Mapping your marketing funnel economics - Google Analytics Tutorial

- [Instructor] To know what to track, you have to understand the stages of your marketing funnel. Let's sketch out an example to show you why. It's important to understand what stages a person goes through in the process of becoming a customer and how many drop off at each stage. This is an example marketing funnel. From all website visitors, some people search and get to the search results pages. Some of those people then continue on to the product pages, some of those add to cart and then only some of those people who get to add to cart actually purchase. It makes a funnel shape because at each stage some people drop off. Once you've mapped out your marketing funnel, you want to calculate the conversion rates between each stage. So for example, from stage A, visits website where we have 10 000 people, 80% of those get to stage B which is, searches for product. So we have 8 000 people at that stage. In order to work out the conversion rate, we just need to take the 8 000 and divide by 10 000. That gives us 80%. You can do the same thing for any stage of the funnel, so for example, the conversion rate from visits website to purchases product is 600, which is how many people have purchased the product divided by 10 000, which is how many people visited the website. So that would be 0.06, or 6%. Once you have your conversion rates, the next thing to look at is event values. If you know how much a purchase is worth to you, in this case we've selected $100, then you can work backwards through the conversion rates to work out how much event is worth. So for example, going from stage E, which is purchases product which we know is worth $100, we can calculate the value of stage D, clicks on add to cart. To figure this out, we multiply $100 times the conversion rate, in this case it's 60%. So, $100 times 0.6 would be $60 which is how much we've assigned to stage D. To work out how much a website visitor is worth, we can do the same thing. We know the conversion rate for website visitors is 6% so it would be $100 times 0.06, which is $6. This isn't the full story, there is additional value to a conversion aside from the immediate value that you get from the purchase. I call this, forecast value. There are two major components of forecast value. One is retention, which is a certain percentage of people will come back and buy again. And then the other is referral, which means that some people will refer a friend. If we assume that 12% of people repeated purchase, that would be an additional $12 to every purchase you make is worth, because that $12 is going to come back to you in the future. Same thing for referral. If 24% of people refer a friend, every time you get a purchase then that's an additional $24 in your pocket that you can bank on in the future. So in this case, if we added those two together the forecast value would be $36. Add that to the average order value of $100, then the lifetime value of our customers is $136. Now you can get more complex with this, for example, incorporating a discount rate because a dollar made today is worth than a dollar made in the future, or a pay back period because with cashflow you might not be able to wait for that full $36 to come through before you need to make that money. Once we have our forecast value, we can work backwards to figure out the event values again. It's the same formula, in this case it's $136 instead of $100 that we know a purchase is worth. So if we take $136 times 0.06, which is the conversion rate from website visitor to purchase, now we get $8.16 instead of $6. So on average, every website visitor should be worth about $8.16 to us. The final thing to take into account is segments. So for example, users who come through different marketing channels will be worth different amounts to us. People who search for our brand term, already know everything about us and potentially can be worth a lot more to us. In this case, we've assigned their value at $16.32 because they have a 12% conversion rate, which is double the average. Organic search is about average for us, 6% so those users are worth $8.16. However, our paid ads, our PPC, Google ads that's worth about $6.80 to us. Referral has a 4% conversion rate so they're worth about $5.44. Once you've mapped out your marketing funnel, you will be better prepared for effectively measuring the performance of your business.