You’ve done your research and created buyer personas — now what? Columnist Jacob Baadsgaard explains how to place financial value on your personas in order to determine your marketing budget.
If you have a love/hate relationship with buyer personas, you’re not alone. According to a 2016 survey by Customer Think, 72 percent of marketers are familiar with these personas, and 60 percent have created their first persona within the last two years.
Unfortunately, lots of search marketers are confused about how to use their personas or are frustrated that their personas are not producing the hoped-for results.
For this reason, buyer personas have been criticized as an exercise which, although well-intentioned, can distract marketers from actually producing meaningful deliverables.
So, let’s get practical.
A typical buyer persona contains a lot of “touchy-feely” stuff: the interests, values, behaviors and pain points that motivate a particular market niche, all wrapped up in a cutesy name and a stock photo picture to match. That’s nice, but it often isn’t all that useful when it comes to marketing metrics like cost per click (CPC) or return on investment (ROI).
However, if you add a few cold, hard financial facts to a buyer persona, you can instantly start to use it to refine your search marketing budget. Now, I know, this isn’t a typical way to use personas, but it’s a great way to start using them to actually change your business.
With that in mind, let’s take a look at three financial aspects of buyer personas and how to use them to build a better budget:
1. Lifetime value
Each buyer persona you target has different goals, behaviors, background… and monetary value for your business.
For example, if you sell bicycle parts, one target audience might be mechanically-minded kids who don’t want to pay for repairs at a shop. You should expect small purchases from this group.
If you’re also targeting people who restore vintage bicycles, you can expect that they will be willing to pay more to get the quality they want. If you target bike shops, however, you might sell at a lower per-product cost but more than make up the difference in volume.
To make things even more complicated, the value of a customer often includes more than a single purchase. This is where lifetime value (LTV) comes into play. Lifetime value includes all of the revenue produced by a single customer over the lifetime of that customer.
For example, a bike store might buy a box of chains for $50, but if they keep buying a box every month for five years, their LTV is actually $3,000!
When you add customer worth to your buyer personas, you’ll be selling them short if you neglect LTV. After all, a customer who buys a Ferrari on a $0 down payment promotion is worth a lot more than $0!
2. Cost per acquisition
Knowing how much your buyer personas are worth is important because the monetary value of a persona directly influences how much you’re willing to spend to get them.
Think about it this way: In order to recruit the nation’s best high school quarterback, colleges are willing to pay for airplane flights, campus tours, fancy dinners and scholarships. For a no-name linebacker… not so much.
In the business realm, cost-per-acquisition (CPA) is one of the easiest ways to measure the success of your paid search campaigns. The question, then, is: “What is a good CPA for my persona?”
Now, your knee-jerk answer to this question might be, “Anything less than the persona’s LTV.” However, while this makes sense on a superficial level, you have to remember that marketing is not your only expense. When you take the fixed and variable costs of your business into account, you can spend $2 on marketing, make a $4 sale, and still be losing money.
In my experience, to make a reasonable profit with a buyer persona, the LTV for a given persona needs to be at least four or five times larger than their CPA. If it costs more than 25 percent of your LTV to close a buyer persona, something in your marketing needs to change.
3. Buyer scarcity
The last important financial aspect of each buyer persona is how many members of that persona are actually up for grabs.
You may identify a buyer persona that is very profitable, but if there are only a few of those buyers in the nation, pouring more and more money into marketing won’t make more of them appear. As the Wall Street saying goes: “Trees don’t grow to the sky.”
If you are an established business, you can figure out how many customers you’re getting from each of your target groups by examining data from previous years. However, if you’re a startup, you may need to rely more on area demographics, industry averages and educated guesses, similar to how you calculate your market size and market share.
Knowing how many potential customers you have within each persona will help you decide how much you can spend marketing to them and still expect a return on your investment.
Putting it all together
Now, let’s put all of this together and see how you can use the financial data associated with each buyer persona to plan an effective search marketing budget for 2017.
Imagine a company called “Green Room Lights” that makes and sells energy-efficient light bulbs. Green Room Lights has recently researched their customer base and come up with three distinct buyer personas (complete with stock photo pictures!):
Jenny is the head of a single household. She cares about the environment and has decided to make her house more eco-friendly. Jenny is searching for an Energy Star qualifying bulb to replace her current incandescent bulbs.
Mark is a contractor who builds small-to-medium-sized apartment complexes. He advertises to his clients that he uses energy-efficient construction methods that will save them money in the long run. Mark is looking for the most cost-effective way to deliver on this promise.
Nicki is a buyer at a large chain hardware/home improvement store. As incandescent bulb sales have begun to taper, she has decided to explore more energy-efficient replacements to stock. She wants a product she can sell at a reasonable profit margin that will attract buyers like Jenny.
Green Room Lights has a goal of getting $4 million in gross sales through $1 million of marketing. It wants to know how much to budget for marketing to each of these three groups to accomplish this goal. So, Green Room’s clever marketing director starts looking at the financial aspects of the company’s buyer personas.
Lifetime Value
First, let’s take a look at each persona’s LTV:
Like the average American, Jenny’s household has 45 light bulbs. Whether all at once or gradually, Jenny intends to replace them all. She buys a more expensive bulb ($10 each) because an eco-friendly product is more important to her than price. Because the bulbs will last for years, she is not expected to make any more purchases in the future.
Mark is looking for a bulk order price of $5 per bulb. He installs 1,200 bulbs in each apartment complex and builds two apartment complexes per year.
Nicki wants an even lower wholesale price of $4 per bulb. She stocks 2,200 stores with 200 bulbs each over the course of a calendar year.
Cost per acquisition
Now, let’s take a look at what Green Room Lights can afford to spend on each type of customer:
Because Jenny buys her bulbs at full price, Green Room Lights will make a profit at $1 of sales for every 25 cents of marketing.
Mark gets his light bulbs at a price with a smaller profit margin for Green Room Lights, so their marketing needs to be more efficient for him (20 cents of marketing per dollar of sales).
Narrow profit margins mean that marketing to Nicki needs to be the most efficient of all, producing $1 of LTV for every 18 cents of marketing.
Buyer availability
Lastly, let’s take a look at Green Light Room’s customer base (CB):
Of the 124.6 million households in the US, 29 percent use no incandescent bulbs, making the “Jenny” customers an almost inexhaustible resource.
There are 477,950 contractors in the US, but let’s assume only 2 percent of these, like Mark, build energy-efficient apartment complexes. Based on last year’s numbers, Green Room Lights has also been getting 0.5 percent of this market and would like to up that to 1 percent.
In a given year, there are only one or two Nickis up for grabs. In fact, Green Room Lights has only made one “Nicki” sale in the past and would feel lucky to get even one more, but they will do whatever it takes to lock a Nicki down in 2017.
Planning the search marketing budget
Now that Green Light’s marketing director has this information, it should be simple to plan out the budget. “Mark” and “Nicki” customers are more valuable to the company, so they will try to get every last sale possible, and any leftover money will be spent on “Jenny” customers:
This distribution of funds provides direction and clear goals for each campaign and ensures that each type of customer is receiving an appropriate level of attention.
Make sense?
By the way, figuring out the optimum arrangement of buyer personas can be challenging, so to make things easier, I’ve actually put together a free marketing budget calculator you can use (click here to access the calculator). All you have to do is drop in your CPA and LTV for each buyer persona and identify how many sales you expect on a monthly basis from each persona, and the calculator will give you your expected revenue and marketing budget. Give it a try!
Conclusion
So, if you’re part of the 60 percent of marketers who’ve recently built their buyer personas and are wondering “what now?,” try fleshing your personas out with a few dollars and cents. Trust me, you’ll be on your way to building a better budget.
An approach like this will kick-start future targeting efforts by making sure your resources are put in the right places and are properly balanced between each customer group.
As the end of the year approaches, budgeting is increasingly relevant. I’d love to hear your feedback on how you use these principles in your 2017 budget and how it’s changed your marketing approach.
[Article on Search Engine Land.]
Some opinions expressed in this article may be those of a guest author and not necessarily Marketing Land. Staff authors are listed here.
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