Jordan Elkind – Search Engine Land News On Search Engines, Search Engine Optimization (SEO) & Search Engine Marketing (SEM) Fri, 15 Aug 2014 08:00:03 +0000 en-US hourly 1 https://wordpress.org/?v=5.5.1 The Single Metric Every SEM Acquisition Marketer Should Be Tracking /single-metric-every-sem-acquisition-marketer-tracking-192916 /single-metric-every-sem-acquisition-marketer-tracking-192916#respond Wed, 04 Jun 2014 14:45:28 +0000 http:/?p=192916 When it comes to SEM acquisition marketing, there’s no such thing as a free lunch. As acquisition marketers can attest, there’s almost always a tradeoff between the number of new customers acquired, and the customer lifetime value (CLV) of those customers. In short: The more new shoppers you bring in the door, the less each […]

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When it comes to SEM acquisition marketing, there’s no such thing as a free lunch.

As acquisition marketers can attest, there’s almost always a tradeoff between the number of new customers acquired, and the customer lifetime value (CLV) of those customers.

In short: The more new shoppers you bring in the door, the less each of those customers is likely to be worth to the business in the long run.

What accounts for this widely-observed phenomenon? There are a couple of factors that explain why number of customers acquired and CLV tend to move in opposite directions:

  • Self-Selection. As a thought experiment, consider two customers: one who clicks on your paid search ad in a top position, and one who seeks you out on page three of search results. Which customer is more likely to have a strong affinity for your brand and products? Probably the customer who was willing to wade through all those pages of search results!

    In contrast, the customer who clicks on your paid search ad shows less self-selection toward your site — they may simply be curious but ultimately have a lower level of brand attachment, resulting in a lower CLV.

    The same principle is true across all paid acquisition channels. Gaining a wider reach often comes at the expense of acquiring just high-value customers. The consequence? “Acquisition double jeopardy.” Customer acquisition shows increasing marginal cost (it costs more to acquire each new customer than the customer before) as well as diminishing marginal returns (each new customer is likely to be lower-value than the previous one).

  • Organic Customer Mix Evolution. Relatedly, many businesses start with a small but fiercely loyal coterie of brand loyalists. Over time, they start attracting a more diverse mix of customers, including those with less attachment to the site and its products.

  • Seasonality. The holiday season is generally when retailers bring the most new shoppers in the door — but those customers are often disproportionately flighty and price-sensitive. On average, their lifetime value is 15% lower than that of shoppers acquired during other times of the year.

    Many times, these shoppers are “gifters” with little natural brand attachment, or they were enticed into placing an order with steep promotions. (Think Cyber Monday or last-chance holiday rush.) As a result, fewer of these folks tend to stick around after their first purchase than customers acquired at other times of the year.

ccm_retain

Of course, the job of the retention team is to maximize the value of every customer relationship.

But as an acquisition marketer thinking of your customers as an investment, you need to be able to optimize the tradeoff between the number of new customers and their value to the business — to determine, in other words, what level of acquisition spend on Google AdWords will provide the best return on investment (ROI).

This means you need to find the sweet spot between quantity and quality — and the single most important metric to help you optimize that tradeoff is customer equity.

Customer equity is a metric that provides visibility into that tradeoff. In this case, it represents the amount of new customer value generated in any given period (whether it’s a week, a month, or a quarter) through new customer acquisition — in other words, the cumulative long-term value of all the new customers acquired today.

Here’s how customer equity is calculated:

Customer Equity = # of new customers acquired * new customer CLV

Note that customer equity represents a tradeoff between the quality and quantity of new customers acquired. Teams can boost the new customer equity generated in a given period by acquiring a greater number of customers (without a commensurate decline in their predicted long-term value), or by acquiring more valuable customers (without too great of a decline in the number of customers acquired).

For example, all else being equal, a company would prefer to acquire 10,000 customers in a given month worth $120 each in CLV ($1.2 million in customer equity), than to acquire 15,000 each worth $75 ($1.125 million in customer equity).

The Definitive KPI

For businesses that are serious about viewing their customers as long-term investments, customer equity is the definitive key performance indicator (KPI). And in the best customer-centric marketing organizations, it’s a dashboard metric tracked by everyone from SEM channel managers all the way up to the CMO. Teams can easily use cohort analysis to determine historical CLV, or a predictive analytics platform to identify the CLV of actual recently-acquired customers.

For most teams, it makes sense to track new customer equity on a monthly basis. That’s typically the cadence at which acquisition strategy decisions are made (e.g., shifting budget between different acquisition channels); and for the majority of retailers, it provides a robust sample size for tracking changes over time.

Customer Equity, as important as it is, is not the only metric customer-centric marketing teams track. It is joined by KPIs like Repeat Rate, Winback Rate, and The Leaky Bucket Ratio (read more about these KPIs and download a cheat sheet of them here).

Ultimately, customer-centric marketing is about understanding what makes customers unique. For acquisition marketers (for both SEM and other channels), this comes down to the CLV impact of varying acquisition strategies — and customer equity is the single most vital tool for acquisition marketers in optimizing their strategies around long-run customer value.

Images by Matt Brown, courtesy of Custora.

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6 Steps To Boost The Profitability Of Your SEM Acquisition Program /6-steps-boost-profitability-sem-acquisition-program-187455 /6-steps-boost-profitability-sem-acquisition-program-187455#comments Wed, 16 Apr 2014 13:20:49 +0000 http:/?p=187455 Imagine that your job is to stand outside a barber shop and bring in new customers. If a businessman with shaggy hair comes walking by, you give him a big wave and a hello. If a bald man walks by, not so much. This analogy is used by Google AdWords to describe its Enhanced cost-per-click […]

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Imagine that your job is to stand outside a barber shop and bring in new customers. If a businessman with shaggy hair comes walking by, you give him a big wave and a hello. If a bald man walks by, not so much.

This analogy is used by Google AdWords to describe its Enhanced cost-per-click (ECPC) feature. The feature is intended to identify auctions that are more likely to lead to conversions — and to automatically raise bids to “work harder” for those sales. It’s a powerful concept, and one that has understandably gained traction in the SEM community.

Imagine if you could take this logic a step further. Imagine that you could identify those Ad Groups (or even keywords) that are likely to attract great customers — shoppers who are likely to turn into loyal, long-term, repeat buyers and develop a relationship with your site far beyond their initial conversion.

Wouldn’t you be willing to spend more to acquire those customers? Odds are, you would.

While PPC accounted for 15% of conversions this January — up from 14% in January 2013 — the growth of paid search was eclipsed by the explosion in other channels, like organic (26% in 2013 to 30% in 2014) and email (12% in 2013 to 15% in 2014). These figures come from The Custora Pulse, a free US e-commerce industry benchmark, aggregating transaction and customer data from over 100 US e-commerce retailers, developed and updated by e-commerce marketing analytics company Custora (disclosure: my employer).

In other words, while PPC is still growing, the channel won’t always provide a boundless stream of prospective new customers — so, it’s important to focus on the long-term value of the customers that your paid search program is helping you acquire.

The Opportunity For Search Marketers

The traditional approach to SEM management has been to optimize return on a particular Ad Group or keyword by tracking the value of a conversion against the cost to acquire that conversion. We can think of this as managing for immediate payback. Here’s a simple numerical example:

  • Average cost-per-click (CPC): $3.00
  • Conversion rate: 20%
  • Cost/conversion (transaction): $3.00/20% = $15.00
  • Value/conversion (=transaction amount): $30.00

Return: $30.00/$15.00 = 2x

But let’s say that the conversion in question belongs to a brand new customer. That initial purchase may capture only a fraction of their long-term value to the business. And, where a retailer may only want to pay up to $30 to get that initial conversion, that might go up to $45 or $50 when the customer’s long-term value is considered.

Enter Customer Lifetime Value (CLV)

Savvy digital marketers have long recognized the importance of aligning a customer acquisition strategy around customer lifetime value (CLV). CLV represents all of the profit that we expect to make from a particular customer over his or her “lifetime” in our store. It includes the profit from the initial conversion, as well as any subsequent purchases that he or she may go on to make in the future.

The key insight, as any marketer can tell you, is that not all customers are equal. Some make a single purchase and then vanish forever. Others turn into loyal, repeat shoppers. And, if you could identify the channel, affiliates and ad networks that were attracting high-value customers, you’d want to invest more in them. This isn’t just a thought experiment. Customers acquired across different paid search terms frequently differ in long-term value by as much as 30% or more.

Furthermore, most of this difference is driven by your customers’ likelihood of making repeat purchases down the line — not by initial order value. In other words, if you’re optimizing your SEM program solely on immediate payback, you’re leaving money on the table. If you could identify the Ad Groups that are bringing in your highest-value customers, you could invest more, knowing that you’re still driving a robust return on new customer acquisition.

Optimizing Paid Search For CLV

So, how can search marketers actually leverage CLV to boost the profitability of their acquisition marketing programs? The key is to gain visibility into the customers that you’re acquiring across campaigns, Ad Groups and keywords, and to use those insights to guide your SEM strategy. Here’s how to do it:

Step 1: Move From Transactional Metrics To Customer-Centric Metrics

Google Analytics’ e-commerce tagging lets you pull data associated with unique order IDs. Matching this data up with the order IDs in your database enables you to associate orders with customers. So, you can move from questions like, “How much revenue did I earn from keyword x?” to questions like, “Who were the customers acquired through keyword x?” Match each customer acquired via paid search to the campaign, Ad group and keyword through which he or she was acquired. shutterstock_84816412-measuring-tape

Step 2: Identify The Lifetime Value Of Your Customers

Tools like a cohort analysis can give you visibility into the historic spend of different customer segments: for example, the average one-year spend of customers acquired from one Ad Group compared to another. Alternately, some marketing analytics software platforms can offer predictive lifetime value scoring. This enables you to quickly and accurately identify the CLV of new customers acquired across your search program — even if you’ve just recently launched a particular campaign or keyword. (To learn more about Customer Lifetime Value and how to calculate it, see the Customer Lifetime Value course on Custora U.)

Step 3: Bring In Cost Per Acquisition (CPA)

Once you’ve identified the CLV of customers across different Ad Groups, the next step is to understand how much you’re currently paying to acquire each customer. Take your spend on campaigns, Ad Groups and keywords in a given time period (e.g., last quarter) and divide it by the total number of new customers acquired via those vehicles. For example, if you spent $2,500 on an Ad Group last quarter and that Ad Group brought in 100 new customers, your CPA would be $25.

Step 4: Search Out Favorable Ratios

Identify Ad Groups or keywords offering a higher-than-average CLV-to-CPA ratio — that is, those Ad Groups where the lifetime value of a new customer far exceeds the cost of acquisition. This could be because a particular Ad Group is attracting unusually high-value customers. It could also be because there’s limited competition for a particular Ad Group, leading to a lower average cost-per-click, or because most of the conversions through a particular Ad Group are new customers — meaning that you’re not paying as much “overhead” on returning customers to support new customer acquisition. Whatever the case, a high CLV-to-CPA ratio signals a potential opportunity to invest more of your paid search dollars.

Step 5: Identify True Opportunities

Once a group of Ad Groups have been identified with a high CLV-to-CPC ratio, confirm that investing more in them will actually move the needle. Remember, the goal is to acquire more customers from high-return campaigns, Ad Groups and keywords. If a particular Ad Group is already in the top position 100% of the time, raising the bid won’t actually help acquire more customers. (Branded search terms often come up as illusory “opportunities” for this reason.) A true opportunity is one where increasing the bid actually has the potential to bump up the average position — for example, where your average bid position is 1.5 or lower.

shutterstock_177128498-experimentStep 6: Test & Learn

Start by laddering up your investment in opportunity Ad Groups incrementally, increasing the max CPA (or max CPC) by 10% at a time, and measuring the impact on average position, CPA and CLV. The final step — of testing and measuring results — is critical to establishing the success of a CLV-driven paid search strategy. By tracking the overall ROI of your SEM spend over time, you can continue progressively refine your bidding approach, discover new opportunity Ad Groups and ensure the overall effectiveness of your strategy.

Getting Started

Optimizing your paid search strategy around CLV isn’t a cakewalk: there aren’t currently any commercially-available solutions that automatically set and manage bids based on lifetime value, out of the box (although some can accommodate up to a 30-day cookie window). But ultimately, using CLV to guide your SEM program can boost the profitability of your customer acquisition efforts. It can make every SEM dollar work harder for you by ensuring that you’re investing in the highest-return campaigns, Ad Groups and keywords — and driving long-term value to your business.

Image courtesy of Custora.

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4 Surprising SEM Stats Every E-Commerce Marketer Should Know /4-surprising-sem-stats-every-e-commerce-marketer-know-184426 /4-surprising-sem-stats-every-e-commerce-marketer-know-184426#comments Fri, 07 Mar 2014 14:40:59 +0000 http:/?p=184426 Santa’s elves weren’t the only ones busy this past holiday season. Paid search was also working overtime to make sure shoppers ended up with perfect holiday gifts. The share of e-commerce transactions driven by SEM during November-December 2013 was 15%, up from 14% in 2012. And, organic search accounted for 26% of holiday e-commerce orders. […]

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Santa’s elves weren’t the only ones busy this past holiday season. Paid search was also working overtime to make sure shoppers ended up with perfect holiday gifts. The share of e-commerce transactions driven by SEM during November-December 2013 was 15%, up from 14% in 2012.

And, organic search accounted for 26% of holiday e-commerce orders. Clearly, Google was the gatekeeper for e-commerce success, with over 40% of all e-commerce sales originating in search queries.

ordersbychannel

These stats are based on e-commerce data from The Custora Pulse — a free US e-commerce industry benchmark, aggregating transaction and customer data from over 100 US e-commerce retailers, developed and updated by e-commerce marketing analytics company Custora (disclosure: my employer). Most of the stats pertain to the 2013 holiday period, but are just as relevant in 2014.

Stat 1: SEM Conversion Rate Was Up 20% During The Holiday Season

In November and December 2013, conversion rates for e-commerce visitors that came through paid search ads jumped up 20% relative to the rest of the year — from 3.00% in off-holiday months to 3.60% during the holidays. This is compared to a 10% bump for all other advertising channels. (Note: this refers to desktop conversions; we discuss mobile conversion below)

What It Means For Marketers

In an age where showrooming and instant online price comparisons have become the norm, customers have never had so many ways to find bargains with the click of a mouse. And savvy search marketers — the ones that can capitalize on that purchase intent to deliver the right product, at the right time, at the right price — are stepping in to clean up.

Stat 2: The Average Order Value Of E-Commerce Orders Originating From SEM Went Down During The Holiday Season

The average order value (AOV) across all channels except for paid search stayed remarkably stable — and actually inched upward — during the holidays, from $78 to $80. But for paid search, the AOV actually went down. Paid search shoppers dropped their average spend per transaction from $108 to $101. (Note: this is AOV of desktop shoppers; we discuss mobile shoppers below)

What It Means For Marketers

During holiday time, paid search attracts a more price-sensitive shopper: a bargain-hunter on the lookout for great deals. Google Trends identified the hottest-trending search terms in the month leading up to the Black Friday / Cyber Monday frenzy including three of the steepest-discounting big box retailers (Walmart, Best Buy and Toys R’ Us). Search terms like [plasma TV], [iPhone on sale] and [PS4] all saw huge spikes in traffic around Black Friday.

What does this mean for marketers? If you’re able to manage your e-commerce inventory, get your bidding strategy together and promote your deals in a timely way, you may be in for a great holiday season, maximizing revenue and transactions. But it’s worth bearing in mind that these shoppers are likely to be “fair-weather friends” — not the type of loyal customers who will drive long-term value to your business by way of full-price shopping.

SEM + Mobile = A Promising Future?

While the analysis so far has focused on the traditional desktop SEM landscape, the story becomes more complicated when we bring mobile into the mix. Mobile presents its own challenges — and opportunities — to marketers looking to identify insights from last year’s holiday season.

Stat 3: During The Holidays, SEM Desktop Conversion Rate Was 4X That Of SEM Mobile Conversion Rate

sem-conversion-table

The difference between desktop and mobile SEM conversion rates shines a light on the gulf in advertiser and user experience across these platforms. During the non-holiday months, desktop outperforms mobile conversion rates at a pace of about 2 to 1. But during holiday time, that gap jumps to almost 4 to 1. In other words, paid search on desktop generates four times as many conversions per click than on mobile devices — a startling metric given that mobile site visits jumped over 40% from holiday 2012 and represented nearly a third of all traffic during the 2013 holiday season.

What It Means For Marketers

It wouldn’t be fair to attribute all of this gap to the nature of paid search alone. Much of this discrepancy owes to the fact that the shopping experience is simply more rugged on mobile devices than on a traditional desktop. Site navigation and checkout remain patchy, with not all retailers optimizing user experience for mobile. Advertisers remain constrained by space limitations and variations in ad format from one mobile device to another.

Nevertheless, forward-looking digital marketers will be focusing their sights on how to effectively leverage user purchase intent when the search takes place on a mobile device.

Stat 4: Average Order Value Of Mobile SEM Shoppers Was Up Nearly 20% During The Holidays (Relative To Non-Holiday Months)

One data point from last holiday season might be a consolation for mobile marketers. While the deluge of bargain hunters dragged down the AOV of desktop SEM shoppers, the AOV of mobile CPC shoppers actually shot up nearly 20% during the holiday months, relative to non-holiday months in 2013.

What It Means For Marketers

The mobile SEM shopper is a different animal. While desktop paid search has become the go-to for discount-seekers, mobile SEM is still driven primarily by tech-savvy users who aren’t daunted by the obstacles of mobile paid search.

With their higher spend, these customers represent a potential market for marketers eager to introduce pricier, higher-end goods into their mobile CPC strategy.

Summary

The holiday 2013 season highlighted the crucial role that SEM plays in the e-commerce ecosystem and surfaced key areas of opportunity for 2014 as the channel continues to evolve. Instant price comparison is the new norm — and SEM marketers will be focused on experimenting with new ad formats and extensions to reach price-sensitive shoppers when they’re in the market to buy. And as mobile e-commerce shopping reaches maturity, digital marketers will be focusing on closing the gap between the mobile and desktop SEM ad experiences.

 

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