I'm sure you've read a thousand pieces in the press or online recently that start with the phrase "in the current economic climate." Personally, I find myself becoming a little bit jaded toward this statement, even though it's affecting everyone in the same way. I'd like to suggest that before any of us start to feel sorry for ourselves because our acquisition budget has been cut in half, we need to return to grassroots.
This means taking a step back, looking around at current visitors or customers, and realizing their value. It is vital to understand just how much they are worth and whether there are opportunities for growth. In fact, as well as working hard to retain existing clients, it's likely you can clone your best customers by identifying look-a-likes and targeting those that you can grow.
There are three key metrics that you'll need to look at to do this: lifetime value (LTV), churn rate, and penetration.
Lifetime value
The most difficult part of calculating LTV is deciding what a "lifetime" actually is. It is generally considered to be the amount of time a customer will stick around before defecting and leaving your business. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.
The lifetime value concept has been somewhat misinterpreted from the very beginning of the dotcom era. It's really not necessary to figure out an absolute lifetime value for a customer or wait "a lifetime" to find out the value. If you are new to this concept and have not tracked the appropriate parameters, or your company is new and lacks meaningful operating history, you can link relative lifetime value to customer behavior and still get tremendous leverage from using LTV within your business model.
Here's a very simple example: Say I run the same ad on two different websites and get response from both. When I look at the data a week later (for a visit alone) or 30 days later (for a success event like a purchase), I find a high percentage of repeat visitors or buyers from one and a low percentage from the other. Repeat behavior indicates higher lifetime value and predicts future repeat behavior, regardless of what the actual monetary lifetime value is. I can move spend from the site that delivered a low return to the high one and achieve a higher ROI without having to measure anything but repeat behavior.
Churn rate
When it comes to customers, you win some and you lose some. Some turnover in the customer base is inevitable, but too much is a serious problem. Most dramatic is when customer losses (or churn) exceed new customer wins.
However, not every prospect is a customer, and not all customers are active at a given point in time. A customer that has not responded to any of your outreach within a predefined period of time is referred to as an inactive customer. Why do customers become inactive? Is it that the customers have stopped purchasing the product or service you are providing altogether, or have they simply gone elsewhere?
So, what is the appropriate churn level for a company? You would probably answer that it is the level where the company's profitability does not get affected. But what is that exactly? The Pareto principle states that 20 percent of customers will provide you with about 80 percent of your business -- so theoretically, it could be huge.
Penetration
The third stage of working out the behavior of your current customers is penetration. This is a quick way to determine how successful your campaigns and activities are in drawing customers further into the sales process. It often comes as a surprise to many e-tailers that most of their visitors never get past their homepage. You spend all of that marketing money driving traffic to your site, only for visitors to do an about-turn immediately upon arrival. In fact, most of that traffic leaves before your homepage is even finished loading.
An easy way to calculate penetration for, say, a brand's website is to divide the number of unique visitors that click on any interior page by the total number of unique visitors that arrive at the homepage. Multiply this number by 100, and you've got a number that represents the percent of people who go at least one level deeper into your sales process. Subtract this number from 100, and you've got the percent of people that don't even make it past your homepage.
By taking all of these metrics into consideration, you can focus your spend on activities that are already making you money, have been proven, and have a customer base upon which to expand.
Rebecca Ellis is SVP of Marketer Solutions at Acceleration.
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