Long Term Value (LTV) of Local Search Engine Marketing

Long Term Value (LTV) is the basis for a lot of marketing efforts.  The web hosting industry pays out huge commissions ($80-$150) for a new client that spends $8.95/mo. because of the long term value of a hosting customer.  That’s also why web hosting related terms are so expensive and competitive in search engine marketing.  Companies will pay $20 per click knowing that each new customer is worth $537 (60 months at $8.95/mo.)

I would venture to say that most industries don’t analyze or pay attention to the long term value of a new client because it takes too much effort and isn’t as easy as the Cost Per Action (CPA) or (Cost Per Lead) CPL we are all so used to.  With a local business and local search engine marketing the focus should be the LTV, and here’s why.

Let’s talk about a local restaurant like Peter’s Soup & Sandwich (PS&S is what I’m going to start calling them).  PS&S does a lot of catering in and around their primary location of Localville, KY.  When they try to analyze the response from their search engine marketing efforts they are looking for coupon downloads and coupons coming into their restaurant as to whether or not their online marketing is working.

They also do catering and hopefully have a call tracking number for their catering line to quantify their catering leads from online marketing channels (Suggestion #1 – CALL TRACKING on all marketing materials, sites, channels etc.).  They are currently seeing a $15 CPA (meaning they spend $15 on online marketing to get someone to download the 20% off coupon).  They’ve also found that 50% of the downloaded coupons end up in the store (they are excited about that percentage:).  The real CPA is now double the $15 because it takes two coupon downloads to get someone in the store.

Now if PS&S were to simply look at the cost of getting a new customer ( $30+) and their average restaurant tab is $20 they will say, we need to cut back.  But here’s where LTV becomes so valuable and why some companies are willing to pay a lot more for traffic via paid search marketing (Google Adwords, Yahoo Search Marketing or MSN AdCenter) than others.

PS&S has amazing sandwiches and their soup is loved by all.  Most new customers end up coming back with their friends, family and don’t need to click on the Localville Restaurant keyword on their second trip (no marketing spend) .  In fact, the rewards program that PS&S has is showing them that their average new customer comes back 3 times a month.  This means that the $30 they are spending for a new customer is worth $60 to them in just the first month, plus they are getting word of mouth advertising (still #1) from these new customers.

Now the explanation above simplifies (I hope) the importance of not looking at the “This click equalled this action” mentality that often comes from any website owner. By analyzing the Long Term Value of a new customer, PS&S learned that they are profitable in just the first month on their paid search marketing.  Even if their average customer only came back once a month, the cost of getting a new customer would have them breaking even on their marketing after two months and being profitable after the third visit.

Take LTV and apply it to your own business and see if that changes your perception of how your online marketing is growing your business.  The hardest part is doing the research to find out how many of your new customers are turning into repeat customers AND gathering their information the first time so you can follow up with them (and remind them to come back) at a fraction of the cost of PPC advertising.