Why Customer Value Optimization Trumps Conversion Optimization

by 0 06/04/2014

If you’ve been in the online marketing world for any length of time, you’ve probably heard the name Ryan Deiss. He’s one of the most widely known and respected online marketing gurus around.

The thing that really separates Ryan from a lot of other gurus out there in this space is the amount of hands-on, real-world experience he has online.

According to his personal site, over the last 3 years, he and his team have:ryan-deiss

  • Invested over $15,000,000 in marketing tests
  • Generated tens of millions of unique visitors
  • Sent out over a billion permission-based emails
  • Run around 3,000 split and multi-variant tests

And, keep in mind, that’s not just selling online marketing products to online marketers. He has business interests in a number of different niches that are about as far away from the Internet as you can get.

So, basically, the guy truly knows what he’s talking about! And what he’s talking about in this interview is called Customer Value Optimization. It’s a process he uses for every business he’s a part of and is a big factor in his success.

Here’s what he has to say about it…

What is Customer Value Optimization and why is it important for marketers and business owners to understand?

Customer Value Optimization (CVO) is the process we use for every business we start, acquire or consult.

The goal is to create a sales funnel that allows you to outspend your competition to acquire and keep customers.

Jay Abraham once said that there are only three ways to grow a business,

  • Increase the number of customers
  • Increase the average transaction value per customer
  • Increase the number of transactions per customer

The CVO process is what we use at Idea Incubator (our parent company) to grow revenue in all three of these ways.

Marketers and businesses should understand it because it is how you create an unstoppable business.  Those that employ this process are impossible to compete with.

That’s a pretty bold statement that employing this process makes a business impossible to compete with. Can you tell us more about what makes it so powerful?

One of my favorite business quotes comes from Jeff Bezos, CEO and Founder of Amazon.com, who often says… “Your margin is my opportunity.”

What I often say is… “He who can spend the most to acquire customers, wins.”

The idea behind the CVO process is to build a marketing funnel that allows you to spend more than your competition to acquire customers.

We use a 5-step process…

  • Lead Magnet Offer
  • Tripwire Offer
  • Core Offer
  • Profit Maximizer
  • Return Path

The first two steps (Lead Magnet + Tripwire) increases the number of customers.  The Core Offer plus the Profit Maximizer increases the average transaction value per customer.  And the Return Path increases the number of transactions per customer.

With each of these five steps in place, you’ll be able to spend more than your competitors to acquire customers.

Can you tell us a little more about each step of the process and give us a real-world example for each of how businesses use them to grow revenue?

Sure thing.

Lead Magnet is a valuable piece of information given in exchange for contact information (usually an email address).

Tripwire Offer is a low-dollar (usually $1 to $20) that is intended to convert the maximum number of leads into customers.

Core Offer is what most businesses already have.  This is the flagship product and is usually a higher dollar amount.

Profit Maximizer is the upsell, cross sell, bundle/kit, etc that is used to maximize the transaction value of each new customer.

The Return Path is the tactics used to bring existing customers and customers back into the funnel.

Let’s look at a simple funnel an information marketer might be running.  In this case the marketer is running traffic from an email list (built through a Lead Magnet) to a Tripwire Offer.

We’ll talk about the Return Path a bit later if you want… it’s kind of its own animal.
CVO
Here’s what the metrics look like for this funnel…

  • Tripwire Offer – A $9 Information Product is converting at 8%.
  • Core Offer – A $197 Information Product is converting at 4%.
  • Profit Maximizer – A $497 Coaching Offer is converting at 6%.

Once you have these conversion rates… it’s time to calculate two VERY IMPORTANT metrics that will tell you:

How much a customer is worth

How much you can pay for traffic

There are so many metrics to look at in business and marketing. Can you tell us about the importance of these two metrics and how they relate to each other?

Well… remember that the goal is to be willing and able to spend more than your competitor to acquire a customer.  To do that —> you need to know what a customer is worth and how much you can pay to acquire a customer.

To calculate how much a customer is worth, you need to calculate Average Customer Value or ACV.

And to calculate how much you can pay for the traffic to acquire a customer you need to calculate Average Visitor Value or AVV.

It’s pretty simple to do…  the formula looks like this:

Tripwire Price + (Core Offer Price * Core Offer Conversion Rate) + (Profit Maximizer Price * Profit Maximizer Conversion Rate) = Average Customer Value

For the funnel above it would look like this:

$9 + $197(.04) + $497(.06) = $46.70 Average Customer Value

This means that you can spend up to $46.70 to sell a $9 product before you go negative.

Now… to find out how much you can spend to get a click, you simply take ACV and multiply it by the Tripwire Conversion Rate.

For the funnel above it looks like this…

$46.70(.08) = $3.73

This means that you could spend as much as $3.73 per click to acquire a new customer on the front end of this funnel before you go negative.

That’s good information to have.

A lot of business owners focus so much on attracting new customers, they forget to market to what may very well be their best source of new sales… their existing customers. Is that where the Return Path comes in? Can you tell us about how that works?

Sure thing…

The Return Path is about increasing transaction frequency with your customers.  If you have a funnel in place there will be some customers that will go all the way through purchasing each offer.  For all others you will need follow-up in place.

You also need to create systems by which you can notify existing customers and prospects of new offers you have available.

The big tactic here is, of course, email marketing.  But retargeting, remarketing, loyalty programs, custom audiences in Facebook and all forms of organic social media are also great ways to get people to come back and buy more often.

Want to know more about how Customer Value Optimization can make a business “unstoppable”? Ryan digs into it all a bit deeper here.

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About 

Adam Kreitman coaches business owners on how to make their websites more compelling to their prospects.. and to Google. He owns Words That Click, a firm specializing in Conversion Optimization and managing Google AdWords campaigns for small businesses.Follow him on Google+

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