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Lifetime_Value_Online
| 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. I
hope this helps in your future marketing decisions.
About the author:
David Bell is Manager, Online Marketing, at
http://www.wspromotion.com/ , a leading Search Engine
Optimization services firm and Advertising Agency.
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