The CLV three step: drive, convert, enrich. Mike | June 27th, 2011

In a post last week, Ross discussed the need to find a balance between driving traffic and conversion for web-based businesses. It’s a great video and a very valuable discussion of one critical issue of strategic emphasis that many web-based businesses grapple with. Ross’s overriding point was that a business should not choose between a focus on driving traffic or  on converting that traffic, but rather to approach both as a cohesive strategy. But Ross did not discuss a third crucial strategic factor – how to make the most of that new customer once they have converted from a new visitor to a paying customer.

This is where the subjects of revenue enhancement and customer lifetime value arise. As Ross discussed, many online businesses choose to focus only on driving traffic, and lose focus on the need to successfully convert new visitors into those paying customers. The first steps are simple: website traffic is easy to analyze and many tools are available to help managers accomplish that; conversion data can also be tracked using analytical tools such as Google Analytics and others. But once you have been successful at converting healthy percentages of your traffic , it is essential that you turn your focus to supplementing revenue, increasing shopping cart value, and maximizing the lifetime value of your new customers.

The missing factor? Enrich. Businesses need to constantly analyze their pricing, service offerings, products, bundles, add-ons, fees, discounts, promotions, etc in order to maximize the revenue they earn and make certain that they have not left money on the table. If a customer is happy to pay $19.99 for the value you deliver to them, why would you charge $14.99? This can be a complicated process and volumes have been written on this complex science, but a good place for small business to start is testing different price points, offering different bundles to ascertain the customer’s price sensitivity, surveying users to determine their priorities and value perception, and adjusting your business’s value proposition to maximize revenues.

The fact is is that your newly converted customer will open their wallet to you, so you want to help them to do two things: first, convince them to spend as much of their money with you as possible, and second, get them to come back to your business over and over again. These are the two components of Customer Lifetime Value. This can be calculated with a simple mathematical formula: LTV=(APV*n)-CPA, where APV is the average shopping cart value, n is the number of repeat purchases by the customer, and CPA is cost per acquisition. Understanding LTV is imperative; without this knowledge, you can not possibly determine if any given marketing value is worthwhile. For instance if it costs a company called YourCo.com an average of $100 to acquire a new conversion through online advertising or other marketing tactics, that customer spends on average $200 when they visit your site, and the typical customer makes 5 purchase over time, the formula would be ($200*5)-$100 = $900 LTV.  In this example, YourCo.com could spend as much as $899 to acquire a customer and still see a positive return on that marketing investment. Obviously the goal for them is to keep their CPAs as low as possible and their LTVs as high as possible, but you can see that YourCo.com has some good wiggle room as they design their marketing tactics and budget their marketing spend.

So be sure that you can drive the visitors to your site and then convert them to paying customers. But just as important, consider carefully your product mix, value offerings, customer sensitivity to price and pull every lever to maximize that LTV!

photo: icanhascheezburger.com

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