In the past couple of weeks I’ve spoken with two CLV converts — one of them a banker who runs his own advisory practice, the other a client of mine. Both of them told me that CLV had transformed their perception of marketing. As the banker put it, “Marketing was too squishy for me before I understood CLV.” Today, he uses the CLV equation to advise SaaS companies and identify weak spots in their sales and marketing platforms. As for my client, he now computes CLV for three types of customers and uses these calculations to allocate scarce marketing dollars with clarity and confidence.
So we know how great CLV is for devising a marketing budget and optimizing marketing activities. But for young companies especially, CLV can be hard to calculate — they may not have the data, or they may still be struggling to attract customers. In that case, it’s more important than ever to spend marketing dollars wisely along each step of the marketing funnel. So how do you do that?
A Simple Scenario
Let’s approach this problem with a simplistic scenario. Say you sell a subscription service where you expect your typical customer to contribute $300 in revenue over time. So you know you want to keep the cost of acquiring a customer well below $300 — maybe you set $100 as your target. Armed with that number, you create an AdWords campaign and tell Google to target an acquisition cost of $100. Done.
If only it were that simple, right? In real life, you need more than one marketing channel to get customers. In addition to AdWords, you’re hustling to add people to your mailing list; you’re providing free phone consultations; you’re offering a freemium service as a gateway to paid subscriptions. And you know that only a fraction of the people who request a phone consultation or sign up for freemium services will convert into paying customers.
So how do you value all these marketing activities along the path to purchase? You do it by breaking down your funnel and assigning each component an economic value.
Let’s do this now with another example.
Assigning an Economic Value to Each Step of your Marketing Funnel
Say you sell on-demand website maintenance for $300/month. And say you know that the following three events lead to a paying customer:
- Referred to your website from AdWords: 100%
- Registers for a phone consultation: 30%
- Signs up for a free trial: 15%
- Converts into a customer: 2%
In other words, for every 100 visitors to your site from AdWords, 2 of them convert into paying customers, providing $600 in revenue.
Knowing that, how do you allocate budget to your various marketing activities? Well, take that $600 in projected revenue and divide it up across your funnel, like so:
- 2 out of 100 AdWords visitors to your site become paying customers, so an AdWords visit is worth $600/100 or $6.00.
- 30 out of 100 AdWords visitors registers for a phone consultation, so a phone consultation is worth $600/30 or $20.
- 15 out of 100 AdWords visitors signs up for a free trial, so a free trial user is worth $600/15 or $40.
Why Is This Beneficial Again?
Having put a monetary value on each step of the path to purchase, you know how much you can spend on each marketing channel while remaining profitable. So if an AdWords visit is worth $6.00, I will use that figure to set my cost per click (CPC). If a phone consultation is worth $20, I’ll put a $20-per-lead cap on remarketing to prospects who did a phone consultation.
Once, at a meeting, I estimated that the cost of gaining an email subscriber through Twitter or Facebook (I don’t remember which) would be $0.80. “Well that’s cheap,” one of my colleagues said. But how did we know it was cheap? Was $0.80 actually wildly expensive? By determining what percentage of our email subscribers turned into paying customers, we could have made a more informed judgement.
This Works for Apps, Too
Of course, you can apply this method to other business models and products, such as apps. In that case, your funnel for a certain customer segment might be:
- Downloaded the app from your website: 100% of users
- Registers to become a member/completes profile: 80%
- Starts a free trial: 40%
- Converts into a paying user: 10%
Same thinking applies here. If you expect a user to contribute $200 in revenue over their customer lifetime, then in this case, then you’re looking at $2000 in revenue from your 10 customers. That means an app download is worth ($2000/100), or $20; a free trial is worth ($2,000/40), or $50; and a registration is worth ($2,000/80), or $25.
But Don’t I Need Data to Do This?
Yes, you need marketing performance data to make these simple calculations. But if you’ve got your analytics set up, that isn’t difficult. Take the example of the website maintenance business: Every step of the funnel can be tracked in Google Analytics, as long as your AdWords and GA accounts are linked, and you’ve set up your Goals properly. Then all you need to do to arrive at the percentages above is to filter your data to show visits from AdWords only…and you’re on your way.