In my eight years of building Internet businesses, I have seen more of them damaged by marketing than by any other item.
The recent downgrading of Internet businesses by Wall Street is a result of investors not being comfortable with the marketing economics for Internet businesses. This is especially true for business-to-consumer businesses, whether they are advertising or e-commerce revenue-driven. More and more, I see many Internet business plans include a new abbreviation: It is P2P, or path to profitability.
The public and private markets now demand a clear path for how fast a business will become profitable. While it is obvious that both the revenue and expense side drive the profits of any business, nothing more often affects that equation than marketing. However, it is not just the cost side of marketing but, more importantly, it is the value derived from marketing that matters.
The high cost of customer acquisition. It wasn’t until I entered direct marketing later in my career that I really understood how expensive acquiring customers was and how often it is not profitable for many products – a fact lost on many Internet marketing folks. A basic look at the economics of standard Internet marketing underscores this point.
If Web banner advertising, sold at $20 cost-per-thousand to an advertiser, produces an average click-through of 1 percent (well above the current average), then the cost to get a customer to visit a site is $2. If you further assume that 20 percent of everyone who visits that site registers or becomes a regular user, then the cost to capture that user is $10 (e-mail marketing economics is not much different). Keep that number in mind – I’ll come back to it.
Whether in Internet or traditional media, we have learned there are several ways to improve that equation but many of those solutions come at a sacrifice. You may be able to capture a lower CPM but that often lowers performance or the quality of the audience. You also may be able to aggressively boost the offer and, therefore, the performance of the Internet advertisements, but overdoing that will begin to lower the registration or value of those registrants.
The best way to better customer acquisition is to implement a personal relationship marketing program, alternatively called tell-a-friend, viral marketing or word-of-mouth. As author Seth Godin indicates in his seminal work on Internet marketing, “Permission Marketing,” having permission to contact someone is the critical issue. Naturally, friends have that permission to make trusted recommendations to one another.
Personal relationship marketing arrives. Personal relationship marketing programs leverage relationships among friends to promote a product. Obviously, a product recommendation from someone you know is more powerful than one directly from an advertiser.
Back in my brand agency days, we talked a lot about leveraging personal relationships conceptually but never put programs together. We just told the clients, “The advertising we’ve created is so great it will get people talking.” That is nice but not enough.
As any direct marketer knows, programs that target individuals need a measure of effectiveness so you know how to allocate resources and whether they are economically viable. However, any program of this type via traditional media would most likely show that personal relationship marketing is far from economical. It was hard enough to get consumers to act and buy the advertised product, let alone give them an efficient method to tell others.
The landscape and economics of what could be done was radically changed with the Internet. Now, a personal recommendation on the Internet is just a quick and free e-mail away.
Some sites have benefited immensely from this. Hotmail, the Web-based e-mail provider now owned by Microsoft, grew to an astonishing 12 million subscribers in 18 months using viral marketing techniques, according to its venture capitalist, Draper Fisher Jurvetson, Redwood City, CA. AllAdvantage.com used a referral system that paid folks a la a multilevel marketing ploy that caused it to grow from nothing to 5 million worldwide registrants in less than one year. What makes this really interesting is that neither of these companies did any real advertising.
The real value of personal relationship marketing. Let’s go back to the economics identified earlier. Data indicates that, on average, 20 percent of registered users to a site will tell five friends about that site. Fifty percent of those notified visit, and a third of the visitors register themselves. Therefore, current users have been converted into marketers and extended the value of any marketing. Additionally, the really beautiful part of personal relationship marketing programs is that it continues to deliver. For every new group of users acquired, more new users result from their recommendations.
Extended to three levels deep (a user refers to others, they refer to others and those users again refer to others), the assumptions above suggest an additional 17 percent in registrants captured. I haven’t met a marketer yet that would turn down a budget gain of 17 percent. I view this as fairly significant for one program, especially one that keeps on giving without any real effort on the part of the advertiser.
Remember the earlier example, where the cost of a user was $10. Using the data points above, the cost per user is now only $8.30. That can be enough to push many of today’s negative-earnings Internet businesses into the black.