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Pay Per Click (PPC) KPI #2

Customer Lifetime Value

Pay Per Click (PPC) KPI #2

Customer Lifetime Value (CLV)

Once a prospect is converted into a billable customer, another Pay Per Click (PPC) metric to consider is Customer Lifetime Value, also known as CLV or CLTV.  This measurement takes into account not just the initial revenue and profit generated by a new billable client, but also the longer term revenue and profit implications. A CLV analysis views break-even and positive ROI milestones from a campaign differently from Cost Per Lead (CPL) since it acknowledges that a new client could generate further future benefits. By viewing the lifetime impact (on average) beyond the first sale, owners can better appreciate how impactful customer retention can be.  Further insight can be attained by dissecting performance by location, time of year and/or type of service or product promoted to make wiser decisions on how marketing funds can be best allocated.
Here is an initial simplified equation approach to determine Client Lifetime Value. Please keep in mind there are other factors to consider beyond this quick approach to find CLV.
CLV Formula:
Average Number of Billable Sales x  Average Purchase Cost = CLV
Therefore, on a per client basis, lifetime value can be viewed as the number of sales on average along with the average billing per sale. Other considerations should take into account other factors, such as cost of good sold (COGS) as well as average profit to more accurately state CLV since some of these scenarios below will be encountered as part of the sales cycle:   
  • Some leads may not buy right away or could be in ‘research’ mode, so follow up is needed to nurture them to cross the line to a sale.
  • As trust with new clients is built, they can buy multiple times and then they share their positive experience with other potential new clients.
  • New leads are also an opportunity to up-sell or cross-sell products and complimentary services. This tactic if properly handled could be perceived as adding more value to these new customers while increasing your initial basket size and overall CLV.
This graphic is a good representation of CLTV showing the lifetime value of a customer to a brand throughout their entire time as a paying client. 

To step through this concept, an online store has an average order value of $50 and typical purchase frequency is 3 times every year with an average customer lifespan of 3 years before testing a competitor brand. Therefore, the average value each client brings is around $450 over 3 years or $150 per year. Of course, there are variations on this formula depending on how in-depth you want to get.  Regardless, whatever your customer lifetime value number ends up being, you want to keep it higher than your client acquisition costs. 

Another consideration to further maximize CLV is by investing in client retention instead of acquisition. For example, for every 1% of shoppers who return to an eCommerce site after their first visit, revenue increases by 10% roughly based on industry studies.  Therefore, by retaining 10% more of current clients, revenue doubles typically for most eCommerce websites. Another viewpoint to consider is by reducing churn rate or rate of client turnover by 5% will boost profit by 25% to 125% roughly. It’s a wide range, but it illustrates the compounding benefits of a CLTV oriented strategy.

Additionally, it’s easier to incentivize existing customers since it’s more likely to generate billings from a current client vs. a new prospect and returning clients spend more on average.

Furthermore, a benefit of a customer lifetime value strategy is client segmentation to focus on more profitable clients and targeting prospects that match the profile of those type of customers.  Being mindful of this requires an appreciation that not all customers are equally important. Therefore, a CLV focused segmentation allows a firm to determine the most profitable group of customers, understand their common characteristics and focus more on them rather than on less profitable clients.  Customer Lifetime Value applies well for relationship based businesses, especially those with customer contracts. 

Keep in mind that a CLV analysis often times has to make several other simplifying assumptions to be aware of:

  • Churn rate is the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the Retention rate. Typical CLV formulas incorporate either churn rate or retention rate, assuming that either rate is constant across the life of the customer relationship, which is not always the case.
  • Retention cost is the amount of money a company has to spend in a given period to retain an existing customer as part of a Cost of Goods Sold (COGS). Retention costs include customer support, marketing, promos, discounting and so on. 
  • Period is the length of a customer relationship which is divided for analysis. 

There are also other inputs to consider such as Cost Of Acquisition (COA). For example, if a new customer costs $50 to acquire and their lifetime value is $100, then the customer is judged to be profitable, and acquisition of additional similar customers is acceptable. Knowing this can lead to other operational benefits that could further improve business results such as:

  • management of customer relationship as an asset
  • encourages focus on the long-term value of customers instead of just acquiring “cheap” customers with low total revenue value
  • optimal allocation of resources in order to achieve a maximum return
  • an analytical basis for selecting ‘ideal’ customers
  • creating customer specific communication strategies based on profiles 

In summary, Customer Lifetime Value is a KPI to monitor when assessing a Pay Per Click campaign or any customer focused effort for business growth. 

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