We have made calculating your costs per click and acquisition quite easy already, but how much value is each conversion really creating? Even more, where and how is it created? Can we improve it?
Funnily enough, this seems to be the trickiest question for most of our clients. If you are running a web store selling software digital downloads, this is much easier, but when we go to more traditional markets like print magazines you get a lot of bulbous eyes rolling around in their sockets. There's really no formula in following the trails on this detective story. You'll just have to isolate a single purchase event from far enough in history, start tracing the steps towards today and see what the value created is.
There's no easy road in calculating your costs, it's detective work.
When you have this number figured out, you'll need to think the opportunity in repeating that process. Can you do it with the same price? Should you give a discounted price, since you are obviously saving on acquisition costs? What is the likelihood of this value recurring with the same client? Having this sorted out will give a much more accurate way to predicting incoming money and focusing your activities in the right direction.
Figuring out this path can be very beneficial in the grand scale. In most scenarios we've seen, the first thing it will accomplish is to divide your marketing into relevant and irrelevant efforts. You would be astonished how much money is spent in marketing that is for no one and brings even less results in. There are usually positive surprises as well, from areas no one even thought existed, yet they are bringing great quantities of business. The long tail effect is only useful if it compares to the spending as well and it might not even apply in your case.
Imagine a situation where you are maintaining a collection of technical documents on your site. There are ten thousand of them and four of them are bringing $5000 worth of business in every year, but you don't know which ones, as they change every year. So you keep diligently updating all documents, since you'll never know if you might hit gold. The truth is that even if you spend just one single dollar to maintain those documents per year, you are probably not even making a profit of that business of $20,000 (unless you have a 100% profit margin. If you do, we want to talk with you.) Calculating value without costs is not a very sensible thing to do.
Perceived value doesn't pay salaries.
Perceived value is important when selling consumer goods, but when you're doing marketing on a grand scale, perception doesn't pay salaries. There are hundreds of different variables in your web environment, not just your online store. Like John Wanamaker famously said, he knew half of every dollar he spent on advertising was wasted. He just didn't know which half. That was a hundred years ago. Man has been to the moon and back. We have sent a vehicle outside our own galaxy. Isn't it time to know which half is wasted and try to minimise it?
When we start opening our eyes and seeing the big picture, we can go to the next question: What is the likelihood of this value recurring again? Like in the example given earlier of the technical documents, if we are unable to see the continuous benefit from our investment, why do we keep investing? I know only one personality type that does the same thing over and over again and keeps expecting different results, the crazy kind.
What is the likelihood of that value recurring again?
When you are able to figure out the value a marketing investment creates and understand the lifecycle, you can easily calculate the value of your customer lifecycle. This can help you invest more efficiently, as you might leant you'll not even break even on the first year, but have a 95% chance you will double your investment in three years. After that it's all about scaling and improving the odds in all contact points.
Only after you understand and can estimate the value of a customer lifecycle can you start delivering excellent results and make marketing moves that others might call risky. Like paying more for an acquisition than your profit on the first year. You can only do this when you know that the chances are very good that you can increase the business by selling X and Y to each high acquisition customer. Kind of like how air carriers handle their business, selling us seemingly cheap air fares, while still managing to stay afloat.
The value generated is your key performance indicator.
The value generated is your key performance indicator or KPI for short.
If you liked this chapter, please recommend it to others.
"Data, data everywhere and yet all decisions from the gut!" That just about encapsulates why our marketing strategies are faith based, why our websites are barely functional ("the CEO loves purple!"), and why we are not making the types of profits we deserve. I love this book because Steve and Markus provide specific advice on how to unsuck our lives! Buy. Don't suck. Win.
Digital Marketing Evangelist - Google
Author - Web Analytics 2.0
In your face and a Must Read for beginner and expert analysts alike.
Founder - eMetrics Summit
Author - Social Media Metrics
Chairman - Digital Analytics Association
We have a single goal together, to make our customers a billion euros in profit. This won't happen in one year, it might take five years, but we will not stop until we have generated a billion of provable profit for our customers.
We love meeting and talking to new people! Get in touch with us. Come have a pint with us! We are available for projects, especially in warm places with great fishing opportunities and/or great beer.