De-averaging your marketing investments and paying close attention to how your incremental marketing investments pay off is a post I've been intending to write for a while now.

The good folks at Rimm-Kaufman group, however, saved me the trouble with yesterday's excellent PPC Averages can Hide Incremental Nightmares.  Please take the time to read it.

As I was reading it, I started to think about applying LTV to the methodology.  When you think about making decisions based on LTV, the story becomes even more clear.  All will be revealed (with a graph!) after the break.

First, I roughly recreated the RKG dataset from visual examination of the graphs.

Then, I developed some hypotheses about how the customers acquired in the original effort would perform.  They included:

1. Incremental Lifetime Sales. The top bucket of customers (acquired with the first $10,000 in ad spend) would generate an additional 80% more sales.  The bottom bucket would generate just 5% more sales.
2. Incremental Lifetime Marketing Investment. The incremental advertising cost to generate the incremental sales (you have to spend money to make money, regardless of what your CFO may want to believe!) ranged from a 7% A/S ratio for the top bucket to 1,000% for the last bucket.

I suspect I've been too conservative in my assumptions of incremental sales for the top bucket and the rest of the A/S assumptions are just estimates for discussion purposes.  I made no additional assumptions for improvements in gross margins and so on.

So what happens when I applied my assumptions? Here's the graph:

The light yellow and light blue lines are essentially the graphs on the original RKG blog.  The orange/dark blue lines show what happens when I try to add in LTV.  What happens?

1. Peak profit (marketing income) shifts leftward. That means that instead of hitting max profit at around $60K of original acquisition ad spend, this model shows it peaking at around $40K of original acquisition ad spend.
2. The profit slope changes. It becomes more steep in the first four buckets of marketing investment and then the rate of change also falls off more rapidly after the peak.

Of note is that I haven't considered overall revenue and other factors (economies of scale) that may impact marketing investment decisions.  You may, for example, want to be slightly less efficient on the margins for revenue volume purposes or to maintain volumes if you have costs that operate as step functions.

What does this mean as you look at incremental marketing investments?

1. It's even more important than Rimm-Kaufman indicates when you look at investment on an LTV basis.  The mistakes on the margin are not as gradually dilutive to your profit, when you consider LTV.
2. It's important to get up the experience curve. Given that the slope of profit rises pretty quickly, you're leaving money on the table if you don't (or can't) bucket the marketing investments and quickly march up that curve--by investing more in marketing, smartly.

How do you analyze the incremental performance of your PPC campaigns and other marketing investments?  What challenges do you face when trying to build models to maximize your marketing performance while delivering against volume or revenue constraints?

Update, August 6th--Graph above was updated due to some missing data.  All comments above still hold.  The original graph uploaded this morning is available here for review.

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What's the value placed on a social media marketing campaign by the marketers that develop the campaign?  It's hard to tell, because one typically can't get access to the key metrics associated with the campaign, particularly sales attributed to the effort and ROI.

I was intrigued by a new social push by Sony Ericsson for the Z750a flip phone, created by their agency, Iris.  The campaign is titled "Bringing Purple Back."

Well, neither Sony Ericsson nor Iris would give me any objectives for the campaign.  Neither was any information or speculation found on unofficial Sony Ericsson blog sites about the campaign.

Being an inquisitive guy, I decided to use the crude but effective research technique of following the money to learn more.

Smart marketers tend to invest more dollars where volumes are high and margins are high, and less when the expected outcome is otherwise. 

I tend to think of Sony Ericsson as a fairly smart marketer, based on my hypothesis that they're focused on the consumer--they've got a great assortment of cell phones and get generally very good reviews for the products, which are eye-catching and (to my mind, anyway) competitive with anything out there.

So how much is Sony spending on the Bringing Purple Back campaign?  Not much.

Let's take a look at what I've found this morning:

1. Prizes of just $2,393.  Six lousy free cell phones and one grand prize of a $599 gift card, positioned as a free pair of designer shoes. (Why not a phone and a free year of AT&T service?  But I digress.)  No million dollar sweeps.  Not even a free phone a day.  Six over the course of a six week promotion.
2. Short promotion length.  Six weeks.  Unless something is absolutely crazily viral, it takes a couple of weeks at minimum to get a campaign off the ground.  By the time things are up and running, it's game over.  The excessively short time frame smells of a budget compromise.
3. PPC buys of $0.  Go to Google and Yahoo and try to search for "Sony Ericsson 750a".  While I don't expect the Bringing Purple Back website to pop, why no PPC spend?  (I tried a number of different KW searches including the obvious "Purple Cell Phone" and came up snake eyes.)

Say the agency fees for the planning and site were $300K.  Sony Ericsson spent over $88 million just a couple of years ago to sponsor the WTA women's tennis tour.  What do you think gets daily attention back at HQ?

In conclusion, I have to believe that either this social effort is either:

1. Not worth much to Sony Ericsson and given an appropriate amount of investment and care.
2. A botched effort, due to poor planning and low budget (see the PPC buy screw-up above).
3. A test.

If it's got the right amount of effort associated with it, given the expected ROI, then OK.  (I still have to believe that some PPC, particularly at the kickoff when you might get some search attempts, makes sense.)

If it's a botch, then I hope there's a good campaign debrief on the calendar for Sony Ericsson and Iris to review execution against objectives and so forth.

What do you think of the effort? Might it work?  Could purple be the new black?  Do you like the Z750a phone?

photo credit: Marco Gomes

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If you've gone through the hard work of developing physical products for customers, why not take advantage of the low-cost and free Web 2.0 tools available to help increase adoption of your product and reduce your sales cycle?

A perfect case in point is Octane Fitness and their line of elliptical trainers.

We were in the market for an elliptical trainer for about 6 months, when we finally pulled the trigger in early April on an Octane Q37ce trainer.  Since then, we've been extremely happy with the investment.  I've found that a six-day-a-week workout routine is easy to maintain and have seen marked improvements in my level of cardiovascular fitness.

So why did it take 6 months to purchase a product that I; a) really wanted; b) really needed; and c) is a terrific product that fits my needs exactly?

After reflecting for a month and doing some additional research, it's clear that Octane could have cut the sales cycle down to under a month.  Here's how.

Our month and a half with the product has been great. It's sturdy, has a number of very usable electronic training programs and it fits both Mary Beth and I quite well.

The key product benefit for us? It has narrow pedal spacing, which makes the stride very comfortable for both myself (5' 8") and Mary Beth (4' 11").

Of course, neither of us knew that pedal spacing was important (to us, anyway) or the other features and benefits of a trainer that might be important.

And we didn't find the answer when we started doing some basic searches for information about elliptical trainers.

This is the point where we get into the marketing of elliptical trainers and where Octane Fitness could easily improve their efforts.

AIDA and SEO

Let's see where Octane Fitness could have done better in the old AIDA model through some simple improvement in their SEO and other online marketing tactics.  We got stuck in the "A" part of the funnel for a number of months, even though we were intent on buying home fitness equipment.

Attention/Interest

Try some searches on elliptical trainers or for elliptical trainer reviews.  The search results, whether you use Yahoo or Google are disappointing and confusing.

The SERPs return mostly SEO'd pages from various manufacturers or online retailers that clearly don't offer any real consumer point of view on the best elliptical trainers.  The landing pages are mostly garbage and devoid of objective information.

Within a few minutes of searching, I came to the conclusion that the entire fitness equipment industry was somewhat sleazy.  Not an environment conducive to immediate purchase decisions and I froze here while I tried to figure out who to trust for unbiased information on the product category.

How could Octane do better to improve Attention and Interest? A few quick suggestions:

1. Build an online community.  It doesn't have to be complex.  It could be as simple as a Yahoo or Google group or a message board.  Get some deep and unique content generated about the benefits of the products.  As that takes hold, real consumer information will start to show on the SERPs and will counteract the impact of sleazy SEO tactics.
2. Improve/start SEM efforts.  I just checked and still see zero efforts by Octane in SEM.  Create a thoughtful SEM strategy that targets consumers at key points in the purchase cycle funnel with the right information to counteract the SEO efforts of the competition.  Octane could have driven me to the right retailer in our area, Fitness Resource, to demo the product.

Decision

How do people decide on which product to buy?  Increasingly, it's through word-of-mouth (or blog).  Octane has to get it's satisfied customers (like me) to write and blog about their products.

How can Octane get customers to blog about their products and participate in community?

1. Launch an effective email program.  I registered my trainer online the day after it was delivered.  As I write this, I haven't received a single communication from Octane.  Why not email me to thank me for purchasing?  Or encourage me to participate in their online community?  Or ask a trainer how to make better use of my purchase?
2. Build the online community. Give people a chance to talk about their product and how to use it.  When prospective customers identify with a current product owner and get an honest and unbiased review of the product, it opens the door for Action.

Action

The key to driving action is to give me an immediate reason to buy today.  If you check out Elliptical Trainer Deals on Yahoo search, nothing from Octane or Octane retailers pops up.

How can Octane Fitness drive action?

1. MDF to retailers for use in SEM.  Provide your retailers MDF to spend on SEM and for incentives, such as free home delivery or a free floor mat, to drive traffic to the stores where the sales people can close the sale.  This is a particularly good tactic if you're not doing any SEM (as appears to be the case with Octane) or if you sell through retailers instead of direct to consumer.

Summary and key takeaways

As you can see, building great products is just the start.  Even manufacturers of physical goods need to use new "pull" marketing techniques to complete the sale.  A quick checklist:

1. Are you using your database? If you're asking for customer information and they give it to you, are you taking the time to thoughtfully engage the customer in a conversation about the products?
2. Give the customers a chance to talk with each other. Even if the interaction between your customers isn't always positive, you have the opportunity to learn about how your products are being perceived in the marketplace.  And if they're collectively raving about the product, you'll rise above the SEO noise screen your competitors might be tossing up.

Are there any products you've used that could benefit from the free/low-cost techniques available now?  How would, say, manufacturers of industrial pumps take advantage of Web 2.0 in their marketing?

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How do you make money?

This is one of the first questions I ask all my clients. The answer usually comes back including some aspect of "buy low, sell high" and other margin-related facts. Regardless of the complexity or depth of the answer, one word is always included.

The magic word is "people."

So why isn't all marketing done on customer lifetime value (LTV)?  What are the five things you need to consider when developing LTV-based models that allow you to build CPA (cost per acquisition) based marketing plans?

You typically don't make money on the one-shot sale.  Your automobile dealership didn't make money strictly on the sale of your car, unless you struck an extraordinarily poor deal.  It was the financing, insurance, trade-in and accessories that made the transaction palatable to them.

The real money is in the service and the 2nd and 3rd cars that you might buy in the future.  (Along with the ancillary financing, insurance, trade-in and accessories associated with those sales.) Acquiring you as a customer is the key to long-term profits for the dealership.

Why doesn't everybody consider an LTV-based marketing model?  

I was speaking to a potential client last week and asked them "how much did it cost to acquire new customer?" and "what is the lifetime value of your customers?"

The fact that they didn't know the LTV of their customers wasn't a surprise.  It was a new business, after all, and they didn't have any history.  What was surprising was that they didn't believe customer LTV and having a solid CPA was the way to look at the business.  Marketing was not looked at as a revenue-generating component of the business. Rather, it was seen as an expense and nothing more than a percentage of sales.

I thought this was interesting. Is it true that there are some businesses where looking at customer acquisition costs and calculating customer LTV doesn't make any sense?

I thought about it all weekend and came to the conclusion that--in the B-to-C space--the answer was no.

If you generate profits by selling to customers, then you need to calculate and understand customer LTV and use that to understand your allowable CPA.

Estimating (or calculating exactly) customer LTV fundamentally only includes about five factors.  They are:

1. Understanding your conversion funnel.  You have to have some idea of the Suspect to Prospect to Lead to Buyer flow. You have to know that conversion rate, because your marketing activities will bring in people in different parts of the funnel. Sometimes, your marketing effort will get you no more than a suspect. Other times, such as in SEM, you'll get somebody who's ready to buy right then. Knowing and understanding the flow of suspect through buyer will help you allocate your marketing dollars more effectively across all your channels.
2. Initial unit of sale and margin on the unit.  You need to know what the initial unit of sale is and the level of profit (before marketing expense) is included in that unit of sale.
3. Opportunity for repeat purchase.  Is your product one that needs to be replenished periodically?  How frequently?  How many of the initial buyers will replenish from you, as opposed to your competitors?
4. Ancillary purchases.  What other products and services do you sell?  What is the attach rate for each of those to your new customers and installed base?  In our case of the automobile dealership, what percentage of the new car buyers will choose to come back to the dealership for routine maintenance?  (And what kind of marketing activities will you have to undertake to encourage them to do so?)
5. LTV window. This is probably one of the most important things to consider.  In the case of our automobile dealership, the lifetime value window for a car buyer in her 30's might be 5 or 10 years.  In the case of a digitally-delivered product--say, music downloads--I think you'd be taking on a lot of risk to consider a window longer than 18 to 24 months.

The rest is just building an Excel model to determine how much you could spend and then developing a bottom-up plan to exhaust all possible marketing channels that can deliver against that allowable cost per acquisition.

Yes, sometimes you'll have to make some assumptions and sometimes you'll not have all the data you'd like.  But if you know the ballpark you're playing in, you'll know which marketing channels might make sense and make your ROMI goals.  You'll also know where to take calculated risks to stretch your marketing budget and grow more quickly.

Summary and takeaways

1. Every business should know the value of a customer over some reasonable time frame, because profits come from selling products and services to customers.
2. It's relatively easy to calculate customer LTV.  Even if the data isn't entirely clean, it's still pretty easy to determine at least the rough value of a new customer.
3. Build your acquisition marketing plans using a known allowable CPA.  Once you know how much a customer is worth, it's easy to figure out how much you'd invest to get them to buy from you.

So what do you think?  Can you really calculate customer LTV for businesses as diverse as magazine subscriptions, convenience store customers and shoe store customers?

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