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In "Big Time Banner Advertising," we discuss the
importance of establishing an acceptable level of return for
your promotional investments. This number becomes the criteria
for what is deemed a success and what is deemed a failure.
How you determine this number is not only critical to the
success of your advertising efforts, it's also critical to
the ongoing success of your business in general.
Many dot-coms make the mistake of using a "lifetime
value of a customer" calculation to determine their success
criteria. They estimate how many purchases a customer may
make from them over a long period of time. Then they calculate
how much profit will be contained in all of these purchases.
They will then use this "lifetime value" figure
to determine how much they are willing to spend to acquire
this customer. This is how some of these dot-coms can rationalize
spending nearly $100 in promotional dollars for every unique
customer buying $20 worth of books or CDs.
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Do lifetime value calculations even make sense in an environment
where "switching" is so easy? In the online business
environment, it's very easy for your customers to simply click
away to a better deal or a more appealing offer. Online, there
are fewer opportunities for true customer lock-in. Sure, our
customers have a certain level of familiarity with us that
helps gain their loyalty. And, we may also offer our customers
rewards or incentives to encourage their loyalty. But when
compared to an offline lock-in such as the location of your
nearest grocery store, these types of online lock-in are clearly
far more fragile.
Many online businesses find themselves in serious trouble
when they acquire customers based on a lifetime value calculation
that simply never materializes as their customers click away
to the latest deal of the day.
In "Big Time Banner Advertising," it is recommended
that a cost-per-order target be used instead of lifetime value.
A cost-per-order or CPO target simply allows you to treat
each order as a one-time event. By setting a CPO target, there
is no guesswork as to what a customer may be worth to you
in the future - you know exactly what customers are worth
on a per-order basis.
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For example, based on your product margins and average order
size, you may determine that $5 is the most you can pay for
each order while still meeting your business objectives. This
number becomes the CPO target for your marketing efforts.
Marketing efforts that achieve this target CPO or better are
"keepers" while those that don't get killed. A banner
ad that costs $1000 and drives 250 orders is a keeper. A newsletter
ad that costs $100 and drives 5 orders doesn't get renewed.
By using CPO targets, you are relying less on "what
may be" and relying more on "what is" to make
your marketing and advertising efforts more efficient, effective,
and profitable.
About the Author
Kim Wingate of AvidSurfer, is the publisher of "Big
Time Banner
Advertising" and "Turning Visits Into Action."
Both of these
informative Web business manuals, as well as a FREE conversion
ratio case study, can be found online at:
http://www.avidsurfer.com/default.asp?src=artq
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