ROI, ROI, ROI. I like to think that the blog isn't purely about ROI, but it's kinda important so there have been a few articles about it recently. New research by Washington University argues that most online marketers fail to take account of the impact of their online work on offline behaviours, a thing they call cross-channel sales spillover. They also believe that the traditional last click wins method of attributing revenue stinks because it inevitably fails to account for lifetime revenue from that customer.
The researchers developed an empirical method of calculating the lifetime value of customers acquired via search advertising. The research suggests that the average value per click from SEM is around $10, so a healthy profit on the average cost per click of around $0.80.
Suffice to say that search advertising is already attractive to marketers because it provides such a natural fit between what the customer needs and what the company supplies. The act of searching provides advertisers with a ready supply of people in the right mindset to buy, something that cannot be said for social media advertising, despite the ability to target by demographic. If you can quantify the lifetime value of each new search engine customer though the value grows significantly.
By merging web traffic and sales data from a small-sized U.S. firm, the researchers created an individual customer-level panel that tracks all repeated purchases, both online and off-line, and tracks whether or not these purchases were referred from Google search advertising.
The results revealed that customers acquired from Google spent more often than those acquired from other channels. When you take into account the cross channel spillover as online customers shop offline as well then the value increases still further.
“The conventional method normally just looks at online transactions, that are one-time transactions,” says co-author Ying Xie, associate professor of marketing. “But in our method we propose that we should think about the customer’s lifetime value.
“In their lifetime, they could be an active customer, repeatedly making purchases. The cumulative amount of these purchases—that’s the profit stream we should take into account.”
To derive the lifetime value of each customer the researchers aggregated three data sources to help construct a customer data panel that allowed them to track online browsing history, repeat purchases and data from both online and offline channels.
They then developed an integrated model of customer lifetime, transaction rate and gross margin. Based on their model’s estimates, they find that the firm would incur a loss of $48 on average to acquire a new customer if using the conventional method.
After accounting for sales spillovers across channels and the long-term effect, the estimated value of customer acquisition is as high as $950 per customer.
The video below sees the researchers talking about their findings.
If you want to start tracking the lifetime value of your customers the ever excellent Avinash Kaushik has some great tips on how you can begin to measure lifetime customer value.