Summary :How to Acquire

Customers on the Web

Donna L. Hoffman
Thomas P. Novak

Piyusha Bharti
What is Customer acquisition?
• Process of bringing new customers or clients to your business.
• Goal of this process is to create a systematic, sustainable acquisition
strategy that can evolve with new trends and changes.
• Customer acquisition cost is the cost associated with bringing a new
customer or client to your business, such as marketing costs, events,
and advertising.
• Issue: For most of the companies average customer acquisition cost is
higher than the average lifetime value of their customers.
CDnow – the music retailer
• Highly popular site founded in 1994 by Jason Olim and his twin
brother Matthew in Pennsylvania.
• It was the fourth most-visited music shopping site later in 1999, with
700,000 visitors and 5 million page views every day.
• CDnow is currently the most powerful on-line music brand
surpassing Amazon.com in total on-line buyers with more than 1
million a day.
• One of the first company to develop a multifaceted, integrated
customer acquisition strategy with understanding of the economics of
an on-line business.
Cdnow Customer acquisition strategies
• Banner Ads
• Buyweb
• Cosmic Music Network
• Mass Media Ads
• Word of Mouth, Free Links, PR
Customer acquisition through Banner ads
• Banner ads on web sites similar to a 30-second television spot or a
print ad in a magazine, which base their prices on the number of
people who would see an ad called as “exposure-based cost-per-
thousand pricing.”
• Though Web site charges $10,000 a month for a banner ad but there
was No guarantee on click-throughs and impressions.
• Assuming conversion rate 1%, the cost to acquire the new customer
became $700 which was way more than the lifetime value of each
customer.
Moving to Affiliate Marketing: BuyWeb
• Partnership program with Geffen Records. in 1994.
• Geffen put links on its site to carry fans directly to the Web pages
devoted to Geffen artists at CDnow’s site.
• CDnow started a program, BuyWeb—affiliate program that motivated
other Web sites to put up links to its site.
• Revenue sharing arrangement: When a customer clicked through an
affiliate’s Web site to the CDnow Web site and actually bought a CD,
CDnow gave 3% of the revenue from the sale back to the affiliate thus
turning partners to virtual commissioned sales force.
Cosmic Music Network
• The BuyWeb program evolved into “Cosmic Credit” in 1997 to targets
low-volume, nonprofessional sites of music fans.
• CDnow pays referring sites from 7% to 15% based on volume when
visitors click through and make a purchase on the CDnow site.
• It gives CDnow a staggeringly large number of potential marketing
partners.
• The program has over 250,000 members and most significant sources
of customer acquisition, allowing the company to advertise even to
unreachable potential customers
Cosmic Music Network
• With the Web expanding, CDnow has good potential to enroll millions
of members into the program.
• Also since the entire activity can be monitored and tracked in real
time, revenue sharing is transparent unlike banner ads.
• CDnow has a databank which helps to estimate the lifetime value of a
customer by source of acquisition which eventually leads to
determine the proper mix of all its marketing efforts.
Integrated Strategy

• With the growth, CDnow moved to physical market as well.

• This involved investment in traditional media like magazine, radio,
and television ads.
• Though evaluating the customer acquisition cost is not direct in this
type.
• CDnow used its calculation of the lifetime value of a customer from
cosmic music network to find out how much of its resources it could
afford to invest in more risky traditional media.
• Traditional media are risky as a great deal of money is invested with
no guarantee that any sales will result
Radio, Television, and Print Advertising.
• Advertising in the mass media are the most expensive and least direct
way to acquire customers.
• CDnow’s mass media ads included:
• National television commercials during the Grammys and the
American Music Awards;
• Print advertising in music-related publications such as Rolling
Stone, Spin, and Variety;
• Radio spots on the Howard Stern show.
On-Line Advertising.

• After the average price of banner ads reduced from the $70-per-
thousand-viewers figure to a reasonable $30, CDnow bought banner
ads on the sites of major Internet content and service providers,
including CNN Interactive and AOL, as well as some more-targeted
music-related sites like Billboard.
 Strategic Partnerships.
• CDnow also established strategic alliances with America Online, Excite, and
other powerful Internet content and service providers.
• CDnow entered into an alliance with AOL for an exclusive right to place
music banner ads and integrated links to the CDnow store on certain pages
of the AOL service.
• Though these strategic partnerships are more efficient than general banner
ads or advertising in mass media for channeling customers to CDnow’s site
but they were very expensive, costing millions each year.
Word of Mouth
• Word of Mouth is a very powerful medium of customer acquisition
with no direct costs at all.
• With no investment, the company views it as its most powerful
source for acquiring new customers.
• Other big investments in ads and partnerships act as a way to fuel
very lucrative word of mouth in the off-line world.
Free links and PR
Free Links
• CDnow benefits from a slight number of free links that it does not
purchase directly or obtain by entering into a specific alliance with a
site.
PR
• Traditional public relations efforts also help to generate word of
mouth and influence sales.
Conclusion: Marketing Mix
• With the databank created, CDnow is able to optimize its overall
marketing productivity.
• CDnow acquires customers from seven different sources from highly
expensive TV, radio and print ads contributing few paying customers
to the inexpensive cosmic music network and word of mouth which
results in greater customer acquisition.
• CDnow can identify the tagged and untagged customers. Specifically
identified customers acquired through Cosmic Music Network, one of
its strategic partnerships, or a banner ad are the tagged cutomers.
Conclusion
• Untagged customers are those unaccountable customers acquired
either through following a free link, television and radio ads, word of
mouth accounting almost for 60% of new CDnow customers.
• Also 96% of advertising budget of CDnow brings only 45% of its new
customers.
• Any cost of advertising budget of CDnow can be afforded as long as
the total cost of customer acquisition is less than the total average
lifetime value of its customers. Eg: the Cosmic Music network.
Conclusion
• Results-oriented marketing with the tagged customers helps
management’s attention on the development of a long-term
marketing strategy.
• CDnow’s experience is based on the power of the Internet applied to
marketing.