Why do people spend massive amounts of time, energy, and money to summit the highest mountain peak in the world? They have assigned a high value on achieving this goal. The reasons may vary for each individual but all of them understand the cost and are committed to reaching the summit.
In order to fully understand the value of a conversion, we need to work backward. Starting with the king of the mountain, the customer.
What is the value of the Customer?
Say the average cost of a product or service that you offer is $800 and the average customer purchases once every year. Your customer value is $800.
However, maybe your sales model is more complex. For instance, you may determine that over the next 3 years a customer is actually worth 5k based on up-selling and inflation.
Thinking about the lifetime value of a customer is very important. This will have an influence on the amount of time and effort you put into customer retention. We can talk about this later…
What do you consider a Conversion?
Remember multiple goals and actions can be considered conversions.
- Arriving on a landing page
- Email Submission
- Request for a Quote
- Adding a product to the shopping cart
- Entering Payment Information
- Purchase / Sale
After you place a value on your loyal patron and clearly understand what you want them to do (aka Conversions), the next logical question is: How much are you willing to spend?
What is the Acquisition Cost?
If Joe Loyal is valued at $800 and your profit on his yearly purchase is $400. How much of that cold hard cash are you willing to part with to acquire more Joes?
If you have a loyal client base that returns year after year, then you may reason that a higher acquisition cost will pay off over the lifetime of the customer.
Your acquisition cost will vary depending on the marketing channel (Facebook, Google, Instagram) and the value of the conversion.
The acquisition cost for capturing an email may be as low as $0.50 but the initial value of this type of conversion is much lower than a conversion directly resulting in revenue.
But don’t lose sight of the big picture when assigning value. Remember that a simple email capture could result in sales through a follow-up email campaign.
What is the Conversion Rate?
If 100 people click on your Facebook ad and visit your website but only 10 actually enter their email requesting product information your conversion rate for an email capture is 10%.
If you knew that for every 100 emails captured requesting product information 1 resulted in a purchase then simply divide the average purchase by 100 to find the value of an email capture.
Why is this important? Knowing the conversion rate will allow you to allocate your media buy commensurate to the value you have assigned to each conversion type.
Let’s take a look at the BIG PICTURE. Welcome to Conversion Mountain:
- Understand the value of your customer.
- Clearly, define what you consider a conversion.
- Decide what you are willing to spend for each conversion type.
- Learn how conversion rates impact your advertising budget.