Lifetime Value Online?
By Kim Wingate   ©2004 All Rights Reserved

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. 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. 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.

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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