Understanding the lifetime value of your customers is a good first step for creating profitable digital marketing campaigns. For many businesses, Pay Per Click is the top revenue source.
The question is, how do you know if your campaigns are actually making money? Yea, it’s nice if you can turn an immediate profit off of your ad spend, but not every business sees a day one return-on-investment.
Here is how you can calculate your customer lifetime value (LTV).
Calculating Customer Lifetime Value
In marketing, customer lifetime value is defined as a prediction of the net value (typically revenue) attributed to the entire relationship with a customer.
So, if T= average monthly transactions, AOV = average order value and ALT = average customer lifespan (in months), then:
Customer LTV = [T] x [AOV] x [LT]
There are a few other ways, to calculate LVT. This quick and dirty calculation will give you a good feel for your customer LTV and the profitability of your digital marketing campaigns.
Why Your Customer LTV Matters
In many industries, it can difficult to drive a first purchase profit from digital marketing.
Unlike conventional advertising, in digital marketing you typically use pay-per-click. With a billboard, you pay a fixed amount regardless of how many people see your sign. With PPC advertising, the more people that click on your ad, the more you pay.
However, because every interaction with your ads happens online—where everything can be tracked—you know exactly which ads, campaigns, keywords and clicks produced which conversions and sales.
As a result, it’s fairly easy to figure out whether or not your ad spend is producing value for your business using your customer LTV.
Using Your Customer Lifetime Value
There are several ways this is going to help you but, once you know your customer lifetime value, you can use it to figure out where your business needs to improve to become more profitable.
For example, if my client’s average customer only lasted 1 year but the industry average was 3 years, they could focus on improving their customer lifespan.
Overall, your customer lifetime value is an incredibly important way to assess the effectiveness of your digital marketing. Sometimes, what initially looks bad could actually hold tremendous value.
If you’d like to calculate your customer LTV and get a free audit of your marketing results, let me know here. I’d love to help!