The Importance of Customer Lifetime Value
Customer lifetime value (CLTV) is an often overlooked metric but one of the most important predictive measurements that marketers should track. Paid search & display networks are competitive and, as a result, paid campaigns can be quite expensive. You might see a high cost-per-click or high cost-per-acquisition and think there’s not much room for profit but don’t hit the panic button just yet. You are likely failing to consider CLTV, a must for any new user acquisition campaign. There are many ways to calculate CLTV and many eCommerce platforms track it automatically, if you know where to look.
Why is customer lifetime value important for SEM?
I’d like to illustrate the importance of tracking customer lifetime value with the following example:
Allow me to introduce you to Bob. Bob owns a sneaker shop in town and like many marketers he is trying to justify spending money on Google AdWords. One day, while taking a look at the data in his AdWords account, he realized that his cost per acquisition was just shy of $50 over the last few months. He charges, on average, $50 for a pair of shoes. It would be an understatement to say that this discovery troubled Bob. At first glance, it appeared that he was just barely breaking even, or even losing money, depending on the cost to make the shoes. Cost per acquisition and return on ad spend are great KPIs (key performance indicators) to track. However, you may only be looking at one piece of the puzzle.
After taking a deep breath and crunching some numbers Bob figured out his customer lifetime value. Bob has realized that his customers order an average or two pairs of shoes per year and spend $500 during their lifetime as a customer. This is a great discovery for Bob. Factoring in the cost per acquisition, each new customer would likely add an additional $450 of lifetime revenue to the shop. Something he would never have noticed making adjustments based on data only available in his account.
If he did not take the time to calculate CLTV, Bob may have prematurely ended an otherwise profitable PPC campaign, a mistake that likely would have cost him tens-of-thousands of dollars in new business over the course of a few years. A mistake that unfortunately is all too common in the world of paid search. When determining the profitability of an AdWords campaign it is absolutely necessary to understand your company’s customer lifetime value.
Don’t be like Bob. Remember customer lifetime value!
Simply glancing at high level statistics will give you a snapshot of account performance, but it won’t always tell you the whole story. Dig a little deeper into the data while equipped with the best predictive measurements; that will allow you to find the insights you need to illustrate your marketing ROI. You may find out that rather than cutting spend, the right move would be to increase your budget. When your account isn’t performing nearly as well as you like, there may be more to the story. Don’t panic: remember customer lifetime value!