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Lifetime Value Online?
In "Big Time Banner Advertising," we discuss the importance
of establishing an acceptable level of return for your
promotional investments. This number becomes the criteria
for what is deemed a success and what is deemed a failure.
How you determine this number is not only critical to the
success of your advertising efforts, it's also critical to
the ongoing success of your business in general.
Many dot-coms make the mistake of using a "lifetime value of
a customer" calculation to determine their success criteria.
They estimate how many purchases a customer may make from
them over a long period of time. Then they calculate how
much profit will be contained in all of these purchases.
They will then use this "lifetime value" figure to determine
how much they are willing to spend to acquire this customer.
This is how some of these dot-coms can rationalize spending
nearly $100 in promotional dollars for every unique customer
buying $20 worth of books or CDs.
Do lifetime value calculations even make sense in an
environment where "switching" is so easy? In the online
business environment, it's very easy for your customers to
simply click away to a better deal or a more appealing
offer. Online, there are fewer opportunities for true
customer lock-in. Sure, our customers have a certain level
of familiarity with us that helps gain their loyalty. And,
we may also offer our customers rewards or incentives to
encourage their loyalty. But when compared to an offline
lock-in such as the location of your nearest grocery store,
these types of online lock-in are clearly far
more fragile.
Many online businesses find themselves in serious trouble
when they acquire customers based on a lifetime value
calculation that simply never materializes as their
customers click away to the latest deal of the day.
In "Big Time Banner Advertising," it is recommended that a
cost-per-order target be used instead of lifetime value. A
cost-per-order or CPO target simply allows you to treat each
order as a one-time event. By setting a CPO target, there is
no guesswork as to what a customer may be worth to you in
the future - you know exactly what customers are worth on a
per-order basis.
For example, based on your product margins and average order
size, you may determine that $5 is the most you can pay for
each order while still meeting your business objectives.
This number becomes the CPO target for your marketing
efforts. Marketing efforts that achieve this target CPO or
better are "keepers" while those that don't get killed. A
banner ad that costs $1000 and drives 250 orders is a
keeper. A newsletter ad that costs $100 and drives 5 orders
doesn't get renewed.
By using CPO targets, you are relying less on "what may be"
and relying more on "what is" to make your marketing and
advertising efforts more efficient, effective, and
profitable.
About the Author
Kim Wingate of AvidSurfer, is the publisher of "Big Time Banner
Advertising" and "Turning Visits Into Action." Both of these
informative Web business manuals, as well as a FREE conversion
ratio case study, can be found online at:
http://www.avidsurfer.com/default.asp?src=artq
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