There is a little trick to calculating the cost of a sale on Pay Per Click. The first step is to estimate how much profit each sale earns. Include sell-ups and extras when calculating this number.
Most ecommerce business owners try to keep their customers indefninetley, building a ‘life time value’ that far exceeds the initial sale.
The product mark up is important. The higher the mark up, the more money the business can invest in winning new customers.
Types of Customers
There are different types of customers. The most valuable short term buyer is the shopaholic or emotional shopper. Next is the impulse buyer. However, a dedicated hobbyist is more valuable than someone shopping for a single item.
Buying traffic can bring in a different type of buyer. These people have already clicked onto a pre-selling site. The value of this traffic varies drastically between companies. Buying traffic lets the merchant avoid affiliate programs and gives the merchant more control over their ad campaigns.
What Is A Quality Customer Worth?
The simplest method of calculating the life time value of a customer is to multiply the average sale with the number of ‘member’ customers.
If the average purchase is $20, and customers make 8 purchases a year, the customer’s value is $140 a year, or $840 in five years. A 20 percent profit margin over the lifetime of the customer equals $168 profit.
Next, calculate the conversion rate. If your keyword is worth $.10 per click, and your conversion rate is 1:240, then the business must invest one year’s profit to win a customer.
The business owner needs to ask whether their mark up will sustain the conversion rate. Random campaigns have a 1:1000 conversion rate. This means that a $.10 CPC keyword phrase will cost $100 to win each customer. With the above 20% conversion rate – the campaign isn’t economically feasible. This type of mark up is only viable with target audience campaigns.
However, in the above example, a 50% mark up earns $420 profit over 5 years. Investing 25% of the profits fits perfectly into the Standard Marketing Campaign algorithm used by random campaigns.
Unfortunately, there is no magic number. No one can create a graph for all to calculate the conversion rate for all merchants.
An advertising company can sell 10 000 targeted hits to two businesses. One will earn 1500 new customers, while the second only earns 200 from the same number of hits.
The real cost will vary depending on the search engines chosen, the PPC campaign signed with, the keyword phrases used, and how well the shopping cart is configured.
There are a few business statistics:
-Invest 20% of the revenues into sales
-80% of revenue is earned from 20% of customers
-Customers take 3 visits, to six months, to make a purchase
-Those who ‘can afford’ are the least likely to buy
-Impulse buyers respond to emotional and hard sell tactics
-Cautious buyers want a social network
-It is 7 times less expensive to keep a customer than to find a new one.
- The average visitor visits a website three times before making a purchase.
Building Customer Relationships
Keeping customers should also be factored into the cost. Once business wins a customer it is critical to build a relationship with them. It’s important to generate new customers, but not at the expense of retaining the existing customer base.
The customer needs to feel like they are important to the business. They want to have their say.
There are different methods of building a relationship with buyers. The most common two are email campaign and newsletters. Others include live chats, forums, blogs, and workshops.
Offering free downloads, coupons, discounts, and incentive programs have proven effective methods of retaining customers.
