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Pour And Stir II – Managing Your Cost Per Customer
By John Greathouse
“I know half the money I spend on advertising is wasted, but I can never find out which half.” John Wanamaker
If Mr. Wanamaker had access to the Internet, his oft-repeated quote, would have never been uttered. In the “good old days”, pre- 1999, advertising dollars were largely gambled away.
As noted in Pour and Stir Part I, the key to the successful execution of this strategy is managing the following equation:
The cost to acquire a customer < lifetime value of a customer
This entry focuses on how you can minimize your cost per customer acquired by systematically establishing the infrastructure necessary to track the results obtained from a variety of online and offline marketing vehicles.
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Decreasing Your Customer Acquisition Costs
There are two ways to decrease your cost per customer; (i) optimize the amount of money you pour into the top of the funnel and, (ii) increase the rate by which you convert potential customers into actual customers and thus increase the effectiveness of your marketing dollars. For instance, if you enhance your conversion rate by ten percent and your historical cost per customer is $50, your revised cost per customer will decrease in direct correlation. This is equivalent to being handed a free customer for every ten customers you acquire.
Ultimately, your overall customer acquisition costs should calculated as an average of a variety of marketing channels. Some channels will be expensive but highly scalable, such as direct response radio, while others will be less expensive, but more difficult to scale, such as search and affiliates. By tracking each channel and managing your overall acquisition costs such that they are less than the customers’ lifetime values, you will maximize the growth of your Pour and Stir business. For instance, if your average lifetime value is $250 and the average radio acquisition costs is $300, it may still make sense to implement a radio campaign if both: (i) your other acquisition channels are optimized and further growth is limited, and (ii) the inclusion of $300 radio customers does not drive your overall customer acquisition costs beyond your customers’ $250 average lifetime value.
In addition, you must consider your customers’ lifetime value by channel, as there can be a great deal of variance between various clusters of customers. In the example above, you may find that although radio listeners cost $50 more than your average cost per customer, they may correspondingly have a longer life and thus a higher lifetime than your average customer. Tactics which can increase your customers’ lifetime value are discussed in Pour and Stir – Part III.
- Unattributed – There is no such thing as organic customers. No one wakes up and says to themselves, “I need to buy that product I have never heard of before.” It does not happen. Thus, include these unattributed customers in your overall calculation of customer acquisition costs. However, there are inevitably customers for whom it is difficult to attribute to a specific source. Your marketing dollars paid for these unattributed customers, but like Wanamaker, you cannot identify when or how. If you benefit from true word-of-mouth marketing, consider yourself lucky. As Marketing Guru Guy Gabriel of Idea Engineering points out in Max Brand, viral marketing has made many an entrepreneur terminally ill.
- Unpaid Search – Never pay a consultant to help you achieve a higher search ranking. Such Search Engine Optimization (SEO) is modern-day snake oil. No one, including the engineers who work on Google’s constantly evolving search algorithms, fully understands how to reliably and consistently boost search results via artificial means. Thus, avoid link farms, mindless keyword content and similar techniques designed to make your site more Google friendly. As long as you have a well architected site that allows Google to properly spider your content, spend the rest of your time and money focusing on maximizing the remaining marketing tools listed below.
Paid Search – Customers which click on sponsored ads associated with search keywords fall into this category. Google’s market capitalization is in the stratosphere for a reason – keyword search advertising is highly effective. However, Search Engine Management (SEM) is not a “set and forget” exercise. If you simply define a list of keywords, establish maximum bids per word and walk away, your efforts will fail. You must apply dedicated resources to your SEM efforts, either in-house or via a trusted third-party partner, in order to maximize customers acquired from this channel.
Affiliate Network – Affiliates are third-parties which are only compensated when they perform a particular action on your behalf. Affiliates invest the up-front marketing expenses required to attract customers. If you have the proper mechanisms to accurately calculate your Cost Per Customer / Lifetime Value Equation, you will happily purchase as many customers from affiliates as your cash flow constraints will allow, as long as the average acquisition price is less than the customers’ average lifetime value.
To put yourself in an affiliate’s shoes, consider that you have ten billboards and you can advertise anything on each of them. However, you are only paid for ads that generate sales. Given your opportunity costs, you will carefully evaluate the ads you place on your billboards, because a poorly performing ad will result in a significant loss of revenue.
Instead of billboards, affiliates own websites, many of which contain meaningful content associated with the products they advertise. For instance, a travel site might contain travel tips, along with ads for great deals on vacations. The affiliate is only paid by the vacation advertiser when someone clicks on the ad and completes a lead form. They are paid nothing for simply displaying the ad.
The downside of the affiliate channel is that affiliates tend to be relatively small publishers, which are inefficient for most advertisers to work with individually. As such, a number of marketplaces have arisen to address this issue, such as Commission Junction, Google Affiliate Network and LinkShare. Although such networks are effective, they attach a fee to the affiliate payouts, ranging from 20% – 30%. Such fees must be factored into your cost per customer calculation.
- Cost Per Action (CPA) – Similar to Affiliate Marketing, CPA advertising dollars are not spent until a particular action is achieved, as defined by the advertiser. Such actions include sales, trials, leads, downloads, etc. For instance, an advertiser might pay $45 per sale, irrespective of how each are particular sale is generated. Some might be from banner ads and others may arise from an email campaign.
- Cost Per Click (CPC) or Download (CPD) – As the name implies, advertisers pay only for clicks on its advertisements or when a user downloads its software, case study or whitepaper. Such ads must be carefully vetted by the advertiser in order to avoid generating unqualified clicks that do not convert into the intended action. Ideally, such ads should clearly articulate the value proposition including the price.
- Co-Registration (CoReg) – CoReg opportunities arise once a user has registered for a third-party product. Once this process is complete, they are exposed to your offer. As with all marketing techniques, the more contextually relevant the co-registration offers, the higher the attach rate. For instance, if a user registers for a firewall, subsequent offers for anti-spam or anti-spyware solutions will generally fare better than random solicitations for Netflix, Geico or the secret to whiter teeth. In most cases, the advertiser only pays per valid registration obtained. As such, you must view the registration process in its entirety, including what incentives are being offered and what other co-registration products are offered. For instance, if a user is rewarded for selecting multiple offers, then their intent is clearly lower than a non-incentivized user who registers for a complimentary product.
Direct Response Email and Newsletters – Although rightfully vilified due to the irresponsible actions of Spammers, targeted, opt-in email lists can be lucrative sources of customers. In many cases, editorial content in an email newsletter is an effective manner of acquiring customers. For instance, if you sell a software security solution, you might write an article that describes ten ways consumers can protect themselves online, highlighting your solution as one potential tool. As described more fully in Thrill The Messenger. Note: be sure to always disclose your association with any products included in such lists.
Another economical manner to utilize email marketing is to conduct reciprocal email campaigns with partners in which both parties agree to send a minimum number of emails to individuals within their respect databases. As with co-registration offers, the respective products should be complimentary so the emails provide value to the recipients.
- Cost Per Thousand (CPM) – CPM ads are a throwback to the days of offline advertising. The advertiser is guaranteed nothing, other than a prescribed number of “impressions”. Such impressions might appear on a website below the fold at 3:00 AM, but they still count toward the publisher’s fulfillment of the Insertion Order (IO). Avoid CPM ads unless you are able to negotiate an extremely aggressive rate, which may be possible if you are willing to commit your advertising dollars to a future calendar quarter or if you purchase remnant inventory. CPM deals can be optimized by identifying the most relevant locations to display the ads on the publishers’ sites, daypart the ads and specify frequency caps. You can significantly lower the risk of a CPM deal, and effectively convert it into a CPA arrangement, by negotiating a guaranteed minimum number of referred visitors or customers from the CPM impressions.
Given the breadth of the various online marketing mechanisms, it is typically difficult for startups to maximize each of them. Although I generally despise the involvement of consultants during a venture’s early stages (see Beware The Consultant), consider securing a risk – reward relationship with an outsourced marketing firm. Although such agencies are relatively rare, they do exist. For example, RevUpNet, an online marketing agency I Co-Founded with Ben Kiblinger in 2007 and currently act as an addVisor, prides itself in establishing revenue sharing relationships in which it is rewarded when it drives incremental revenue for its clients.
Direct Response (DR) Radio
In the early days of marketing GoToMyPC, circa early 2002, I was highly skeptical regarding the use of offline channels. I was concerned that very few radio listeners would hear a URL while driving, arrive either at work or home, get online and then be motivated to enter “gotomypc.com” to access our offer. As such, we took an incremental approach, starting with online streaming radio, then highly targeted endorsement radio by tech gurus, followed by slowly rolling out a direct response campaign on terrestrial radio (satellite radio was not a mature medium at the time). I was dead wrong. DR radio proved to be one of our most effective customer acquisition channels.
DR radio comes in many forms, as described below. In each instance, the intent of the message is to initiate a particular action by the listener, such as picking up the phone or visiting a website. Similar to online ads, a particular radio ads’ trackability is highly correlated with its relative cost and effectiveness.
- Online Streaming Radio – Online radio can be a particularly effective advertising medium for products which lend themselves to online sales. For instance, if an audio ad describes a security software solution, the listener can open the browser (which most listeners generally minimize while the radio plays in the background) and click on an ad displayed in the radio player in order to learn more about the offer. Such sales are highly trackable, because the clicks can be measured like any other online ad. Several companies have aggregated smaller Internet radio stations, in a mode similar to Affiliate Networks, most notably Jetcast.
- Remnant Auction Radio – Brand oriented advertisers tend to hold remnant advertising in disdain, as they fear they cannot control the context in which their marketing messages will be communicated. Such brand-focused, non-call to action advertising is appropriate for some products and services, but not those which qualify for the P&S business model. If you are in the midst of a branding campaign, you likely work for a Big Dumb Company which has a large budget, no ability to track its marketing spend and hold its advertising investments accountable. However, remnant radio can be a viable option for direct response marketing campaigns, where the primary concern is performance, rather than branding.
Remnant radio has become extremely sophisticated in the past several years. Users can now target their ads in the same manner as with traditional radio, including geographically, demographically and dayparting (i.e., selecting the time of day ads run). In addition, advertisers can specify the maximum amount they are willing to pay per spot, via weekly reverse auctions.
As with any offline medium, tracking remnant radio’s results is challenging. One way to maximize such trackability is to tailor your website and search campaign to facilitate radio’s success. For instance, include a visual callout on your website’s front door welcoming radio listeners and inviting them to enter the promo code announced in the call to action portion of the ad. Alternatively, create a vanity URL that is only communicated in specific radio spots. For instance, if your primary website’s URL is Attachmore.com, you might encourage radio listeners to visit Attachmoresales.com while ensuring that your keyword search campaign includes all the logical variants of this vanity URL.
- Satellite Radio – The abundance of stations offered on satellite radio allows for effective demographic targeting. Unlike satellite music stations, talk radio shows include commercials and the audience tends to be affluent, professional and relatively sophisticated.
- Terrestrial Radio – Despite its limitations, old-school radio can also be an effective direct response channel. However, it requires significant money, time and attention, primarily because terrestrial radio listeners are generally passive; using the radio as background, ambient noise. Thus, the most effective direct response vehicles tend to be talk shows, as these listeners are more prone to act upon the marketing messages they hear as opposed to tuning them out as “noise” to be ignored between the musical interludes.
- Endorsement Radio – Although it is generally expensive, personal endorsements by a radio show’s host can be highly effective. A key advantage to such campaigns is that once you contract with a particular radio personality, the host will not offer personal endorsements of your competitors’ solutions. At GoToMyPC, our first foray into radio was a series of personal endorsements by Kim Komando. Nearly 10-years later, Kim continues to sing the praises of GoToMyPC and has yet to endorse an alternative remote access product.
In addition to ranking these marketing tools from cheapest to most expensive, the above list also reflects the approximate order in which each should be pursued. For instance, it does not make sense to develop an Affiliate Market presence until you have established an effective SEM campaign. In addition, it generally is not prudent to establish a terrestrial radio campaign before addressing the tracking issues associated with online, remnant and satellite radio.
In 1995, the surviving 15-stores from John Wanamaker’s once thriving retail chain were sold and the Wanamaker brand ceased to exist. However, Mr. Wanamaker’s name lives on, due to his once lauded quote, which has become an anachronism in today’s highly trackable advertising age.
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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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Topics: Entrepreneur, Strategic Planning, The Fringe | 4 Comments »
December 2nd, 2009 at 4:54 pm Quote
[...] Sales Kids With Grit – Web 2.0 Paper Routes | Main | Pour And Stir II – Managing Your Cost Per Customer [...]
December 3rd, 2009 at 10:10 am Quote
John – fantastic post!
Based on my experience across a lot of startups including eHarmony, I use the same initial model of Acquisition Cost vs. Lifetime value.
However, based on looking at McClure’s work, I’ve started to look a bit broader at other kinds of Startup Metrics.
In particular, the retention and referral and their impact on acquisition and lifetime value is good to have in mind as you lay these things out.
On a side note, would love to have you involved in the So Cal Tech Central. Let me know if you are interested.
December 4th, 2009 at 4:18 pm Quote
Tony,
Thanks for your kind words. Part III of this series covers retention, win-back and other ways to extend LTV. I just need to finish writing it…
I would be flattered to be involved with So Cal Tech Central. Let me know the most appropriate next steps.
Cheers,
John
March 2nd, 2010 at 12:00 pm Quote
[...] ability for advertisers to track the effectiveness of their campaigns, as discussed more fully in Managing Your Cost Per Customer. However, as the Internet advertising industry matured, it became populated with traditional media [...]