Recently a client asked us how to value a new online marketing business. The business was planning to sell food supplements via the internet and he was trying to figure out if his business plan was economically viable. In addition he also wanted to know which mix of online marketing strategies would produce a scalable business.
Basically online marketing businesses can become quite interesting cash generation machines when choosing marketing strategies, which ensure that each new acquired customer contributes to further profits.
An online marketer can choose between several different online marketing strategies in order to drive traffic to his website: Google Adwords, Facebook Ads, Twitter Ads and Search Engine Optimization (SEO). The first strategies consists of paid advertising while SEO will produce constant backlinks which brings ongoing organic traffic to the website. In order to have a scalable business model, one needs to figure out which marketing mix optimizes the cash flows in the next months and years.
The way to compare the effectiveness of each strategy is to compare their Cost Per Acquisition (CPA) for new customers. In paid advertising, CPA depends on the Cost Per Click (CPC) and the conversion rate – the rate in which website visitors turn into paying customers. For organic advertising, CPA depends on the number of quality backlinks produced and their impact on website traffic over time. The task of the online marketer is to find the most optimal marketing strategy and to continue validating his assumptions for his specific situation as good as possible.
Illustrative Example 1 – Cost per Acquisition (CPA) Comparison
The goal is to focus only on marketing strategies, which produce positive Customer Lifetime Profits (CLPs) for each customer. The corresponding financial calculation requires estimating the average Customer Lifetime Value (CLV) – the revenues produced over the customer’s lifetime – influenced by order size and re-orders. Then all costs such as cost of goods sold (COGS), order fulfillment costs and CPA have to be deducted from CLV in order to obtain the expected Customer Lifetime Profit (CLP).
Illustrative Example 2 – Customer Lifetime Value (CLV) Breakdown
Having such an online marketing business is the objective of every online marketer. Due to positive lifetime profits, the more marketing money is invested, the more profits can be generated in absolute numbers. Thus the business becomes scalable and can turn into a cash generation machine.
Contact us if you want to know more how to produce the corresponding financial model and to correctly project your cash flows for the next months and years.