Search engines are an important research tool for consumers and have a big influence on a consumer’s final purchase decision. According to a recent consumer behaviour study, at least 4 of every 5 people search online for information about a product before they buy. In order to discover what traditional marketers can learn from search engine marketing (SEM), let me first explain what SEM is, then how it works, then why it matters for the rest of your business.
What is search engine marketing?
Search engine marketing (SEM) is the process of converting the market’s attention from the search engine results page to your customers. Given the dominance of Google as a search engine, 83% usage, we could also say that SEM is a Google marketing strategy.
How does SEM work?
Lets say my company is an online retailer for popcorn seasoning. Our company did some research and found that the most likely time to gain new consumers is when they are also buying the popcorn makers. Since my future customers are researching online, I should be able to place my product in front of them when they’re open to buying my product.
Google Adwords works like an auction. In order for our ad to show up on the search result page, we had to set our bid price on the value of a click through. In other words, we had to choose how much we are willing to pay for a person to click on our ad. The higher our bid, the more preference Google gives to our ad. If we bid top dollar for the click through, AND we have enough budget, we can essentially shut out our competition on the keywords or geographical searches most important to our company. However, we chose to set a daily budget (so that we could control these marketing costs) and are willing to pay $8 per click.
Over time, our company realized that one in every 20 website visitors buy our product. By analyzing the website visitor traffic, we found that those who buy follow a similar three step pattern. They show up on our homepage, check out the product list page then buy. When we researched our customer files, we also discovered that the lifetime value of one customer is $1000 in profit.
Using all this information, we calculated that we could pay up to $49 per click and still be profitable.
What can marketers learn from search engine marketing?
There are at least three things we can learn from search engine marketing.
1. Measure your costs
There is a cost to acquiring customers through any form of marketing. We can use the method above as a model to calculate the cost of acquiring customers offline. There are lots of ways to refine this formula to make it more meaningful to your business but this will give you a rough start. Add up all your marketing costs in 2012. Divide this number by the number of new customers your business had in 2012. This will give you the cost/new customer. Subtract the cost/new customer number from the lifetime value of a single customer, and you’ll get an idea of how much you can afford to spend on acquiring a single customer.
How much to spend on customer acquisition? = Lifetime value of a customer – (total marketing costs for 2012 / # new customers in 2012)
2. Be more efficient
Using the example above, lets say you started a popcorn seasoning company to compete with mine. After studying my website and thinking about the way my web team designed our customer experience, you were able to cut down your conversion funnel from 3 steps to 2. By convert prospects more efficiently, you win in two ways.
First, you can afford to pay more to acquire new customers. Your site convert 1 of every 5 visitors to a sale. My site converts one of every 20 customers to a sale. This means you you can afford to pay up to $200 per click, out-bid my adwords campaign everytime, and still be profitable.
Secondly, you win by adding to the bottom line. Your conversion funnel takes two steps (instead of the three that it takes me), so your cost to convert a customer is $32. Assuming our profit margins over the lifetime of a customer are the same, and my cost to acquire a a customer is $160, you get to add $128 to your profit.
3. Build brand preference
The equity of your brand can have a big effect on the number of people who intend to buy from you. A brand’s equity also has an effect on the premium customers are willing to pay for a product or service. If you’re inclined to read some more on the correlation between brand equity and purchase intent, have a go at this paper.
A customers perception of your brand is built on their experience with your popcorn seasoning and comparing that with your promise. If their experience consistently exceeds the expectations set by your promise, you’ll have earned equity for your brand and the customers preference. If you’re company is able to create and communicate more value to customers than I can, you win. You will be able to get more click throughs, gain more preference within the market and be able to charge a premium for your product.
Are there any other lessons traditional marketers can learn from SEM?