment with it, and let me know what you think.  In particular, if any of you marketing experts out there have any suggestions/comments about the churn rate and sales conversion rate defaults, I’d love to hear from you.

I look forward to refining this model with your help…

Reader Comments (8)

"In general, email lists tend to be more valuable than other online marketing channels, so this seems like good segment to focus on as a starting point."

Any guesses on why?

September 30 | Unregistered CommenterJustin Boland

^^Not why that's a starting point, but why "email lists tend to be more valuable."

As a side note, today's news had something very relevant to your project I think you'll dig:

The Value of Online Fans report from iMedia Connection.

September 30 | Unregistered CommenterJustin Boland

Nicely done. I’ll need to dig deeper into this, but on the surface provides much needed transparency for artists in terms of where the money is/can be made…it’s not just about selling your recorded music. Look forward to following this effort, it will provide valuable prospective as assumptions and other factors are fine tuned in the model.

September 30 | Unregistered CommenterAndy Young

@Justin I think with email lists you tend to have a more dedicated, receptive audience overall. People only join your email list if they actually want to hear from you. With twitter followers, facebook fans, etc., there may be other motivations (self-promotion, increasing friend count). On the whole, you typically see a higher purchase rate from your email list than from social networks.

September 30 | Registered CommenterLaurence Trifon

I'm really glad you asked the question. It might be the most important question I've ever heard. It lies at the heart of every artist/fan interaction that can even be imagined, and has some bearing on which artists will ever have any kind of career.

September 30 | Unregistered CommenterMojo Bone

In research that can be found in reputable sources such as the Marketing Profs and Marketing Sherpa sites, email has proven to be channel that is the most effective in driving conversions. More clicks per view and furthermore more action after the click.

I have a theory of why I think this is. It's based off of my own personal experience and so I'm not claiming any data here- but here goes:

Basically it comes down to that I feel more protective of my inbox than I do of my Facebook/Twitter / etc. I also check my email box more frequently than I check my Twitter stream. (although I do have a "Junk" email box that I sometimes use when I don't really want to give my email).


Furthermore, I also think that the private nature of email has an influence. If I sign up to someone's email list, it is not necessarily public knowledge. It's between me, and what I subscribed to.

Twitter, Facebook and other social media are built to publicize / update the world at large that I'm "following" or participating.

I believe this creates a different or additional motive for tweeting, following, or becoming a fan of something on facebook. In other words, my motive to become a "fan" of something on facebook is more to show the public my affiliation to something cultural rather than my desire to use facebook as a channel to receive information.

Last, I think I'm more habituated to actually reading my emails - so the message has a better chance to seep in, and therefore offers the marketer a better chance to get my click. Emails can also carry a better mix of images and text than a facebook update or tweet can carry. Also, email has the power of the subject to hook my attention, then the content of the email to win me over to clicking.

So to recap:

1. since email is personal and private it takes more of a reason to make me want to subscribe to something via email


2. email can be more rich in terms of how it can deliver information and it's more likely to be read vs. missed like a tweet or other communication channel

Aside from taking a swing at that question, I would like to see a conversation evolve around how we can define a fan and that fan's life time value (LTV) that is able to include ticket sales, merch sales, iTunes sales and so on.

It would then be a thrill to define, for example that it takes 500 facebook fans to = 1 LTV fan, but after 10,000 facebook fans, you get 1 LTV fan per 250 facebook fans.

Then further qualify an LTV fan as worth X dollars per year over a fixed number of years.

As artists even at the major label level continue to move into non album based product sales (Dr. Dre headphones for example) - the ability to measure things as they correlate to a more or less stable unit of value will be critical for successfully determining ROI.

What are some ways we can do that? We'll need some historical data from enough people over enough events (units scanned, downloads sold, spins on radio, ticket sales etc). So that we can start looking for correlations.

Any statisticians out there want to weigh in? Think about the fun we could have! We could make a version of fantasy baseball for the music industry!!

Has anyone else out there read the book "Moneyball?" I literally just finished it...amazing timing. I highly recommend this book as it pertains to what is happening with the direct to consumer movement in the industry. Michael Lewis is the author.

Thanks for reading - thanks to musicthinktank for throwing the first shot at this up.

October 1 | Unregistered CommenterJason Kadlec

good stuff! I did something with a spreadsheet to look at the difference between an artist booking themselves 7 nights a week vs an agent only booking them 5 nights per week.......the difference in LESS food and beer to buy on days off, less hotels, more t-shirt sales and cd sales extrapolated over 40 weeks was 50K
I Love seeing stuff like this Lawrence .....nice one - thought provoking for sure and thats always a good thing. I'd love to use it (or part of it) or help work on the next version of it? and put it in Band:Smart....the sequel to Tour:Smart. lemme know if thats possible

bestestestest

MA

October 5 | Unregistered Commentermartin atkins

Saw this article today about the "6 Types of Last.fm Friends" which touches on some of the questions/points raised here about email driving more conversion than social networks:
The 6 Types of Last.fm Friends

October 13 | Registered CommenterLaurence Trifon

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