About Pay-per-Click and Customer Acquisition Cost

We have seen previously how Google is making its money through AdWords and AdSense programs which basically follow a pay-per-click model.

One can expand this for pay-per-lead (the users must contact the store or sign up to something) and pay-per-sale. This is also known as a cost-per-action model (CPA). And besides google it is used by spam and junk mail.

Obviously, if I am a business, I am only interested on the new customer acquisition cost. (If I am a good business I can retain parts of my customers, if I am a bad business I only need to always get new and different customers - like some drugs or weight-loss programs that work for specific types of persons but are advertised as working for everybody)

And the new customer acquisition cost should be less than what a seller is paid to sell the same product. Which usually ranges between 10-40% of the product price, all depending on your profit margin on that product.

This is where the problem comes in.

Say i sell online $20 backpacks.
I make a profit of $10 on every backpack sold.
To use AdWords it would cost me $0.5 per click.
So I need to make a sale of at least every 10 visits in order to gain $5 per backpack.

Well the customer acquisition costs for online stores is still in the $teens.

So the best model for this type of sale is still eBay.
An interesting incentive model is proposed by MyStoreRewards where sellers can send buyers money credits in order to make another sale. This is a good combination since the user gets a rebate and the seller saves on the new customer acquisition cost.

In any case, besides putting money in the ads the seller should have:

- customers willing to buy (ebay)
- good trust system (reviews, etc)
- a good incentive system
- an extremely fast and user-friendly website
- great products - that's another story

-- Octavian Mihai