True Campaign ROI
Links to LTV (Lifetime
Value)
First published: ClickZ
Forum, "High-ROI Marketing" 10/9/00
The following article is from the advanced topics section; you might want
to take the tutorial Comparing the Potential Value
of Customer Groups before reading it. If you would rather
see a general description of the Drilling Down method and specific
benefits first, go to the home page.
There are several ways ROI thinking is
used in marketing. Some people look at the ad spend versus the
visits or clicks created, and reallocate spending to the highest ROI
(lowest cost) areas, as measured by cost per visit or cost per
click.
Others may be able to take it deeper, and turn an action directly
into a monetary value using ad sales or purchases, calculating ROI
on dollars spent versus profit generated for the campaign.
These "campaign management" applications of ROI thinking,
while a good start, are very front-ended and representative of the
Web's early focus on customer acquisition. They are short-term
oriented and don't include the future value of the customer to the
company in the thought process. Return on Investment is not a
place in time; the notion of a "Return" almost always
implies a longer time horizon.
Here's what can happen with the campaign management approach to ROI.
Let's say one media/creative combination generates
a low cost per action, but these customers fail to repeat the
action. They're "one-timers." Another
media/creative combination generates a high cost per action, but the
customers repeat this action over and over, generating additional
profits with no additional costs.
If you are using the campaign management style of calculating ROI
outlined above to administer this campaign, you could actually be
responsible for ultimately decreasing the future value of
your company. You would be allocating campaign resources away
from the most valuable repeat customers, just because they have a
higher initial cost per action!
The next step towards accurately measuring ROI comes into play when
the Web starts to focus on customer retention.
With a customer retention marketing perspective, ROI takes into
account the LifeTime value of the customer, that is, the net profit
to the company from the customer as long as the customer remains.
A High-ROI campaign starts off by acquiring the right customers,
customers who will continue to contribute to the profitability of
the company after the initial acquisition. ROI is the LifeTime
Value of the customer divided by the acquisition cost. This is
the definition of ROI most customer retention oriented companies
use. It is a sequence of events and measurements over time,
ultimately resulting in a marketing campaign being deemed High-ROI or Low-ROI.
The sum of all the LifeTime values of customers represents the
future profits of a company. Understanding these metrics
allows for accurate predictions of future profits and thus the
valuation of the company as a whole. This kind of ROI thinking
can be very similar to the financial idea of cash flow, with each
customer contributing their own cash flow to the company over time.
So creating a high-ROI marketing campaign starts with understanding
the LifeTime values of the customers the campaign will
generate. You have to analyze the current customer base, look
at customer LifeTime Value relative to how and where the customers
were acquired, and target appropriately.
Customers coming from RON banner ads may have a lower LifeTime value
than customers coming from newsletter sponsorships. If true,
you would move most of the marketing budget out of RON banners and
into newsletter sponsorships. ROI thinking, when applied to
retention marketing, means a migration over time from acquiring low
LifeTime Value customers to acquiring high LifeTime Value customers.
In this way, a marketing budget can remain flat or even decrease
over time even as the value of the customers and business rises.
Let's say you just don't have the time or resources to do a LifeTime
value analysis. Maybe you never tracked customer source and
just can't do the analysis. What are some of the keys to
organizing campaigns along LifeTime Value ideas, given the lack of
ability to determine LifeTime Value?
There are two issues: targeting the campaigns and measuring success.
Targeting on the Web, because of roots in the publishing business
model, has been dominated by demographics. High-ROI marketing
is about ongoing customer behavior, not demographics.
The reality is, you want people to behave in a certain way: to buy,
click, or visit. Outside of some narrowly focused pure
publishing plays, if customers behave as you want them to, how
important are their demographics? You would probably be
surprised how many of your "best customers" are outside
your "core demographic." Demographics should play
second to behavior when targeting for high-ROI marketing campaigns.
People tend to continue behavior they have established in the past.
Using behavior to target implies finding people who do what you want
your future customers to do. If you want them to click, find
places to advertise where click-through activity is high, and
address demographics secondarily. If you want them to buy,
seek media known to be heavy on actual buyers, and address
demographics secondarily. And this time, track the acquisition
source and ongoing patterns of behavior for the customers you
acquire.
The measurement of success, if you don't have the time or resources
to do a full LifeTime Value analysis, can be looked at in two ways:
1. Use proxies for LifeTime Value. The simplest is
repeat buying / visiting. Do the customers coming from RON
banners have a higher or lower repeat rate than customers coming
from newsletters? For examples of other proxy metrics you can
use without actually measuring LifeTime Value, see the article Tracking
the Potential Profitability of B2C CRM Implementations. It's based on
this idea of proxies for LifeTime value and explains the approach in more
detail.
2. Just pick any time period, say the past 30 days, and start
tracking behavior. Customer value is relatively constant
in the short term. Customers who are the most valuable at 30
days tend to be the most valuable at 60 days; customers who have low
value at 30 days tend to have low value at 60 days. Just start
tracking and readjust your horizon as you move along. As
you're doing this, you will begin to discover exactly what a
LifeTime is for customers acquired from different sources.
Want a hint? It's shorter than you think.
Here's the point, folks. You don't have to overcomplicate any
of this. There is no absolutely right way to do it. The
idea is to start doing something, anything, regarding measuring ROI
over a longer timeframe than the point of acquisition of the
customer.
You're already doing a good job with campaign optimization.
Just follow through and tie acquisition source back to the customer
behavior over time, using any metric you consider valuable to your
company. You will end up driving an increase in revenue while
reducing the overall cost of acquiring and retaining customers.
The future value of customers can be
predictably determined by looking at media source, product of first
purchase, time of day, affinity profiles, and many other
"triggers." This is the first step towards improving
customer retention - measuring the value of customers acquired by source.
After measuring customer group value, the next step is to manage
customer value - to make money by creating very high ROI
customer marketing campaigns and site designs. The Drilling Down book
describes how to create future value and likelihood to respond scores for
each customer, and provides detailed instructions on how to use these
scores to continuously improve profitability.
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