Blog

LCV and PPC – How To Outsmart and Outspend Your Competition With AdWords and Paid Search

How happy are you with the amount of traffic you’re driving to your website these days? Wish you could have more? Wish you could have any at all?

Whether you already have an existing website or you’re still just in the early stages of thinking you might want to start one, traffic is the holy grail you will be seeking.

Unfortunately, sometimes it seems like it might be easier to find the real holy grail than generate the traffic you want for your website.

It’s a simple problem really, no traffic = no list building = no list = no one to sell to, and… that = no money.

So, what’s a poor traffic starved website owner to do to generate more traffic and kick up the volume of lead generation?

There are several options, and they range from high effort and free options to low effort and paid options. I’ll talk about the no cost options at a later time, but for now, let’s talk about the paid options and, more specifically, what you should be willing to spend on them.

Since it’s the simplest and most common pay for traffic solution these days, let’s talk about figuring out how much you should be willing to pay for Pay-Per-Click ads. Okay?

Pay-per-click is also known as PPC, and it’s one of the simplest and quickest ways to get traffic to your website.

Basically, you cut a deal with a search engine like Google, Yahoo or MSN, or another site or network that has traffic and you get to place small ads on their sites with links to your site.

What’s the catch? Well, you have to pay the search engine or site owner each time someone clicks on your ad.

That’s not a bad thing though, as long as you have something to sell them when they get to your site AND you know what a customer is worth to you over the lifetime of your relationship with them.

Knowing what your customer is worth to you is important, because you can’t know how much you should be willing to spend to get them to your site if you don’t have a clue how much they will spend with you – not only once they get to your site but also over the full term of your relationship with them.

Before we get started talking about numbers, let’s make a couple of assumptions that will simplify our examples. For purposes of our discussion, we’re going to assume NO product/service cost and NO transaction costs.

That is, we’re assuming you’re selling an information product that’s a download so it doesn’t cost you anything when someone buys it. If you have a product or service with an associated cost, then you would have to deduct that from the numbers I’ll talk about below.

Similarly, I’m assuming you sell the product/service directly, so you have no affiliates or other third parties to pay in connection with the sale, AND that you sell for cash or check, so there is no credit card, Paypal or other transactional fee involved.

Got it? Okay, good…

Let’s say that you sell a $60 product, and that you know that 20% of the people who come to your site on average will buy the product. If that’s the case, then the average visitor to your website is worth 20% of $60, or $12.

Knowing that, you know that you can pay up to $12 per lead to your site on average without losing any money. Are you with me so far?

But, what if you are also selling OTHER products and half of the people that buy your $60 introductory product go on to spend another $400 with you buying your other stuff?

Armed with that information, you now know that a customer is not just worth $12 to you, it’s worth $12 (price of your intro product that everyone buys multiplied by the percentage of visitors to your site who buy it) PLUS ANOTHER $200.

Why $200 and not $400 or some other number?

Simple, if one half of your customers go on to spend an extra $400 with you over the term of your relationship with them, then EVERY customer is worth ON AVERAGE $200 more than their initial purchase.

Figure it out by dividing the total extra spend of $400 by the number of customers who usually go on to spend that amount (one half). One half of $400 = $200. Make sense?

Knowing that gives you a tremendous advantage over your competition who doesn’t have a clue what their lifetime customer value is.

When you are competing for PPC traffic, you do so by bidding against other advertisers in an auction kind of environment.

Let’s say you sell video cameras, nutritional products or weight loss systems. You will be bidding on key words related to those products or systems, and there will be other people bidding too.

If you know that the initial customer spend on your site is the $60 we’ve been talking about with 20% of your visitors buying, then you know you can’t spend more than $12 to get someone to your site, or you will lose money.

BUT… If you ALSO know that on average one half of the people that spend that $60 on your initial product spend another $400, then you know that you can actually pay a LOT MORE to get potential buyers to your site.

In fact, based on our calculations above, you can actually spend up to $212 to get someone to your site and still break even.

We get that number with the following math:

(20% of visitors buy for $60) + (50% of buyers spend an extra $400), which is the same as…

(20% of $60) + (50% of $400), which is the same as…

($12) + ($200) = $212. Make sense?

So, while you may be selling or advertising a lower priced product on your site, you might be willing to spend a lot more than the price of that product to get people into your marketing funnel so you have the opportunity to sell them more stuff.

What’s the competitive advantage to having this knowledge?

Easy! You see, if your competition doesn’t know what a customer is worth to them, they will not be willing to spend more than what they think they will make off of the initial sale to get a client.

Because you know that a customer is worth much more to you than just that initial sale, you may be wiling to actually LOSE money on the first sale, just to get them in the door and be able to market other products or services to them.

Knowing that lifetime customer value gives you the edge by letting you know what your maximum ad spend should be, and THAT is a HUGE advantage.

In fact, knowing your Lifetime Customer Value or LCV can give you the confidence to leave your competition in the dust by intelligently outspending them on a consistent basis.

I am a Commerce, Computer and Law graduate. I am running my own IT Company since 1993. I like to Read, explore Hindu Sanskruti, Travelling and Riding/Driving.

No Comments
Post a comment