The symbol of a funnel represents the many phases of a customer’s purchase process (from before they are even familiar with the brand to when they happily recommend it to others).
The funnel or bottleneck imagery illuminates that in each stage of the buying process the number of users will decrease leading to a smaller portion of loyal customers at the apex of the inverted pyramid.
There are many different funnel approaches with different strategies for each phase from which companies should carefully select based on their goals.
Generally these can be divided into three steps:
TOFU or Top of the funnel
This is the first step of the conversion funnel when users are introduced to the brand or product. The goal of this phase is to attract as many users as possible to the website, blog, or application.
This phase has two fundamental metrics:
CPM: “Cost Per Thousand”. The number of published ads (by thousands) determines the cost in this strategy. That is to say if a company purchases ads at a CPM of $6 per thousand publications the company will pay $6 for each 1000 times their ad appears.
CPC: “Cost Per Click”. Payment in this model is determined by the number of times users click on the posted advertisement. If someone sees the ad while browsing but does not interact with it, the company does not pay for that ad. This payment model is primarily used to attract traffic to a landing page or website.
MOFU or Middle of the funnel
The second step of the funnel is known as MOFU. In this phase the audience knows of the brand, but needs more information before committing to a purchase. The key to this phase is to increase interest in the product and turn interested users into potential clients. It is important to remember that the user may still be considering various competitors at this stage.
The most important metric to consider at this stage is the CPL (Cost Per Lead). In this cost model, the advertiser pays a fixed amount each time a user performs a predetermined action, such as subscribing to a newsletter, filling out a form, downloading an ebook, etc.
CPL = Marketing cost / Number of leads
BOFU or Bottom of the funnel
Bottom of the funnel: This is the final step of the funnel, after the user has considered all of their options and decided that our solution/product is the best one. This is the phase when users go from leads to clients.
To close, companies usually offer discounts to leads at this phase to increase the perceived value of their products and secure the purchase. This is the most critical phase and there are three crucial metrics to consider:
Cost per Acquisition: This is the cost that the company pays for each sale made. This is a highly used payment strategy in ecommerce as it is linked to the cost per transaction.
CPA = Total cost of the ad campaign / Number of sales
For example, if a campaign has an investment cost of $2,000 for 200 sales then the CPA would be $10.
CPA = $2000/200 = $10
Another valuable metric used in this phase is the CAC or Customer Acquisition Cost, which is the required investment for each new customer. This metric is usually used in recurring models (such as software and telephone companies) looking to calculate the additional cost per customer.
CAC = Number of newly acquired customer / Marketing costs
The third and final metric that this article will examine is the CLTV, the average lifetime value of a client to the company. This is seen as a predictive measure of how beneficial each new client is to the company in the long run.
The formula for CLTV :
CLTV= ARPU * Lifetime * Gross Margin
Where:
- ARPU: Average revenue per user
- Lifetime: The period of time that the client will remain with the company.
- Gross Margin
So if for example Spotify wants to calculate the CLTV, it would be more or less like this:
CLTV: $6.99 x 48 months x 0.30% : $100
That means that the customer will contribute $100 to Spotify in the time they are subscribers.
