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PPC Expense: What Is A Customer Worth?
Calculating a customer's lifetime value
When determining how much to spend on a pay-per-click campaign, an etailer should first calculate what a customer is worth to his business.
Getting a customer to purchase a single product isn’t the goal of most ecommerce site owners. However, most owners fail to calculate the potential lifetime value of a customer when determining how much to invest in a pay-per-click (PPC) campaign.
So what is it worth to the bottom line to attract a quality customer with a keyword campaign?
There are some complicated ways to calculate the lifetime value of a customer. However, a simple way to calculate the lifetime value of a customer is to multiply the average sale at your site by the number of times an average customer reorders. For instance, if the average shopping cart size at my pet supply store is $40 and the average customer places an order six times per year, the “value" of the customer is $240 per year and $1,200 over five years.
If you run a 20 percent margin of profit with your business, would you invest a year’s profit of $48 to capture and retain one customer that would stay for a lifetime? What is your average cost to acquire a customer and how does that compare to the lifetime value of a customer? Is your average cost to capture and retain a customer more than a year’s worth of profit? Less? Those are the types of questions you can ask yourself once you know what a customer is worth to you.
There’s no “magic number" for a business to spend capturing and retaining a customer. The important thing is to realize attracting a quality customer has significant value to your bottom line. You’ll probably want to spend more to get a quality customer knowing that customer’s true value isn’t tied up in a single purchase.
When calculating how much an average customer is worth to your business, you’ll probably also discover what brick-and-mortar stores have long known: 80 percent of your revenue comes from 20 percent of your customers.
Arthur Hughes serves as vice president/solutions architect for KnowledgeBase Marketing in Richardson, Texas. He noted that getting more money out of ‘gold customers,’ the top 20 percent, is difficult.
“They are already giving you all their business in your category. They are “maxed out,’"he wrote in an article for Database Marketing Institute. “What should you do for them? Given them special services and attention so as to retain them. The people you should market to are those just below ‘gold.’ They have the ability to move up to ‘gold,’ if you will only encourage them. Building a relationship with customers only works if the customer benefits from the relationship."
Once you have a customer, building a relationship with them is critical. It’s through that relationship that a bond is created between consumer and retailer. It’s always great to generate new customers, but it’s usually much less expensive to hold onto existing customers.
“You can start by the rule of thumb that it’s seven times less expensive to maintain a customer than to find a new one," said Gail Goodman, CEO of Constant Contact, a permissionbased email marketing solution used by more than 65,000 small businesses and associations. “Repeat business is always more profitable."
Email is the most efficient way to communicate with customers, to keep them informed about new products and services your business offers and to provide coupons and other incentives to keep them returning to your site.
“What is clear is that you can drive repeat sales and customer referrals at a dramatically lower cost than you can generate new customers," Goodman said. “That drives profitability."
Goodman notes that once an ecommerce business creates a happy customer, that customer becomes part of your promotion team as they are bound to spread the news.
“Enabling your passionate customers to spread the word about you easily is another piece of the profitability model,"she said. “Email is easy to forward. As consumers, if we find a product or a company we’re excited about, we naturally spread the word. Consumers interact a lot with those who have similar views and needs. Getting sales from a customer’s network of friends is all part of the formula for maximizing the lifetime customer value."
Your PPC campaign can get the customer to you, but it will be your products and service that make that customer stay with you for years to come.
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Published on Monday, July 31, 2006
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