How much should I Pay Per Click relative to Lifetime Value of the customer?
For simplicity assume conversion rate is 10%, and margin is 50%. How much should I pay for the visitor in relation to the lifetime value of the customer?
PPC/10% < LTV*50% has to be true, but by how much?
Adwords Advertising PPC Customer Value
-
I am charging customers for product upfront for 1 year. I am not certain how many will stay after the first year. So right now I have LTV = "Product Price for Year 1" – Tim Nikolaev 13 years ago
3 Answers
Technically its when the two marginally equal zero. So cost of aquiring customer marginally = the life time value of the customer marginally. However though that is acurate at day one you will not know your LTV. You can estimate it but you will not know how long the customer will continoue to stay. I believe your main decison making factors has to do with cash on hand for aquiring customers. So that is your limiting factor that is the main focus in the beginning of the business. Later it will be what I first stated because you'll know the various rates of conversion cost price payouts and loss of your customer. So I would focus on postive cash flow at first unless you have another line of cash coming in that would replenish your marketing costs.
-
Thank you! Should I budget some revenue from each customer into future development of the product or acquire customers as long as I am breaking even? – Tim Nikolaev 13 years ago
-
When making budget choices you look at the whole sales funnel. Impressions -> (clicks or interest -> try it out - > purchase. Improving your product is a value proposition change and so it is between the try it out and purchase conversion rate. Probably changes many other parts of the sales funnel (not shown) like duration a customer stays a customer and word of mouth to other customers. So I would suggest measure each of the funnel points and improve the one that is the greatest profit. All of them need to work for sales. I'd suggest product development is part customer aquisition. – John Bogrand 13 years ago
The answer has to do with the confidence you have in your assumptions. If you are certain about your conversion rate, your margin, and your lifetime customer value, anything up to PPC/10% = LTV*50% is fine. Furthermore, the period of time over which you will collect this lifetime value is a factor. The fact is you are guessing at all the numbers at this point. You imply in your comment to Genadinik that you need to be profitable from day 1. So let me make this suggestion. You will have to make an investment in advertising with no expectation of a return on that investment as a test. Figure out the amount you are willing to commit. Then run a test and get some actual numbers. You should be able to see your conversion rate and your margin. The LTV will still be a guess but at least it can be a somewhat educated guess. Now you can actually do some calculating.
-
I already did exactly that and from a small sample PPC run have the conversion rate and am pretty certain that I know the margins. In your opinion I should acquire customers as long as I am just breaking even? – Tim Nikolaev 13 years ago
-
@Tim Nikolaev, I am not suggesting you just break even on LTV, I went with LTV*50% as you already stated that in your question. However, LTV is still unknown. If you have no further capital to invest, your choices are to A) target breaking even on the first payment; or B) wait until subsequent payments come in to fund your PPC campaign. Choice A is very conservative and choice B is slow. The bottom line is you will need to invest some money in acquiring customers more quickly or grow slowly organically. – Kenneth Vogt 13 years ago
It depends on what phase of the business growth you are in.
In a "growth" phase you should overpay and try to get as many customers as possible. If you are conservative and have to be mindful of profit margins, then obviously you have to follow the math that makes sense then.
Also it depends on your particular business, and the niche. Just doing random math without knowing what your competition is doing, or the future of your business segment, is like throwing darts into space.
-
Very early stage: I am focused on have positive financial growth from day 1. Each new customer adds profit. – Tim Nikolaev 13 years ago
-
@Tim If you are very early stage, then very likely you do not really have a strong idea of lifetime revenue per customer. This is one of those things where you have to experiment and learn what really works in your business niche. – Genadinik 13 years ago
