Page 214 - Electronic Commerce

Marketing on the Web

Costs of Customer Acquisition, Conversion, and Retention
The benefits of acquiring new visitors are different for Web businesses with different
revenue models. For example, an advertising-supported site is interested in attracting as
many visitors as possible to the site and then keeping those visitors at the site as long as
possible. That way, the site can display more advertising messages to more visitors, which
is how the site earns a profit. For sites that operate a Web catalog, charge a fee for 189
services, or are supported by subscriptions, attracting visitors to the site is only the first
step in the process of turning those visitors into customers. The total amount of money
that a site spends, on average, to draw one visitor to the site is called the acquisition cost.
The second step that a Web business wants to take is to convert the first-time visitor
into a customer. This is called a conversion. For advertising-supported sites, the
conversion is usually considered to happen when the visitor registers at the site, or, in
some cases, when a registered visitor returns to a site several times. For sites with other
revenue models, the conversion occurs when the site visitor buys a good or service or
subscribes to the site’s content. The total amount of money that a site spends, on average,
to induce one visitor to make a purchase, sign up for a subscription, or (on an advertising-
supported site) register, is called the conversion cost. Most managers use a cumulative
definition for conversion cost—that is, conversion cost includes acquisition cost.
For many Web businesses, the conversion cost is greater than the profit earned on the
average sale (or the average first sale). In such cases, the Web business must induce the
customer to return to the site and buy again (or renew the subscription, or view more
advertising). Customers who return to the site one or more times after making their first
purchases are called retained customers. Different businesses use different measures for
determining when a customer is a retained customer. Some companies consider a
customer retained if he or she returns just once and purchases again. Others use some
number of subsequent purchases or some number of subsequent purchases within a
specific time frame. The costs of inducing customers to return to a Web site and buy
again are called retention costs.
Companies have found that measuring acquisition, conversion, and retention costs is
important because it gives them an idea of which advertising and promotion strategies are
successful. These measurements are more precise than classifying customers into the five
stages of loyalty in the customer life-cycle model. It is much easier to determine, for example,
whether a customer has been converted or retained than it is to determine whether that
customer is in the familiarity stage or the commitment stage. A company that is evaluating its
promotion campaign can measure the conversion costs and compare them to the profit
generated by the average first-time sale. Most companies are very interested in retaining
customers because the cost of acquiring a new customer is between 3 and 15 times
(depending on the type of business) the cost of retaining an existing customer.
In the rest of this chapter, you will learn some specific techniques that can be
elements of successful Web marketing strategies. Remember that each of these techniques
makes sense only when used in concert with another. Not all techniques work well in all
situations. For example, a retailer might find that a print catalog can be an integral part of
promoting its online sales. However, one company’s success with this strategy does not
mean that printing catalogs is a good idea for all Web businesses (see the Kozmo Learning

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