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Customer value and your pain threshold

Customer value and your pain threshold

August 31, 2006
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On a constant basis, I talk to industry peers about the effectiveness of their ad campaigns, focusing on financial return on investment. For pay site owners, the issue of customer value seems to be straightforward – what is the average value in dollars for each subscriber or simply – what is a customer worth? This piece of information should be one of the most critical driving forces behind decisions that you make which can definitely impact your business, such as how much to spend to acquire new customers, how much to spend on content and resources to keep your customers, etc.

On any given day, there should be at least one person (or computer) system in your company that, when queried, can tell you the current average (gross) value per customer. For many pay sites, this is typically the dollars generated from the estimated amount of billing cycles that average members retain for. Thus, if you charge $2.95 for a trial and then $29.95 monthly & keep users typically for two full cycles, the gross value per customer is $62.85. These numbers are of course impacted by the realistic turn over pay sites see in terms of conversion from trial to full, from month one to two, two to three, etc. plus chargebacks. Obviously, determining what you can justifiably spend to acquire a customer based on knowing your average customer value is very important when it comes time to make buying decisions.

Now comes the fun. Why do we call this the threshold of pain? Simple. If you stumble upon a new paid traffic source that requires you to spend more than you typically do for new sales but where the source can generate many sales for your site, do you jump on it? Answering this question helps define your financial threshold of pain or the cutoff point at which the customer acquisition cost can be a little too much to bear.

While it’s nice to spend as little as possible to take in new customers, note that some traffic sources are qualified enough for you to adjust your threshold of pain, especially when you see that retention is improving, upsell revenues increase customer value, increases to your membership fees, etc. If you ever wonder why some companies seem to be able to buy traffic without regard to cost, it’s not typically because the company owners have lost their sensibility. It is much more likely that the companies in question have a much higher threshold of pain because they have a well engineered approach to generating greater than average revenue from every user their sites interact with.


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