When using a single sale for budgeting, the breakeven conversion rate for the campaign is 0.934%. When using the LTV, the breakeven conversion rate is lower: 0.374%. The company may experience a much lower conversion rate (lower number of orders), yet still generate profit —although not immediately.
You should apply LTV calculations cautiously. On the positive side, when using the customer LTV calculation, companies are willing to spend a lot more to run PPC campaigns. However, on the negative side, they are basing the LTV calculation on longer-term assumptions and predictions, which can be risky.
Some of our clients complain that the numbers for LTV keep changing. They’re right. The biggest challenge is lack of concrete data. This could be the case particularly for many new businesses, but it could also happen with well-established businesses if they are not aware of this. If there is no system in place to track customer retention rates, LTV calculations are based on guesses at best.
There is also debate regarding how much data is needed to accurately assess the LTV of a customer. Is it enough to have six months’ worth of data, or do you need multiple years’ worth? Also, how do you determine how long a customer will remain with the company? Some LTV models calculate a customer’s value to be five to seven years. That might work for some businesses, but definitely not for all.
You may find that your competitors are willing to spend a lot more per click. Likely reasons for this include the following:
Your competitors did not do the math, and eventually they will get to it.
Your competitors are converting more of their traffic into customers.
Your competitors are using the LTV model, perhaps a very optimistic LTV model, in their calculations.
Your competitors have been advertising for a long time, and they are able to lower their PPC spend.
Calculating conversion rates gets a little more complicated for lead generation websites. With these sites, the campaign goal is to convince visitors to give out their contact information, such as an email address or telephone number, so that the sales team can follow up with these leads. The actual conversion takes place offline. The offline conversion rate is impacted by any of the following:
The more money a customer is expected to spend, the lower the conversion rate will be. It is typical for companies selling software or consulting services that cost thousands of dollars to have an offline conversion rate of around 5%. On the other hand, lead generation businesses that require customers to make smaller investments can have an offline conversion rate anywhere from 15% to 20%.
Two elements control the success of online lead generation campaigns:
Let’s take an example of a roof repair company that runs a lead generation campaign. The average profit per customer is $500. The company does not expect any repeat business from its customers. In planning the campaign, the marketing team makes the following assumptions:
The following shows how to calculate the campaign budget assuming an average cost of $2.50 per click:
| Pay-per-click budget = 10,000 * $2.50 = $25,000 |
| Total number of leads generated online = 10,000 * 10% = 1,000 leads |
| Total number of sales generated offline = 1,000 * 15% = 150 sales |
| Total revenue = 150 * $500 = $75,000 |
| Net profit = $75,000 – $25,000 = $50,000 |
Table 2-5 shows campaign profitability based on paying an average of $2.50 and $5 per click.
|
Campaign with $5 per click cost |
||
|
Total number of visitors |
10,000 |
10,000 |
|
Pay per click |
$2.50 |
$5 |
|
PPC budget |
$25,000 |
$50,000 |
|
Online conversion rate |
10% |
10% |
|
Number of leads |
1,000 |
1,000 |
|
Offline conversion rate |
15% |
15% |
|
Number of deals |
150 |
150 |
|
Profit per deal |
$500 |
$500 |
|
Margin |
$75,000 |
$75,000 |
|
PPC cost |
($25,000) |
($50,000) |
|
Additional cost |
($15,000) |
($15,000) |
|
Total profit |
$30,000 |
$5,000 |