Trade PPC for VLV: Visitor Lifetime Value Metric Makes Money

Faced with an increasingly competitive market, coupled with the growing complexity of search optimization and heightened expectations from consumers, one e-tailer turned to the Visitor Lifetime Value metric as a way to increase traffic - and revenue. Here he outlines how to define, calculate, execute and manage VLV.
Faced with an increasingly competitive market, coupled with the growing complexity of search optimization and heightened expectations from consumers, e-tailer Greg Howlett, CEO of Vitabase.com, turned to the Visitor Lifetime Value metric as a way to increase traffic — and revenue. Here he outlines his experience, sharing with us how to define, calculate, execute and manage VLV and explaining why it can help you boost the bottom line.

After eight years of marketing online in a very competitive sector, it is very apparent to me that the fundamentals of e-commerce success are changing. If you were not involved during the early days of the Internet, you missed some highly profitable times. For example, a company could throw up a Web site in practically any niche and start receiving substantial (and free) traffic within weeks from search engines. Shoppers did not expect to see sophisticated sites and slick shopping carts, and of course, competition was sparse.

The E-Commerce Times, They Are A Changin'
Over time, of course, this all began to change. Online retailers began paying for traffic through pay-per-click (PPC) as organic search optimization became more complex. Consumer expectations matured, and even obscure niches became crowded with competitors who seemingly were willing to accept ridiculously tight margins.

I wish I could say that these trends are reversing, but I expect the online retail environment to get even more competitive and complex over the next few years. The online selling landscape looks to me like California must have looked in 1850 — the gold rush is over, and the easy money is gone. However, just as much more gold was mined in California after 1850 than before it, there are enormous opportunities still available online to those smart enough to take advantage of them.

I believe the biggest challenge facing online retailers today is how to profitably acquire traffic — having quality products and great site designs is no longer enough to ensure traffic. In most online markets, traffic acquisition is very expensive. The average PPC price paid by advertisers is around $1.50. Because the average conversion rate is around 2 percent, that means that the average cost to acquire a customer is approximately $75. This poses a big problem — very few e-tailers can afford to pay $75 to acquire a customer.

Are ad networks that charge on a CPM (define) basis a better option? In my industry, CPM ends up costing more and passes more risk on to the advertiser. I doubt that any niche industry is very different. Traditional SEO generates "free" traffic, until you start adding up the staggering human resource cost to do it effectively.

So what is the solution to the traffic acquisition problem? This is the question that my company Vitabase struggled with over the last year. We were in the enviable position of having high-quality products and a top-notch Web site. However, our traffic was costing us much more than it was worth.

Most companies have no idea whether their traffic is costing them more than it should. However, we were painfully aware of the truth, and we also knew we had three options: We could continue overspending on traffic and hope that we would outlast our competition, sit on the sidelines in all the areas where we were over-paying for traffic until we were able to find a way to acquire it less expensively or we could improve the value of the traffic we were buying by increasing the profit it generated.

Meet the Visitor Lifetime Value Metric
We decided to focus on the third option — raising the value of the traffic we got to the Web site. We introduced a metric called the Visitor Lifetime Value (VLV), which refers to how much profit you can expect to generate from a visitor, not on just the first visit, but for all follow-up visits and orders.

Here is an example:
  • Site conversion rate: 1 %
  • Average profit per order: $50
  • Average number of orders placed per customer over his or her lifetime: 2
  • In this scenario, the CUSTOMER lifetime value is $100 ($50 x 2) The VISITOR lifetime value is $1 ($100 x 1%)
  • The Visitor Lifetime Value is the one metric that determines how much you can pay for traffic. If your VLV is $1.00, you should not pay $1.50 for a visitor unless you can find a way to raise the VLV above that level.

The VLV will differ across a retail site based on many factors. For instance, visitors that come looking for Vitamin C might have a VLV of $1 while visitors that come looking for multi-vitamins might have a VLV of $2. It is important to try to get this level of detail so that you can pay for advertising appropriately. In this scenario, we would bid much more for multi-vitamin shoppers. If this level of reporting is too difficult, you can base your advertising decisions on an average for the entire site, and you really only need to know the three factors above — site conversion rate, average profit per order, and average number of orders — placed per customer.

Budgeting for the Metric
How much of the VLV should you be willing to spend for a visitor? There is no right answer, and you must consider the impact on cash flow. At Vitabase, we calculate the VLV for each month and use it to project cash flow. As we tally the VLV for each month, it rises for that month over time as customers reorder. For example, we look at the pool of visitors that came in November 2006. In November, their VLV was $0.40 (hypothetically). In December, that number started to rise as visitors that first visited in November reordered. After six months, the VLV might be at $0.80.

We calculate the VLV across the site on a month-by-month basis to manage cash flow. If we paid $0.60/visitor for traffic, for instance, we know that we are going to lose $0.20/visitor during the first month, but can expect to have recouped it within a few months.

To calculate how much to spend for traffic in specific areas, we calculate the overall VLV for those specifics without breaking it down month by month. Our reporting breaks down the VLV based on such items as search engine searches terms, campaigns, and referral source.

If you can improve your VLV, you will have more opportunities to acquire traffic. For example, you might find that you can safely bid for the top positions for your most important keywords without losing money. That is why the VLV indirectly solves the traffic acquisition problem — if you can afford to spend more per visitor than your competition, you are going to get a lot more traffic than they will.

Focusing on your VLV will help your traffic acquisition in another way as well. A high VLV means happy customers and a great reputation. An impeccable reputation will eventually help you in your SEO efforts because you will start getting good press and links on other Web sites.

As you can guess, to really manage the VLV, you need excellent reporting. We calculate the VLV separately based on products, referrers, keywords and advertising campaigns. While you may not be able to initially get to this level, you can probably calculate the average VLV for your site quite easily.

In terms of help in automating this type of detailed report, I am not aware of any off-the-shelf solutions. (Some calculate value per customer but not LIFETIME value per customer. They have no way of connecting repeat orders back to the original customer.)

The factors that you must concentrate on to improve the VLV are the site conversion rate, average profit per order and average number of orders per customer. Obviously, you want to increase all three. While this can be overwhelming, bear in mind that even incremental improvements at each of these levels make dramatic differences in the VLV.

I strongly believe that the future of online retail will belong to those who focus on this concept. While it may seem tedious at first, integrating the VLV as a metric in your Web store business operations will help you make good decisions about your traffic acquisition and will help improve your bottom line.

Having launched two multi-million dollar online companies, Greg Howlett has been working in the trenches of Internet marketing for more than eight years. He currently is the President/CEO of Vitabase.

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