There seems to be a new online trend. Businesses are jumping into online campaigns and throwing money at different marketing channels because “it’s the thing to do.” They set a fixed marketing budget aside for the year and that’s it. It’s in stone until we talk about it again next year. A big reason for this kind of practice is that these companies don’t actually know what kind of return they’re getting on their investment.
They’ve just been convinced that they need some kind of budget there because “our competitors are doing it and we need to be relevant online.” OK, well at least they have that part down. Having quality products and a great site is all fine and dandy, but if you pay too much or too little for the customers you acquire, then it doesn’t mean much.
There are two reasons why these shot-in-the-dark online marketing budgets aren’t accountable, and therefore aren’t actionable.
- Their data collection is almost non-existent or sub-optimal.
- They don’t use that data to calculate segmented Visitor Lifetime Values (VLV).
Let’s deal with data collection first.
Data Keeps Your Budget Accountable
Without data, you or those you hire are not accountable for the performance your investment gets. Sure, you might have analytics code inserted on your website to look at how many visitors you get, but that alone tells you nothing about what you truly value…your bottom line.
Online data collection isn’t perfect, but with all of the options available, you can have a very thorough picture of the worth of your site and its visitors. So, before you spend another dollar on online marketing, make sure you have your data collection as thorough as it can be. To do this, implement the appropriate tracking opportunities that are applicable to your site.
Combining all of these tracking methods gives you the flexibility to truly see the worth of various traffic sources, as well the total worth of your site to your business. Knowing this allows you to adjust your budget according to its performance. Why only spend $5K per month on PPC if you are making $3 for every dollar you spend? Raise your budget until you are no longer making a profit on the incremental dollars you add.
Know How Much Visitors Are Worth to Your Business
The second thing you need for accountable and actionable data is the sweet, sweet metric of Visitor Lifetime Value (VLV). It’s the amount of profit you can expect to generate from a visitor over their customer lifetime. Why is this metric so important? If you only calculate the profit you make from a customer’s first purchase, you aren’t using a true value when determining what you will spend for important things like traffic acquisition and conversion rate optimization. This can cost you.
If you calculate on first-time purchase only, you might pay $2 to acquire a visitor you believe is worth $4 to the business. If the visitor is truly worth $20 and you are only paying $2 to acquire them, you may be losing out on customers. The reason? Your SEO budget is too small and your rankings are suffering because of it. Or you are bidding too low on your PPC keywords. Or you’re not active enough in social media. Your competitor is spending 4x more for SEO company services/PPC campaigns/social media strategy and may be acquiring 10x more customers. Because they know what those customers are truly worth and you don’t.
How do you calculate VLV? You multiply the # of orders placed per customer over their lifetime by the average profit per order you make by your site conversion rate. Here’s a simplified example:
Orders Per Customer = 3
Profit Per Order = $100
Site Conversion Rate = 2%
Visitor Lifetime Value (VLV) = 3 x $100 x 2% = $6
So, each visitor to your site is worth $6. If you want to make a 100% profit margin on your advertising dollars, you know that you can pay $3 for the average visitor to your site and achieve your goal. Of course, numbers will change based on products, traffic sources, keywords, etc., but you just change the numbers when you want to segment your spending.
If you can improve your VLV, then you can decide to either pay more for traffic (and get more of it), or make more money from the traffic you do get – whichever results in more overall profit. For example, if your most popular PPC keyword allows you to pay $3 per visitor and that earns you an average position of 4 in search results, increasing your conversion rate will allow you to pay more per visitor and move you up in the search results, enabling you to acquire more traffic and sales. Or, you can continue to pay the $3 and stay in position 4 but make more sales while you’re there. Again, whichever makes you more.
Now you’re set up to make decisions with your budget based on what is actually happening. Yay, what a concept!