Adjusting Search ROAS To Optimize New Customer Acquisition

by Tom Alison, Jan 31, 2008, 2:00 PM

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Postage costs up 25%, paper costs up 10% to 15% -- what next, a do-not-mail list? Catalogers are being forced to take a hard look at alternatives to prospect mailings in order to acquire new customers. The good news is that you can now acquire prospects online and often at lower costs than renting lists and mailing catalogs.

In 2007, over 50% of catalog orders were taken online. Some catalogers have online orders accounting for as much as 60% to 80% of their total orders. A strong contributor to online sales, according to industry surveys, search engine marketing produces, on average, 25% of online catalog sales, sometimes accounting for as much as 50%.

Customers Generated from Branded Keywords

By their very nature, branded keywords indicate that consumers are familiar with your company/products from another source. They may be prior customers, may have received a catalog, seen an advertisement or come from word-of-mouth referrals. While some marketers generate the majority of sales through searches on branded keywords (the response channel effect), if the pay-per-click (PPC) campaign is done properly, marketers don't have to pay much to be on top of their own branded keywords.

Focus Non-branded Keyword Campaigns on New Customer Acquisition

Non-branded keywords are crucial to your campaign and will influence how many new customers get to your Web site. Consumers want to quickly find what they need. Your paid keywords make it easy for them.

What should you be spending to maximize and optimize new customer acquisition?

If you have a 50% margin and you want to break even on customer acquisition, you need to average a new customer return on advertising spending (ROAS) of $2 (or $2 in revenue for every $1 of spending). But, you may be setting the ROAS target higher to generate greater profit margin from the channel. By valuing new customers differently than repeat customers, you will be forced to look at your search budget and performance a little differently.

Identify the keywords that generate new customers in addition to creating traffic and orders. Keywords that generated a lot of new customers possibly deserve a little extra credit when budgeting, as they have real business-building value. On the other hand, keywords that yield orders mostly from current customers might be valued more for their retention value and as a substitution for phone calls. After all, you are still incurring catalog mailing and other costs that may be generating online orders both directly to your site and via the search engines.

Look at this hypothetical SEM campaign. This catalog has a $100 average order, with a 50% gross margin. It wants to break even on customer acquisition from search, so the cost per order (CPO) target is $50 or under. The CPO allowable for prior customers ordering via search is much lower, only $10. Their search campaign is producing 65% of new customers. Given their economics and mix, to optimize customer acquisition their overall ROAS average should be $2.78 in sales for every $1 spent on PPC advertising. To have a higher ROAS would restrict customer acquisition.

Now of course, these are averages. You need to look at the category level and at specific keywords. You might even want to create a few "new customer" categories where the percentage for new customers ordering is highest.

Tracking Response, Sourcing Web Sales and Revenue Allocation

Full circle tracking and understanding how customers move across channels is a real opportunity for catalogers today. Make sure you tag your site's visitors with the referring source so you can allocate your sales to the appropriate online or offline channel. This will allow you to determine the lifetime value of search-originated online shoppers, just as you have traditionally calculated lifetime value from different mailing lists.

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