Web Marketing 101: The Fundamentals

We talk to tens of thousands of customers every week at Homestead, and one consistent theme can be heard above all others from all types of businesses in these conversations.  HELP ME MARKET MY BUSINESS!  Now, some of these cries for help are from nascent companies yet to earn their first dollar.  But many are from established businesses already doing hundreds of thousands if not millions of dollars of revenue, looking to grow.  So, I thought I'd start a series of posts on "online marketing 101" which will at least give you my perspective on some global "truths" about trying to build or extend your business online.

I always start any conversation with a small business looking to market online by asking some very basic questions about their business.   

1. What need are your fulfilling? Every business exists to fulfill some specific need.  This is also referred to as your "value proposition."  What exact need are you trying to solve for?  A quick, healthy meal at a reasonable price?  Home pick-up dry cleaning?  Camera supplies for pro-am photographers at the best price around?  Remember that this is different than competitive advantage.  That comes later.  Before worrying about finding a niche that you think you can compete in, figure out exactly WHAT YOU DO. 
2. Whose need are you fulfilling?  (i.e. who's your customer?)  I mean, specifically, describe the set of customers who have the need that you are fulfilling in number one.  Demographic (e.g. single working mothers), location (e.g. within a 2-mile radius of Wesley hospital in Wichita, Kansas), skill set (e.g. professional woodworkers), income level (e.g. have several thousand dollars of disposable monthly income), specific habits (e.g. commute over 1 hour per day).  If you can't describe this set of people specifically, you have a problem.
3. What's your cost of customer acquisition (CPA)?  How much do you currently spend to acquire a new customer?  How much higher could you afford to go?  I'm always amazed at how few businesses do the math to figure out what they are currently spending to acquire new customers.  The simple math here is to to take all the dollars you spend in marketing per month (exclude marketing that you do to generate repeat business), and divide it by all the NEW customers you acquire each month.  A law firm might spend $500 per month on yellow page advertising, $15000 on advertising in journals, and $1750 on sponsoring the local public radio station.  If they acquire 17 new clients in a month, that would be $17,250 / 17 = $1014 CPA (Cost Per Acquisition).  If a hair salon spends $13,200 on their monthly advertising, and gets 210 new customers in a month, then their CPA would be $13,200 / 210 = $62.85.  Different business models have dramatically different acquisition costs, but you need to know what yours is.
4. What's the lifetime value of your customer (LTV)?  Once you understand how much you are currently spending to acquire a customer, it begs the question of how much you should be spending.  To figure that out, you need to know how much your customers are worth to you.  This is called the lifetime value of your customer.  In the above examples for a law firm and a hair salon, you can image that these numbers are quite different.  An average law client might spend $15,000 with you on average in their first case.  Depending on what kind of law you are practicing, these clients may become habitual customers (like in estate law, or dare I say divorce law?), in which case you would also try to estimate what percentage of the clients came back to you and how much they spent on their subsequent visits.  Not that I'm advocating this as a good thing, but let's say that a client who gets divorced may be likely to come back to you 50% of the time for pre-nuptial legal advice and 25% of the time for a subsequent divorce.  That would increase your lifetime value by $11,250, to $26,250.  Now, spending $1014 on CPA sounds a lot cheaper, doesn't it?  In the hair salon example, it's ALL about repeat customers.  So there let's say your average first time bill is $35 and 25% of the time they buy products from you, at an average of $20.  On top of that, 25% of the time the customer becomes a regular customer, coming back an average of 6 times per year, but every year half of your regular customers switch.  Starting to sound like one of those SAT word problems?  Maybe, but it could be the key to solving your business growth problems.  In the above example, the salon's first time value (FTV) is $35 + $5 = $40, plus another $60 in the first year from repeat business (a quarter of your customers pay you $240 ($40 * 6), which is an average of $60).  The next year half of them pay you again, which is another $30, the next year it's $15, etc.  We'll call it about $100 of additional "repeat business" revenue over the lifetime of all your customers, which brings the LTV to $140.
5. Are you maximizing the lifetime profit of your customers?  Let's return to the salon example, which we said had a $62.85 CPA and a $140 LTV.  Once you subtract out your costs of paying your hairdressers, paying for the products, running your shop, etc., chances are you don't have much left for profit.  You have a classic CPA/LTV imbalance.  There are only three ways to fix the profitability (and therefore viability) of this business:
   1. Decrease the cost of your goods/services (this is called your COGS or "cost of goods served"). 
   2. Decrease your cost of marketing (CPA). 
   3. Increase the lifetime value (LTV) of your customer. 

Most businesses focus on cutting their COGS or CPA, but both of those are very hard to do unless you are increasing the volume of your business at the same time.  Spending time on these issues until you have a lot of growth usually results in a dying business.  People say that they "just can't afford to stay in business" or "costs are just too high."  But somehow the hair-cutter down the street is snip-snipping away and raking it in.  Dollars to donuts it's because they've got a better LTV than you.  Instead of trying to cut your CPA or COGS, instead focus on ways to increase your LTV.  Usually the secret to this is in increasing the quality of your customer experience, and the way you encourage repeat business.  In the salon example, if you could increase your "repeat" percentage from 25% to 50%, your LTV would increase from $140 to $250!  One final point, is to make sure that the products and services you are selling to your repeat customers are you highest-margin (or lowest COGS) products or services.  In the example of the salon, it could be that you make more profit on selling hair care products (let's say $20 of profit per visit) versus the actual haircutting (after paying your stylist, maybe you only make $10).  We'll get more into maximizing profit and managing your costs in a later post.

These are the five basic questions I ask before starting to advise businesses on growth strategies. If you want to "play along" then spend some time answering these questions before I post Web Marketing 102: Online Lead Generation.  Understand your business's CPA, LTV and COGS, and you're half way to building a thriving business (BTW, you're also half way to your MBA if you can spout these acronyms!).

Sorry for the long post, but I'm trying to make up for my silence over the past month!

--jsk

Comments

[Art]

Hi, just like to comment on your recent blog re: Marketing and Money. You're on target! I believe 90 % of people in the USA don't know these principles and that is why they have a problem. Also, it is interesting that you took the time to write this out in layman's terms, and the reason I say this, is because most executives don't really want to give solid examples of doing things the right way—they usually beat around the bussh with something like "5 steps to success". Thanks a lot for your effort in educating the small folks out there, they really needs this info to move forward.

Sincerely,

Art

[Mel]

Hello, I want you to know that I think your SiteBuilder software is sensational, however, what is going on with your customer service? Every time I email them to ask how to put a (real, interactive) blog on my domain, they don't email me back anymore. Once, they asked for my CNAME info. I quoted Google with them, where Google is collecting CNAME instructions for all webhosting companies, but so far Homestead has not offered their CNAME instructions to Google, in order to make it easy for us to get a blog.

I think that you need to start communicating and answering your good customers support emails in terms they can understand and tell us how to map a blog on our Homestead domain. Thank you for taking the time to read my comments.

[Justin]

Mel,
The easiest way to put a blog on your Homestead website is to actual host it with blogger or typepad or wordpress and then use our Blog Element to embed it into your site (it uses the RSS feed). This way you can take advantage of the easy Homestead publishing environment for the surrounding context of your blog but still use the blogging software for what it does well: chronological posting, comments, trackbacks, etc.

Hope that helps.
Justin

[Mel]

I don't want an element blog. And why do my emails now BOUNCE to customersupport@homestead.com and support@homestead.com and hostsupport@homestead.com?

[Mike]

(This message is for Justin.)
I had to call and cancel my account with Homestead due to unacceptable customer and tech support. I also called my domain registrar and had them cancel the domain pointing to the trial site I had designed for the non-profit organization of which I am the webmaster. After repeated letters to Perry at support and not receiving a reply I had no choice. I found a hosting service that provides 24/7 phone/chat support.
I caught a lot of heat from our organization due to the fact that the website was down and no-one could access it because the Homestead domain server did not recognize, or see, the domain pointed to it. I was requested by the registrar to notify Homestead of the problem which I did immediately and waited 3 days for a reply but received none regarding the problem with your server.
Justin, I sincerely appreciate your being involved with non-profits just as I am and therefore I know that you will understand the importance of keeping the organizations website active at all times with minimal downtime.
I also know that you are not aware of the situation I just went through but thought you should for your benefit.
Because of the ease of use of your great software I was prepared to recommend Homestead to the students of our education center and help them build their sites on Homestead. Of course this has changed now. Best of Luck to you and your organization.

[Justin]

Mel,
The proper email address to use is support@homesteadsupport.com--or log into your homestead account and click on "Help" to see the help form which you can fill out. This is actually the best way to contact us, as we are easily able to identify your account that way.

Mike, I'm sorry to hear about your issues with your domain transfer and will contact you offline to try and resolve it.

Folks, please try to keep the comments on the blog relevant to the specific post. You can always email me at ceo@homestead.com with other questions, comments or concerns.

Thanks!
Justin

[Erna Buber-de Villiers]

Dear Mel

It is now 01:30 am here in South Africa, and before I finally go to bed, I just need to tell you how much I LOVE Homestead!

I have just completed a big overhaul of the site I made for my husband: http://www.zakbenjamin.com (with Homestead sitebuilder, of course!) and I am so thrilled with my work. If you have a look at my billing history, you'll see that I am one of your oldest clients. When I started with Homestead, I was barely computer-literate, and the help and encouragement I received from Homestead turned me into a confident web-designer.

Your company has provided me with hours of pleasure. I have made new friends all over the world. Long-lost friends find me by Googling my name!

I just needed to get that off my chest. Thankyou!

Erna

[Erna Buber-de Villiers]

Sorry, I called you Mel, Justin, and I did not keep my comment relevant to the specific post. Bad, bad girl! Hope it's okay, this once, and I promise not to do it again!

Erna

[www.greatmarketingstuff.com/blog]

I have gone through your site its good and excellent. and i found many interesting things to read and to gathered information about it, so here i am linking u relevant site to gain more details.

http://www.greatmarketingstuff.com/blog

[Luke]

Couldn't agree more about the importance of knowing Cost per Acquisition and Lifetime Value. I especially struggled with calculating CPA. Recently I started using this service www.adtrackit.com and it has really helped. It's simple and I get real numbers now. It's really helping me spend my advertising dollars on the stuff that's really working without needing a bunch of fancy stuff to track results.

[Kate]

Have just seen this blog for the first time and it is great. I am sorry Mel and Mike had problems; it has been a while since I have needed customer service but when I did, it was primo.

Regarding the ideas/innovations/marketing via websites... of course we need websites! And I have persuaded any number of people to subscribe to Homestead, in a couple of cases getting them hooked on you folks by creating a web (home)page for them on my account and transferring it over when they subscribe. (I used a different site builder before yours and when I discovered you... lol ... you were still free back then, and not just for 30 days!... there was just no comparison!)

I am impressed with how Homestead keeps current with the surge of technical advances and needs of website-building. But, still, the marketing aspect of our businesses is critical, and, since my business is strictly an on-site enterprise (as most here may be), its greatest challenge is to spur folks to recognize their need for what I offer.

And that is tough!

More... it is essential... for them, even more than for myself.

Published material today is appalling in the abysmal uncorrected writing glitches that proliferate in even the "best sellers." I am convinced that copy editors simply do not exist any more.

Communication skills are at the lowest ebb ever in my observation, and it is getting worse. I'll save the reasons behind that for a different forum... :)

Sooooo, Justin... that very narrow skill... that of persuading people of their need for such services as mine which might be a bit ego-threatening for them to acknowledge ... for improved writing in any work they want published ... books, ads, announcements, and shoot, blogs LOL ... (and creating the keywords to reach them) is something I would really like your thinking on.

[Lee Davies]

A very well authored document.

Thank you.

[Ahmed Roushdy]

Justin,

I think we are ready for Web Marketing 102: Online Lead Generation :)

You should make up for the 4 weeks of vacation & send it before you shave :P

Ahmed

[Nick Diemel]

Hi,

In the near future on Homestead SiteBuilder, will it be possible to view a Frame of another website inside of my website page? http://www.rebend.com

Nick Diemel

[Mike Dabo]

Hi, Justin:

My first time visiting your website, and I'm impressed.

For a computer novice (all I can do is word processing) who would like to get a website from you, what do you suggest?

[Justin]

Mike,
Just give our free 30-day trial a shot. All you do is click on the "free trial" button at www.homestead.com and follow the instructions. You should get a call from one of our internet specialists who will answer any questions you have, or you can call them at (800) 710-1998. Also, as a novice, I might suggest that you consider using one of our Web Experts to help you build your site. Their fees are very reasonable and they will really help you get started on the right foot, as well as make your site look great.

Let me know how it goes!
--jsk

[Carol]

I have been a customer with Homestead since it
started with a website called "Craftit" out of
San Diego. I have another great website now
thecountrypetresort.com. living in Missouri.
I am a loyal customer because it works! That
says it all. I have gotten so many great comments on my website, Makes me look smart hahaha Great job Justin and bravo to your customer service department.