Frager Factor

Sunday, March 11, 2012

Forget CPC and CTR: It's Lifetime Customer Value That Matters Most

'Measuring Visitor conversion rates (Visit based conversion rates promote bad marketing behavior) is akin to declaring success after a one night stand."

One of the most important papers on web business valuations, a way to look at a business that is overlooked by traditional metrics and as result by analysts, in particularly Apple's case, is lifetime customer value.

The expert of this subject is Avinash Kaushik, "Director of Research & Analytics at Intuit, Web Analytics Practitioner, The Digital Marketing Evangelist for Google, author of two books and a VERY Nice guy."

In an April 2010 blog posts titled, "Excellent Analytics Tip #17: Calculate Customer Lifetime Value," Avinash claims that traditional metrics fail because they focus on short term success.

Says Avinash, "Even measuring Visitor conversion rates (Visit based conversion rates promote bad marketing behavior) is akin to declaring success after a one night stand."

Some of your customers are going to be spending more with you, for longer.

Let's say I am a car insurance company, or a subscription publisher, with a desire to sort out some of tomorrow's problems today.
I know that the initial cost of acquiring customers (or policies/subscriptions) will only go up as more of my competitors sail for the calm waters of "cost per acquisition" pricing.
So, if I need to sell 10,000 policies every year I have 2 options.
Buy cheap customers and hope that a few may buy again
Buy the right customers that stay with me for 2 or even 3 years
Without doing the value-based segmentation we'll never understand which channels bring in the best customers and that would be a terrible shame.
The ground truth is that I can re-new a policy or subscription for considerably less than buying a new one. How?
One strategy might be to spend an extravagant $1.00 of marketing costs to show my love an appreciation to our customers throughout the year via email or social media, increasing the chances they'll buy again.
That means I won't have to spend $20.00 buying a new one… a saving of $19.00 per renewal.
So if I can grow my repeat purchase rate from 20% to 40% that means I will generate 2,000 policies at $1.00, not $20.00.
That's a $19.00 savings on each of the 2,000 policies. BAM!!
Moving to a Life Time Value acquisition strategy will save my company $38,000. Not bad for a couple of days work.
Let's finish off the concepts of value based segmentation and lifetime value by going back to the original example we were working through.
If we can identify channels, campaigns, media or propositions that deliver "better than average" customers we can begin to see how much more profitable they are and decide how much more we should be spending on them.
Read on for an (sample) analysis I (or you!) should do:

About The Author: Owen Frager is an Internet marketing expert ready to help take your company to the next level.

Contact Owen: Twitter | Google+ | Facebook | LinkedIn | Email