The Authentic Eccentric

Today’s NYT (subscription required) had a good article on pay-per-call marketing. Both Google and Yahoo are working on their own versions of this technology, although no concrete announcements have been made by either company as to when it will become widely available.

Click to call advertising has tremendous potential for business owners, particularly those who lack a web presence. Right now, the technology is new enough and the advertisers few enough that it is still a comparative bargain - that landscape will change over the next 12 - 18 months as larger advertisers move into the space.

Still, success with pay-per-lead campaigns all begin at the same point - knowing the value of a customer to your business. While it takes time and information to determine this, it pays off quickly by ensuring that you don’t overpay for your campaign.

To determine the value of a customer to your business, you have to look beyond the inital purchase and consider the lifetime value of your client, i.e. the number of times that buyer comes back and buys from you. While it’s possible to tie yourself in knots attempting to calculate referrals and other variables, at it’s most basic, the equation then looks something like this:

Estimated Lifetime Value [Average by Customer] = ($ value of Average Sale) x (Estimated Number of times reordered or resold)

Putting this into practice, let’s consider a real life example, shall we?

For the past 10 years, I’ve been buying my heating oil from Woodfin oil. Our average purchase is $300 and we typically reorder 4 times. Our personal equation looks like this:

$300 average sale x 4 annual orders x 10 years = $12,000.00

So, my value to the company is presently $12,000. Since I don’t have their specifics, I can’t give you an actual profit figure on that number, but let’s assume for the purposes here that they have a 20% net operating profit, which means that our $12,000 in revenue equals $2,400 in actual profit to the company.

If I were the savvy marketing person charged with acquiring new clients like myself (long relationships, predictible ordering trends, on time payers) I would be willing to pay up to $1,200 to acquire them. I would also then make sure that I did a good job marketing our add on services to that client (via newsletters, an informative website, ongoing price alerts or email specials) to increase the incrimental account revenue to improve the bottom line value of each acquired customer.

Not really sure this math works? I promise you, it does - when my furnace went out two weeks ago, who do you think I called to replace it? If you guessed Woodfin, you guessed right - I happened to see them at a home show in January and signed up for their newsletter, so when my furnace went out, instead of shopping around, I called the vendor I knew and trusted. Again, while I don’t know their precise margins, I’m guessing they made ~$1,800 on that deal, alone.

Clearly, advertising and marketing alone isn’t enough to keep a client happy during a ten year relationship. Woodfin has done all of the right things to keep my business, from offering after-hours service to polite, informative technicians. While that has a cost, it’s a sunk cost - those are the choices they have (wisely) made to keep their business relevant. If all of those factors weren’t there, I wouldn’t continue using them, but then customer defection rate is worthy of a whole other post.

My point is, a comparable competitor (of which there are several in the area) should be willing to spend up to $1,200 to acquire similar customers if they do the math to understand what those customers are actually worth. In the old economy, those funds would be spent on tv, radio and print advertising. In the new economy I would turn to Google, Yahoo or Ingenio (the company who offers pay-per-call) and create a targeted campaign to acquire new clients.

To illustrate just how effective this is for businesses, I went ahead and set up a Google campaign to test a pay per click ad, using keywords including heating oil, home heating oil, oil and heat - the effective cost per action is $1.01 when chosing a targeted geographic area within 50 miles of their main office. Just those limited terms generated 9 potential leads per day at a total cost of $13.30 - if more were desired, then I would continue to increase the keyword terms until I reached my ideal target.

Obviously, your actual conversion rate also plays a factor in this equation - if you get 9 leads and can convert 10% of them online, your actual cost per lead is $11.97, still significantly lower than the $1,200 we budgeted.

Now, take that same scenario and convert it to a click to call campaign for a business with an experienced telephone sales team. Their conversion rate is much better - they are able to close 30% of those 9 leads using a click-to-call campaign that costs double what Google charges, or $2.02 per call for a total of $18.18. The actual cost per lead then comes to $6.73, because we improved our conversion of those prospects into customers - still significantly below the $1,200 target acquisition cost.

The additional funds can be then invested into educational newsletters, customer care programs and other loyalty enhancing activities that might otherwise have been cut out of the marketing budget. Then, instead of feeding the revolving door of unprofitable customers, you are acquiring ones that are a good fit for your business and then growing/maintaining them instead of constantly replacing them.

Nimble businesses are already benefiting from the explosion of pay-per-lead marketing options. By understanding the lifetime value of your customer, you can spend precisely you need to, knowing that you aren’t over-paying.

Questions? Random bursts of thought? Talk back via our comments section.