Commentary

Don't Judge Marketing Channel By First Sale

Jeff Bezos once said “a company shouldn't get addicted to being shiny, because shiny doesn't last.” Ecommerce marketers, take heed. More often than not, online marketing tends to invest heavily in acquiring shiny new customers. Why? Because when it comes to determining whether a channel is performing well, we tend to be rather short-sighted and reach for the most readily available statistics such as click through, conversion rate and number of sales, all of which favour channels that perform well for acquisition. However, in the digital world, just as it is in the ‘real world’, long-term customer retention should be one of our primary goals. 

We call them users, give them IDs and find it hard to see them as living, breathing individuals, but in their decision-making process, digital consumers, like their alter-ego offline consumers, develop opinions regarding products, brands and websites. And yet the opportunity of developing new customers into regular customers is sometimes neglected within online marketing. But it’s important to identify who your loyal customers are and invest further in the marketing channels that bring you more of them. 

Consider this. A beauty salon puts out a flyer for a Valentine’s Day offer which results in a surge in bookings. The owner gets excited and decides to invest more in regular offers which she hires students to distribute via more flyers which result in further spikes in bookings. But what the owner fails to realise is the weekly radio ad which she uses to promote her shop but from which she doesn’t see any significant increases in bookings directly after it airs, has actually sent in customers who now visit the salon regularly and very often increase their spend as they start using more services. To the owner, the radio ad seems expensive whilst the flyers are a cheap way of getting short-term customers. But over the long term, the flyers method costs her more as she has to pay for printing, hiring students and missed appointments which very often occur with new customers who then don’t re-book.

It’s the same principle online. 

Established online companies, such as Amazon and Zalando, have already integrated the analysis of customer relationships into their marketing strategies, where short- to mid-term losses are taken into account in order to maximise profits in the long term. This approach allows investment in seemingly less profitable marketing channels, which in the long term create loyal and more profitable customers.

With this model, the success of a marketing campaign is measured against the profits or losses attributed to the entire future relationship with a customer rather than a single sale.

Here’s an example with numbers….

An online shop currently invests in search engine (SEA) and display advertising. The turnover is $80 per order with a $6 acquisition cost for SEA and $20 for display. Based on the turnover and cost, the average profit when using SEA is £74 and for display advertising

£60. The average cost-turnover ratio is therefore 7.5% for SEA compared to display at 25%. The SEA channel seems to be more lucrative, which brings up the discussion of dropping display advertising to save costs. 

The weakness of this model, however, is that the entire customer journey, which includes a range of channels and often takes place over a period of time, is not accounted for.

When looking at the customer journey as well as the order history of existing customers, we found out that users acquired via display advertising usually stay customers for 15 months, make 1.8 orders and spend $80 with a 20% margin per month. Compared with the order history of the customers acquired via SEA, users also turn over $80 and make an average of 1.8 orders per month but the customer retention ratio is only 60% (for display advertising it was 80%). This means that only 60% will still be customers in the following month. In addition, the customer retention duration is only 8 months.

By taking this into account, marketing to all customers and prospects in the same way becomes redundant. Customers in different phases of their lifetime cycle should be targeted with marketing activities that are attuned to their individual needs. For example, returning customers should be targeted via mailings or social media campaigns whereas newly acquired customers tend to generally derive from more intricate marketing activities such as SEA or premium display advertising.

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