I sometimes hear Internet marketers pointing to adult entertainment as an industry at the leading edge when it comes to Internet marketing strategies and tactics.

But is adult entertainment really so cutting edge? Is it really worth emulating? Well, if you go on things like conversion rates… maybe not.

Last year, Penthouse Media Group Inc., publisher of the well-known men’s publication, Penthouse Magazine, acquired Various, Inc. which owned the leading adult meeting site, Adult FriendFinder, for $500 million in cash and securities.

Was this a good deal for Penthouse? Without knowing exactly what Various, Inc’s profits were - its projected 2007 revenues were $340 million - nor Penthouse’s expected return on investment (ROI) and time frame for achieving that ROI… ONE simple calculation reveals that the FriendFinder network presented an extraordinary opportunity.

Here were the key statistics from Penthouse’s press release at the time…

• The FriendFinder network had around 260 million free members.
• The paid members numbered 1.2 million.

For simplicity’s sake, let’s assume that each of the paid members was also a free member. What that means is that Various had been able to convert a whopping… 0.46% of free members into paid members! If we consider paid members to be additional to free members, the conversion rate was even lower.

So if the average conversion rate of 0.46% translated into $340 million in revenues overall… what would increasing that conversion rate to 1 percent mean? I don’t have enough data to know, but you can be sure that it would have a MASSIVE impact on profits.

Make no mistake. Various, Inc. appeared to have been a highly successful company. But with just a 0.46 percent conversion rate, it was arguably leaving a lot of money on the table. If Penthouse has done nothing more than focus on increasing conversion rates across all the Various, Inc. media properties… it would have made a very good acquisition indeed.

Of course, whether Penthouse has done that… is a completely different story…

In any case, it’s important not to assume that what seems to be good for one industry, is necessarily good for OUR industry or niche.

Who knows? Maybe a 0.46 percent conversion rate for adult entertainment was a terrific result when compared with the conversion rates of other adult companies. But it doesn’t mean we should necessarily go out and use the same tactics and techniques for our online business…

Source: Press Release, “Penthouse Magazine Acquires Internet Social Network Giant Adult FriendFinder for $500 Million”, PR Newswire, December 12, 2007

Microsoft has announced the pre-release of its next Windows operating system named… Windows 7.

Microsoft will release details of Windows 7 at the upcoming PDC and WinHEC events, when it will share a pre-beta “developer only release” with attendees of both shows and give them a broad in-depth look at the platform.

Vista blogger, Mike Nash, says the decision to use the name ‘Windows 7′ reflects a desire for simplicity. Since the company doesn’t ship new versions of Windows every year, using a date didn’t make sense; nor did Microsoft wish to come up with an all-new “aspirational” name that would undermine its aspirations for Windows Vista.

In any case, Microsoft plans to reveal more details about Windows 7 in the coming months.

Source: Mike Nash, “Introducing Windows 7″, Windows Vista Blog, October 13, 2008

I’m the first one to argue the merits of quality over quantity when it comes to such matters as generating website traffic, list building, and converting visitors or subscribers into customers.

But when I really think about it, the quantity versus quality argument is somewhat redundant. Ultimately it doesn’t matter how much or how little traffic you get to your site… or how many visitors do or don’t optin to your list… or even how many people buy or don’t buy your products and services.

Click-through rates, cost per click, optin rates, conversion rates and the like are still important for reasons I’ll explain below. But ultimately what really matters is the overall profitability of your business.

Let me explain with a quick example…

Quick Example

Let’s say you sell a widget on your website and have (a) a conversion rate of 1 percent from your pay-per-click (PPC) advertising campaign and (b) a 10 percent conversion rate from mailings by affiliates or joint venture (JV) partners.

Which is better?

Before you answer, here’s some more information…

Before marketing expenses, your net profit on the sale of each widget is $100.

The PPC campaign consistently generates 100 customers per day and costs $10 per customer acquisition (CPA). That gives you a daily profit of $9,000 after marketing costs. (For the sake of simplicity we won’t get into lifetime customer value in this example).

Consistent mailings by various affiliates or JV partners together generate 10 customers per day. You offer a 50 percent commission, so your net profit on the sale of widgets by affiliates is $500 per day.

So which is better?

Your PPC campaign gives you much greater volume but the conversion rate is a mere tenth of that of mailings by affiliates or JV partners. Your affiliate marketing generates a smaller number of more qualified prospects who convert at a much higher rate… but doesn’t deliver the volumes generated by PPC.

Okay, so if affiliate marketing generates more qualified prospects and higher conversion rates… shouldn’t you invest more of your marketing budget into affiliate marketing?

Think again. Your PPC campaign yields a net profit per customer of $90, while your affiliate marketing campaign is less profitable, with a net profit per customer of $50.

So should you abandon your affiliate marketing program and spend more on PPC, trying to increase your PPC conversion rate?

Not if you’ve already maxed out your potential in PPC (in terms of conversion rate and/or traffic)… or if your affiliates are reaching prospects that PPC advertising doesn’t…

What if you attempt to make your affiliate program more profitable by lowering affiliate commissions? You could try that… but it may cause fewer affiliates to promote your wares.

What if… what if… what if…

In fact, we could continue this discussion ad nauseum, discussing all the variables you could add, change or tweak in order to optimize your marketing dollars. Which is, of course, the “holy grail” of marketing – investing and allocating marketing budgets in such a way as to generate the most profits. And that’s NOT just in terms of return on investment (ROI)… but in terms of overall profits generated over a given time frame.

So while all the statistics we marketers bandy around - click-through rates, conversion rates, even ROI rates - are all very interesting, let’s not forget that they’re INDICATORS of what we can and should seek to change and improve… they are NOT ends in themselves.

Moreover, they are all likely to have (differing) upper limits. Depending on the origin of a given visitor, visitor value will have an upper limit based on the price of the product, the cost of developing, producing and providing that product to the customer, and the cost of marketing the product to the customer in an optimal way.

So once you have optimized the marketing for a product in, say, paid search, and can’t increase the visitor value any further… you may find that your best option is to spend your extra marketing dollars on other marketing efforts that deliver a LOWER visitor value and a LOWER ROI… simply because they still contribute to greater overall business profits.

Of course, that’s if there is no better use of that excess marketing budget, which leads us into a discussion of opportunity cost…

Okay, I won’t bore you with that (actually it’s quite interesting) but suffice to say that all those arguments about quality, quantity, and the meaning of high or low conversion rates and the like… kinda doesn’t matter in the end. What really matters is optimizing each aspect of our marketing, in order to maximize overall business profits.

(I should add that most of us are nowhere near optimizing our marketing!)