google-adwords

How to Estimate Conversion Value

A useful insight into estimating customer lifetime value, helpful in understanding that it’s far more than the short-term buck we here at Geek Central take into account when forumulating and managing your Google Adwords campaigns. (Piece courtesy of Google).

When estimating value-per-conversion, it’s often strategic to factor in things like repeat business, word of mouth and lifetime customer value. Factoring in these values can give you the flexibility to bid higher while confidently bidding below your value-per-click.

Let’s look at a fictional business-to-business machinery company named Example Machines to see how this works. Rather than sell directly online, Example Machines uses AdWords to generate leads for its sales team. We’ll factor that in too.

Short-term conversion value for Example Machines

Average deal revenue: £3,000
Profit margin: 45%
Leads which convert to a deal: 20%
Value-per-conversion (short-term): £270 (£3,000 * 45% * 20%)

Factoring in word of mouth

Example Machines has data showing that for each customer they usually gain 15% in additional business through word of mouth. Here’s how we factor that in:

Value-per-lead (short term): £270
Gain from word of mouth: 15%
Value-per-conversion (+ word of mouth): £310.50 (£270 * 115%)

Note: We multiply by 115% instead of 15%. This is because we are amplifying a gain as opposed to a loss.

Factoring in lifetime customer value

Lastly, Example Machines knows that each new customer makes repeat purchases worth approximately £5,000 in revenue over their lifetime. It’s easiest to factor this into initial deal value.
Average deal revenue: £3,000
Repeat business over lifetime: £5,000
Profit margin: 45%
Lifetime profit-per-customer: £3,600 (£3,000 + £5,000)*(45%)

Then we can factor back in how many leads convert to a deal and word of mouth gains:
Lifetime profit-per-customer: £3,600
Leads which convert to a deal: 20%
Gain from word of mouth: 15%
Lifetime value-per-conversion: £828.00 (£3,600 * 20% * 115%)

How this enables more strategic bidding
Let’s assume 5% of clicks will convert to a sales lead, and see how this affects our value-per-click:

Value-per-click (short term): £13.50 (£270.00 * 5%)
Value-per-click (+ word of mouth): £15.53 (£310.50 * 5%)
Value-per-click (lifetime): £41.40 (£828.00 * 5%)

Notice how factoring in full conversion value enables Example Machines to consider a broader range of profitable CPC bids.

Conversion value challenges
Many factors can make it difficult to estimate conversion value in practice. Some examples include:

A hotel chain where inventory is limited by time and available rooms
An e-commerce site where customers search for one product, then purchase another
Business services where deal sizes can vary between thousands and millions of pounds
Subscription services where a new customer may enrol in a range of offerings over time

Even in cases where estimating conversion value is difficult, it may still be possible to use an estimated range for your likely conversion value, or conservative estimates for factors that are difficult to track. For example, if you’re intuitively confident that gains from word of mouth represent an additional 20-30% of value but you lack definitive tracking, then using a 15-20% conservative estimate is often more helpful than using no value at all.

Choosing your conversion value
It’s important to use a method that makes sense for your business and advertising objectives. Short-term conversion values can be useful when you want to maximise immediate profit or customer acquisition as cash flows allow. Lifetime conversion values can be more useful when trying to maximise long term growth. When choosing a conversion value, it’s important to opt for a method that aligns with your goals.