Many of you have probably heard of Value Per Visitor (VPV). However, in my experience, very few business owners take the time to understand it’s full importance and actually do the hard numbers for their business. Hopefully, after you read this article, you will not be one of those people.
Although it is often referred to as a “Lifetime” value of a client, more often it is much shorter, and depending on what stage of growth your business is in you may want to calculate it over different time frames. For example, if you are a startup that is strapped for cash, you might want to start by calculating value over three months. If you are a larger corporation that has an ongoing advertising budget, you might project it over a matter of years instead. Why the difference?
Value Per Visitor is most often used to calculate the amount that you can spend to acquire a visitor to your site. It is a simple equation:
Profits / Visitors (during a fixed period of time)
Let me demonstrate by example.
Example 1: Brand New Business
You are a brand new business, and you have one product to sell, which has a price of $29.95. You don’t have any back end products, and you don’t run other people’s advertising on your site or to your email list. If you are going to take a three month snapshot, you need to take it after the first three months of business – months 3 to 6 let’s say. In those three months you get 1200 people per month visiting your site. Of those visitors, you sell 10 products per month. In this imaginary scenario, you don’t have any overhead costs – you are selling an ebook out of your spare bedroom working one hour at night.
So, 3600 visitors and 30 products at $29.95 ($898.50) puts your value per visitor at just about a quarter ($.249).
Example 2: Established Small Business
You have developed your product line, and have a lead product that sells for $19.00. It costs you $2 to manufacture. You also have an upgrade for $59.95 that costs $9.95 to manufacture, and a high end consultation fee of $497 per hour. In the last year your site has gotten 60,000 unique visitors. You have a 3% conversion rate to your lead product and sell a bit more than 100 a month (1800 over the last year) Of those people, 40% move on to purchase the upgrade, and an additional 10% of those buy an hour of consulting.
So, you have:
1800 Sales of Your Lead Product x $17 Profit: $30,600
720 Sales of Your Upgrade x $50 Profit: $36,000
72 Hours of Consulting x $497 Profit: $35,784
Total Profit (Before Overhead): $102,384
Let’s say you also have staff costs of $3500 per month, and an office space rented out at $700 per month. That costs you $50,400 and is essential to the survival of your business, so your actaul take home profits for the year are $51,984.
This puts your VPV for that year at $.86.
I’m actually not going to run the corporate model of this because that usually requires huge profit and loss spreadsheets on top of knowing your site’s analytics, but if you are in a big corporation you should get the idea – profits divided by visitors.
So, Why Is This VPV So Important?
Well, your VPV is what lets you dominate your market, at least in paid advertising. By knowing approximately how much a visitor is worth, you know how much you can spent to acquire a new visitor and still make a profit. If you are a fairly low volume business, and your average VPV is $4, you probably don’t want to spend more than $2 on a visitor to make sure your business makes what it needs. If you are a higher volume business and get tens or hundreds of thousands of visitors a day to your site, you might find that you can afford to make only $.05 on a visitor and still bring in a good profit.
And where that $.05 comes from could be that you have a $.99 VPV and spend $.94 obtaining a new visitor, or it could be that you have a $10 VPV and spend $9.95 to get a visitor to your site.
By knowing your VPV you are less likely to lose money on advertising, because you can calculate up front what you are likely to make. In Pay Per Click (PPC) this can be fairly exact as you pay per visitor. In other forms of advertising you need to have a good idea what your click through rates (for on site advertising), or open rates / click through rates (for email advertising) are.
You can also gain the competitive edge. Since you know very clearly where your upper limit is, you can edge up to it in order to get better ad placements than the competitors, which might drive up your traffic and volume significantly. And although it seems like you make less if you pay more for advertising, let’s assume that you are advertising in PPC. At $.05 per click you get 40 visitors a day. At $.25 per click you get 200 visitors a day. At $.50 per click you get 1,000 visitors per day. At $1.00 per click you get 3,000 visitors per day. Your value per visitor is $1.15.
$.05 x 40 = $2 Cost
40 x $1.15 = $46 Income
Net Profits: $44
$.25 x 200 = $50 Cost
200 x $1.15 = $230 Income
Net Profits: $180
$.50 x 1,000 = $500 Cost
1,000 x $1.15 = $1150 Income
Net Profits: $650
$1.00 x 3,000 = $3,000 Cost
3,000 x $1.15 = $3,450 Income
Net Profits: $450
So, knowing your value per visitor has now let you determine the optimal amount to spend on PPC – about $.50 per click gives you the highest return on investment. Without knowing, many business make the mistake of either being too conservative and not making the most out of the advertising they are paying for, or assuming that the more you spend the more you’ll make and losing money in the long term.
The Game You Need To Play
The real game that you need to play with this knowledge is “How Can I Get My VPV As High As Possible?”
The higher your value per visitor, the more you can pay for advertising. The more you can pay for advertising, the more likely you are to get the premium spots with the hightest traffic. By having the highest VPV you can dominate your market in the paid advertising world.
How do you drive up your VPV?
1. Develop Your Back End: The more products you have to sell to your visitors, the more they will be worth. A business that has a well thought out product funnel will always perform better than a business that just wings it. You should have clear paths from the first point of contact a visitor has with your company all the way through the highest price product you have to sell them, and then maybe even back to downsells or other incremental profit generators like on-site or in-newsletter advertising.
2. Optimize Your Conversion Rates At Every Step: If a visitor comes to your site, signs up to download a white paper, requests a call with a representative, and then is sent back to the site to order, you need to make sure that every step of the process is the best it can be. Assuming your end product is a high end piece of software you sell at $997 (and ignoring the back end possibilities for now)…
1000 people hit your site
15% (150) download your white paper
10% (15) request a sales call
50% (7) come back to your site to order the product.
1000 people hit your site
30% (300) download your white paper
20% (60) request a sales call
90% (54) order the product.
So, with these small incremental changes in the conversion rates across every step of the process you have almost multiplied your VPV by 10! And it may seem extreme to have a jump from 50% to 90% in the last step, but I’ve seen it happen – in this case instead of sending people back to the site to order, the order was taken on the phone, and with a more effective script, closing almost everyone who took the initiative to call.
Get Even More Granular
It should be very clear to you now why it is important to know your VPV. A final thought: to be accurate you should really calculate your VPV by traffic source. Different traffic sources convert at different rates. So, your PPC traffic from direct search might convert higher than PPC traffic from display ads. Your CPM banner ads might do better on news sites than on comedy sites. Your email advertising might perform better to some lists than others. Having an average VPV lets you take an educated guess when starting out with a new traffic source, but getting your VPV by traffic source allows you to completely optimize your advertising across the board.
Now, sit down and calculate! This little number could be the key to your future success or failure in business.