Posted: January 24, 2017
If you're using Google Shopping to build your customer base, let's make sure you do it profitably.
Since you own your customer and you can market to them on an ongoing basis, the effective and actual commission you should be willing to accept should be considerably higher than the commission you pay to a marketplace. Each unique visitor to your site that makes a purchase can be added to email, telephone and snail mail campaigns that incur marginal costs per communication. Understanding and optimizing your customer acquisition cost and the lifetime value of your customer needs to be the definitive focus of your marketing efforts.
Let’s assume your average order value is $50, your average cost per click is $0.30, and your conversion rate is 4%. This means that you’re paying $30 for every 100 visitors. A 4% conversion rate implies that 4 of those visitors will make a purchase for total revenue of $200 (4 transactions x $50 average order value).
Going one step further, let’s say your gross margin is 30%. This means that you earn $60 in gross profit before ad spend on your $200 in revenue and $30 in gross profit after your ad spend. Therefore, the cost to acquire each customer is $7.50 ($30 ad spend / 4 transactions).
Your first sale to this customer contributes $7.50 in gross profit ($50 order value x 0.3 gross margin - $7.50 CAC). Each incremental sale to an existing customer will contribute $15 in gross profit before the cost of follow-up communication ($50 order value x 0.30 gross margin). The average email costs $0.02 to send at scale so you’re looking at $14.98 gross profit per incremental sale.
Assuming you really don’t do a great job of marketing to your customer base and your website does 100,000 orders in a year from 90,000 unique customers. Your average customer is purchasing from you 1.11 times per year. If your average customer shops with you for 2 years, your customer lifetime value (CLV) is $25.78 or a present value of $24.30 if you discount at 3% interest rate.
Now let’s say you decide to put a little bit of effort into marketing to your existing customers via segmented email campaigns. Your monthly emails start paying off and now every 100,000 transactions are made by 80,000 unique customers. Your average customer is purchasing from you 1.25 times per year and shops with you for 4 years. Your customer lifetime value is $67.42, a present value of $59.90.
Knowing how much it costs to acquire a customer and how much that customer is worth are the two most important areas of focus for your business.