It's the Formula That Matters Most: Money In Money Out

Dmitry wrote this on August 08, 2011 in . It has 2 comments.

At ZURB, we don't design with a formula in mind but when it comes to online product advertising we rely on formulas quite a bit. We don't heavily invest in advertising, but have found a pretty good approach that helps us quantify the outcome of our advertising efforts. Before we even start advertising we ask ourselves: Can the product make money without advertising? If the answer is no, we won't start advertising. This means a lot more work needs to be done to create a viable/sustainable product.

Once you commit to advertising, it's very easy to get lost with all the talk of branding and overall impact the advertisers give you. Do yourself a favor and focus on the formula. What you really care about is how much you are spending on the ads and how much you are expecting to get out from the ads. Before you start the ad campaign for your product put something like this together:

Cost: $1000
Duration: 1 month
Number impressions: 1,000,000
Estimated clicks: 2,000 (average CTR on ads x number of impressions)
Estimated paid signups: 100 (your internal conversion rate x number of clicks)
Estimated Lifetime Value Generated = (100 x your lifetime value per account)

This gives you an estimate of what you can expect to get out of the campaign. Once you start the campaign, create a column for actuals right beside this one and track the actual activity. At the end of the campaign, go ahead and compare how well it worked out as compared to what you expected. If you have a 30-day free trial subscription service you'll need to wait for 30 days to see how well the campaign performed.

If your Lifetime Value Generated is significantly higher then the cost of the campaign, keep putting the money into the campaign. If not, find a better targeted campaign or improve the landing pages to get better conversion.


It has 2 comments.

Danny S. (ZURB) says

Interesting way to make sense of how your advertising is doing. People tend to loosely put money in and if they have a few people signing up and paying them money as a result they're happy. This is a much more firm way to keep track of the value you're producing with the money you're putting in. Curious how do you measure your Estimated Lifetime Value Generated?


Dmitry (ZURB) says

Great question Danny. The actual formula for your lifetime value per account is (1/(1-R)*S)/A

where R = Retention rate and S = Annual Sales value of current subscribers and A = The number of paying accounts

The result tells you what your current paying customers are valued at, per account, over the lifetime of those accounts, based on your current rate of retention.

In other words, your current accounts will fade over the course of time - how long it takes for that to happen, depends on your retention rate. So, the current annual sales value shrinks over that same period of time - this calculation determines what the total value of those sales are over that period of time and then divides it by the number of accounts - resulting in the LTV per account.



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