Hello, Goodbye ... NEXT!

by Chad Little, May 11, 2010, 9:10 AM

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One of the most significant changes that online marketing has brought to the industry is the ability to track conversion values more accurately. This swing has created a myopic view of the real CPA, which has shielded organizations from focusing on the lifetime value of a customer.

Before, the majority of all marketing costs were lumped into a big bucket and compared against total growth rates. Now, we can track CPC, CPM, CPA, traffic per day ... the list goes on. But how do businesses interpret that data intelligently?

Today I would argue that the standard mode of operation -- driving incremental conversions at a target CPA -- creates a blind spot by being too close to the data. The critical question is, "What's the true lifetime value of your customers?" This is the real number you should be calculating against, not just the single order value.

Here are some suggestions to calculate the True CPA value along with some suggestions to create culture change:

• The obvious first step is discovering the average lifetime orders per customer and what the value is per order. That's the easy part. What's not discussed in this calculation is determining the likelihood that customer will refer someone else. If you don't know, find out! I posted a piece recently, referencing a report in the Harvard Business Review, that states this data point is likely the single most important figure to determine top line growth.

• Determine what the likelihood is and use it as a multiplier. If 2 in 10 customers are inclined to create word-of-mouth (WOM) sales, increase your lifetime value of a customer by 20%.

• At the same time, work to find out how many of your clients or potential clients walk away in a huff, upset at your service, product offering or website experience. How likely are these individuals to tell their friends, your potential customers, to never do business with you again? As we've all been taught, this person is more likely to create a significant impact on your business than the customer with a positive experience. Subtract this value from your multiplier of positive clients.

• This figure gets much closer to the True Lifetime Value of a Customer.

• Post your lifetime customer value, the "2 in 10" ratio of WOM referrals, the number of negative experiences you have with clients, and post the resulting decrease throughout your entire organization. Discuss it on a regular basis. Tie compensation to increasing these figures or push for it if you don't control it. Customer service individuals should be compensated on increasing the referral rate percentage as well as creating unsolicited happiness from your customers.

• When customer service creates a bad experience, when your Web site has technical issues, when someone returns a product and isn't made happy, don't just say, "Oh well, it's only a $79 sale." Talk about the True Lifetime Value of a Customer -- that's $560 that just walked out the door!

• This all adds up to providing you additional money to drive new incremental conversions. In theory, if the organization decides to drive the same growth rates, your CPA figures will drop as you focus more on your customer's experience. As a by-product of this, the return conversion rate will increase, as will your lifetime customer value. This is the reason companies are able to dominate with their CPC bids on Google (well, excluding those "ego wars"). It's because they have more money to work with, thereby forcing higher growth rates.

These are not simple calculations. They are not simple changes. These are typically a fundamental shift in culture and thinking. It's not about saying, "I have $20 CPA on an average order value of $79." That's the myopic view our industry continues to adopt because we have access to all this data. We need to refocus, and give the True Lifetime Value of a Customer the attention it deserves.

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