When it comes to measuring the effectiveness of their paid campaigns, most marketers look for immediate results. And for good reason – online advertising moves fast. You need to be able to identify what’s working and what’s not, maximize ad spend and justify your efforts with profit, quickly.
But for some retailers, a successful advertising strategy includes thinking long-term and considering not just how much revenue and profit your campaigns are driving right now, but now much they contribute to your bottom line over time.
Here, we’ll take a look at why lifetime value metrics matter, and how you can easily access impactful lifetime value data for your channels and campaigns. For more on this topic, check out this post from our friends at Omnitail about how to use lifetime value metrics to set new customer contribution margin targets and maximize long-term profit!
Traditional KPIs like revenue, profit and ROAS allow you to evaluate your paid channels and campaigns on how much value they’re driving for you immediately – which is important. But for some businesses – especially those that are more established or focused on customer retention – it’s useful to know the long-term impact of your paid efforts, too.
Evaluating channels and campaigns on the basis of lifetime value can help you understand one critical piece of information: how much are the customers you acquire through paid efforts actually worth to you? Lifetime value metrics add another dimension to that reporting, telling you not just how much those customers are worth to you on their initial purchase, but over their entire lifetime with your store.
Having that information at your fingertips helps you understand the value your paid campaigns are driving long-term. That, in turn, helps you make smarter decisions about your campaign strategy and budget. (Read more over at Omnitail about how to use this information to set smart customer contribution margin targets and drive your advertising strategy!)
Lifetime value is traditionally calculated on the customer level: the most basic definition is “the total value of a customer to a business, over their entire lifetime as a customer.” It’s typically calculated as average order value (how much they spend) X purchase frequency (how often they buy).
However, with access to the right data, you can take LTV a layer deeper and associate LTV with channels and campaigns (what’s the LTV of customers who were acquired through Google vs. Instagram?), products (what’s the LTV of customers who purchase shoes vs. pants?) and more.
Take these two examples:
Customer A, acquired through a Google Ads campaign, made a single purchase worth $67.
Customer B, acquired through an Instagram campaign, made an initial purchase worth $42 – but then came back to make two subsequent purchases worth $53 and $25.
With one purchase, Customer A’s LTV is $67. With three purchases worth $42, $53 and $25, Customer B’s LTV is $120.
Based on this sample size, you know that Instagram is a higher-LTV channel than Google Ads. Instagram helps you acquire customers who spend more with you over time. Knowing that, you might want to increase your Instagram advertising spend or put more resources into testing campaigns, knowing that it will pay off in the long term.
Here are a few lifetime value metrics you might want to consider for your performance reporting:
Just like we did in the example above, LTV by channel and campaign calculates the LTV of your various advertising efforts by looking at the lifetime value of the customers acquired through each one.
You can calculate customer lifetime value on a channel level (Facebook, Google, email, affiliates) or campaign level (Black Friday, Holiday Season 2020, New Spring Collection).
→ AOV X Purchase Frequency = LTV
Once you’ve identified lifetime value for your paid advertising efforts, you can use that to calculate other lifetime value metrics, like lifetime return on ad spend – which takes into account your total ad spend on a channel level, as well as the total lifetime value that channel drives (versus just your initial return on ad spend). This helps you evaluate the long-term effectiveness of your paid marketing efforts.
→ (New customers acquired X LTV) / Ad Spend = Lifetime return on ad spend
Lifetime value to customer acquisition cost ratio (LTV:CAC) is another useful metric you can calculate after you have your channel and campaign LTV. It does exactly what it sounds like: compares the amount you spend to acquire a customer through a given channel with the LTV of that channel, so you can understand if the value your customers drive sufficiently offsets the cost to acquire them. (A good LTV:CAC ratio is at least 3:1).
→ LTV / CAC = LTV:CAC ratio
The calculations we provided above are a simple way to calculate LTV and related metrics. But when it comes to identifying lifetime value metrics for specific channels and campaigns, it’s a little more complicated. That relies on two things:
When looking at lifetime value metrics for your advertising efforts, you’ll want to use a first-order attribution model that attributes credit for a sale, and all future sales, to the channel that drove the customer’s first purchase. That means you’ll be able to get a true sense of a customer’s lifetime value over their entire relationship with you, with that lifetime value attributed to the channel that helped you acquire them originally. (First-order attribution is the default attribution model in Glew).
Both of these are easier with an analytics platform that will connect your advertising and ecommerce data sources and present the KPIs you need in one place (in fact, Glew calculates these LTV metrics on the channel and campaign level for you, automatically).
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LTV and lifetime value metrics like lifetime return on ad spend and LTV:CAC ratio are important for marketers and merchants looking to drive sustainable, long-term growth through their paid advertising strategy. Calculating these metrics can help you understand which channels and campaigns are valuable to you in the short-term – and which ones are worth a more long-term investment.
For more on how to use lifetime value metrics to set new customer contribution margin targets and drive effective (and profitable) campaign strategy, check out this companion piece from our friends at Omnitail.
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