Determine your most valuable customers: Customer Lifetime Value, inferred from analytics, spots the best profits segments
Avinash Kaushik has always been a great evangelist for the Google Analytics solution, with useful tips at the Occam’s Razor blog, along with having written two books on the business of web analytics (see the Small Business Trends’ book review on his book Web Analytics 2.0). There are great examples of how to extract value from analytics data. This post on customer lifetime value shows the influence of analytics data to determine your most profitable customer segment.
Explained by David Hughes of E-mail academy , the concept answers three questions regarding the value of an acquired customer base:
- Did you pay enough to acquire customers from each marketing channel?
- Did you acquire the best kind of customers?
- How much could you spend on keeping them sweet with email and social media?
This concept, along with inference of the analytics data, can guide businesses to understand which segments of website traffic are worth the marketing effort. Remember, your analytics data is more than just examining keywords. You can examine your online presence, and infer some answers, as well as guidance for others. I love this post from Avinash because it gets into the meat and potatoes of value. This is not entirely new; Annastatia Holdren gave great comments during her Adwords training about monitoring the value of your keywords so that you are not paying more for traffic (you can read more on the value of clicks here)
Key takeaways relevant for business owners looking to review their analytics.
- Focus on discovering the actions of a segment, not just an individual – analytics is about understanding a group of given traffic.
- Being at the top of a given SERP may be costly in some instances. There are many ways to drive customers to your site without going head to head on a keyword which may be expensive to use in an Adword or CPC campaign. That expense becomes particularly costly if there are few visitors converting from use of that keyword.
- Even if your business attempt to gain a SERP advantage via a focus on keywords, an overfocus on certain keywords can eliminate choices of other keywords and phrase which has lower traffic volume but potentially better odds of conversion – more sales, more sign ups, etc.
- Business owners should be open for other means for customers to discover their site — even a well constructed print ad that links to a great landing page can general the right traffic if the ad is exposed to the right audience. Foursquare, Twitter, Yelp, and social networking sites have provided new means of discovery.
To read the full explanation of the Customer Lifetime Value process, see the post at Occam’s Razor.
Warren Buffett once said “Price is what you pay for; Value is what you get.”
This means the price does not define the worth of an item. Ask Lexus and Cadillac. Both brands offered hybrid versions of their highly desired vehicles, the Lexus LS450 and the Cadillac Escalade. The prices for the vehicles are significantly higher than their gasoline counterparts. The MSRP of a Lexus LS hyrbid starts at $106,000 while a gas-only LS starts at $63,825. So an owner is paying $40,000 for reduced gas consumption and better gas mileage, a difference that causes some to wonder if the choice is a poor economic one. Is a green image worth $40,000? For now the answer appears to be no, since Lexus and Cadillac are offering rebates on these hybrid models up to $10,000. You can read more about the hybrid rebate here at Autoblog.
I use the hybrid example of value to drive a point about overpaying for value, what you want or expect. Closer to the world of online marketing, the same sensibility can be extended to pay per click. Many business owners seek more traffic and conversions from SEO and PPC, but much thought is paid to how to value a bid? Is a PPC bid worth the cost?
Anastasia Holdren, of Sitening, put some real thought into that question and has developed a great method of valuing the worth of a click. A certified Adwords consultant, Anastasia teaches an excellent Adword training seminar (sponsored by the good folks at Google). She has managed web development projects, email marketing campaigns and search engine marketing (SEM) projects for clients including Osram Sylvania, Harvard Business School Executive Education, Cannondale, Air Jamaica, and countless others.
According to Anastasia, the Value Per Click (VPC) should be calculated. This means dividing the profit before advertising costs by the number of clicks. Say you make $100 gross profit. Take the amount and divide it by the number of clicks received in the same period, say 5. So $20 per click is the VPC. It is the maximum bid value; Exceeding it is essentially overpaying for profit-generating traffic! Again, price is what you pay for…value is what you get.
This approach is brilliant — it is similar thinking to valuing a stock against the expected cash flow from company earnings. This approach contributes a significant piece to the analytics puzzle — users must rely on analytic solutions to confirm the cost effectiveness of a campaign, to adjust the campaign accordingly, and accordingly, increase the value of their website, and increase the chance for profits.
What do you believe are any addition best practices for valuing the clicks your receive? Feel free to share here.