In the increasingly complex world of digital marketing, determining the right marketing strategy can be challenging. Programmatic, cross-screen, real-time and big data are just a few of the buzzwords being thrown around recently. Even though the tools at marketers’ fingertips have changed, in many cases, their goals haven’t. They want to understand their customers and make the most of every pound spent. In order to do this, marketers should make decisions based on profits. Profit driven marketers make decisions based on the profits delivered by particular channels rather than the return on ad spend of each channel.
What sets profit driven marketers apart is they understand how the different segments of their target audience drive profits and use that knowledge to inform their marketing decisions. They understand how valuable customers truly are and use this to underpin their decisions about budgets and bidding. Just looking at the combined average of all your customers isn’t enough because not all customers are created equal; to make truly brilliant decisions requires more nuanced information.
Some customers are valuable, while others are less so (for example, one-time purchasers). When marketers understand the behaviour that drives their more valuable and less valuable customers alike, it’s possible to make informed decisions about how to target and bid differently for each as well as how to cater messaging effectively to each segment.
Looking only at average expected value assumes that you’re willing to invest the same amount regardless of the true value of the customer. Take the example below. By using averages only (Fig 1), it looks like you should have a CPA of £10 in order to maximise profits. With this goal in mind, you would budget and bid accordingly.Fig 1
Let’s look deeper though. When you segment your customers (Fig 2), you get a better view of how valuable different customers can be, as well as a clear path to budget and bid for those segments (Fig 3).Fig 2 Fig 3
If you had kept the average CPA at £10, you would have over invested in low value segments, while underinvesting in the highest value segment. For this highest value segment, you want to make sure you’re maximising the budget, so your bids will be more aggressive. If you are budget constrained, you may even choose to sacrifice sales on lower value segments in order to make the most of this highest value segment. A classic example of this is the airline industry. First class customers are the most valuable in terms of driving profits, but there are less people who choose to fly first class than who choose to fly in other cabins. Therefore, the competition between airlines for first class customers is high, which results in a higher cost per acquisition than customers flying business or economy.
Makes sense, right? So let’s get started. The first thing to know is that behavioural signals are the best available predictors of expected value. Signals to consider include how frequently customers visit the site, how much time they spend on the site, what products they’ve added to the basket and what products they’ve ordered collectively. Use indicators such as these to inform your segmentation.
Segmenting along these lines will not only reveal your most valuable customers; you’ll also gain insight into who is becoming less valuable, who might be in need of re-engagement, who has the potential to join the most valuable segment and who’s not worth investment at all (Fig 4).Fig 4
Now that you’ve identified your top segment, it’s time to target these valuable consumers. Ask yourself:
- What marketing touchpoints or other interactions have I had with these customers?
- What kind of message should I send to this segment?
- Do I want to offer a promotion to people who used to visit frequently but haven’t returned to the site recently?
- Could I cross-sell or upsell new products to this segment?
- What would move people from another segment into my segment of most valuable customers?
- How much am I willing to spend to retain a customer in this segment?
- How much am I willing to spend to acquire customers similar to those in this segment?
With your answers to these questions, you’re ready to start building a profit-focused marketing strategy. You’ll know what message to send, where to show that message and how much you’re willing to spend to retain customers and acquire new ones.
How Google Can Help
Once you’ve segmented your customers, use different advertising strategies in order to find additional customers:
- Similar Audiences in AdWords to find potential customers with shared interests and characteristics at scale
- In-Market Audiences to find potential customers who have demonstrated an intent to purchase
- Gmail ads to reach potential customers who are likely to be interested in your products based on similar email subscriptions
- 1.Frequency refers to how often a customer has purchased; recency is how recently the customer has purchased.