Every Customer Has A Price

By Kevin Lee | Posted February 24, 2003
How much should you expect to pay for a search engine marketing campaign to attract customers? If you're working on an online marketing campaign crafted to attain specific post-click objectives, you need to be prepared in order to understand how your campaign is faring and how much each customer acquisition costs.

Your objectives may include a cost-per-order (CPO), cost-per-lead (CPL), or other cost-per-action (CPA) metric, or even a branding metric. The question then becomes: What quantifiable value should you set for your post-click objectives? You may be undertaking a search marketing campaign, another online marketing effort involving banners or pop-ups advertisements, or a combination of the two. Each will deliver against the objectives differently. Should you set the objectives the same for all segments of your campaign or use different target objectives by campaign segment?

If you have not gone through an exercise to determine your CPO or CPA or thought about setting the objectives differently by campaign segment, don't despair. Nearly 50 percent of marketers I talk to are unsure of what to say when I ask them about their current CPO or CPA objectives. That's why I chose to circle back in this article to the basics of setting your numerical objectives. Setting CPO intelligently can result in huge gains in campaign efficiency.

If you have not measured your actual CPOs or other metrics yet, now is a good time to start. It is preferable to tag all of your listings uniquely and keep track of the cost-per-click-through, then watch your conversions by individual listing. Cost-per-action or -order is the cost of the traffic divided by the number of actions. Each listing that has a significant volume of click-throughs and conversions will soon be providing you with individual data. This becomes your baseline action metric.

Of course, some listings will generate actions or orders less expensively than others. Even if you have not yet set your CPO targets based on business strategy, you can use your baseline as a guide and set CPO targets to eliminate inefficient listings (those with unreasonably high CPOs). Now back to the strategy of setting allowable action metrics.

Let's cover e-commerce first. In e-commerce, marketers most often use CPO as their primary objective, although they may use secondary objectives as well. If we look at CPO the way many catalog merchants do, we will set a CPO or cost of customer acquisition target "allowable" based on the average profit earned over the lifetime of an average customer. This practice works with averages and assures that, typically, the marketer makes money on the campaign.

When renting traditional direct marketing mailing lists, catalog marketers are stuck with the averages even if they examine conversion behaviors by list. They do not have the luxury of setting CPOs or costs of customer acquisition separately for different products in their catalogs. As search engine marketers, we have that opportunity. Some items you sell are high revenue and high margin, delivering a significant profit. So, one way we can set a CPO is to look at the profit derived from the sale of the item we are advertising with a search listing. If the listing delivers the searcher to a category results page containing many items, we can use the typical profit we make on orders from that category. By setting our CPO objectives proportional to initial profit, we can concentrate our marketing efforts on the areas where we make the most money.

By moving from a fixed campaign based on the cost-per-order to a sub-campaign based on profitability, we put our marketing budget to better use. Since we have been discussing catalogers, let's use an example from another hot e-commerce category: travel. (The following numbers are for illustration only and do not represent one of our clients.) A travel marketer might initially set a CPO target at $18 for an overall campaign, because the average booking earns $30 in revenue and, after all, there should be a decent profit. However, the following types of booking may have significantly higher revenue: cruise vacations, resort bookings, golf vacations, and first-class travel. Each of these booking categories may have revenues from $60 to $100 and have keywords associated with them. Coach airline tickets alone may only earn $21 in revenue.

Look what happens when we set the CPOs higher for the more valuable bookings and perhaps even drop the CPO target for campaign segments that don't drive as much revenue. Listings with higher CPO allowables can be bid higher or, in the case of fixed-price listings, kept in the campaign (e.g., a listing that would have had an $18 CPO at position 6 can now compete at premium positions in Overture and still come in at a higher level of profit).

In business-to-business (B2B) marketing, you're often trying to generate leads or registrations. As with e-commerce marketing, not all leads are created equally. Tag your leads and see which ones actually convert to sales. For example, our payroll services client knows the keyword and search engine that drive every lead their way. If a particular keyword or search engine delivers traffic that results in a better-than-average rate of sales conversions, the CPL allowable for that listing should be raised. This will result in more of the valuable leads that convert into sales.

If you have a sophisticated business analytics platform and tag each new customer with the source of their acquisition, you can even factor in lifetime value in both e-commerce and B2B situations. In addition, not everyone is always ready to buy, and some listings may have a greater percentage of potential customers in the early research stages of the buying cycle. Studies of your prospect behavior may help you map additional positive behaviors to your search campaigns. I'll cover lifetime value, purchase behavior, and CRM in my next article. Stay tuned.

Adapted from ClickZ.com.

Kevin Lee is chief executive officer of Did-it.com, Inc. Did-it.com clients rely on Did-it's automated systems to manage paid search results campaigns in auction and XML paid inclusion vendors based on their CPO/CPA data. Kevin and the Did-it team have been helping marketers since 1996. Kevin also co-founded INTERACT Multimedia, a top interactive agency, and publishes a marketing newsletter. A frequent speaker at industry conferences, Kevin enjoys sharing tips, tricks and strategies in print and in person. Kevin earned an MBA from Yale School of Management in 1992.


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