What the Hell is LTV and why is it important for your marketing?

16 Jul, 2024

1 min

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Do you remember that time when your friend asked you a so-called basic riddle? The answer seemed so obvious that you wondered why you were being asked this question. But still, the solution was much more complex than it looked, and just required to get an overview of the situation to answer correctly.

It's kind of what happens when you run marketing ad campaigns and you don't take time to take a step back to analyse your performance carefully.

When measuring the success of your ads campaigns, you may be tempted to judge them based on your Return on Advertising Spend (ROAS). You may also be interested to win new customers and measure your campaign success by the Cost Per New Customer.

Well, actually, it's wheels within wheels. It's no secret that it costs a lot to attract more and more new customers. Whence the question: how much should you be investing in retention vs new customer acquisition?

In case you've been wondering why the Customer Lifetime Value is so (so so) important for the success of your campaigns, what impact does it have on your ad spend? Well, feel confident, -you've come to the right place. 

What is CUSTOMER Lifetime Value in a nutshell?

LTV is not Live Television, at least not for marketers. LTV is short for "Lifetime Value", the amount of value a client generates for your business over the lifespan of your relationship with them.

How Customer Lifetime Value is calculated?

So let’s say you sell tea online. You run paid campaigns to generate new business. You see that when a person comes to your website from your campaigns, and they make a purchase, they spend an average of 100 moneys (€ or $ or whatever).

You think to yourself, great, I know what there is to know, and I can determine that with my margins and everything I can allow myself to pay 20 moneys (let’s make it Mz for short) in ads to generate a purchase. What we call a CPA (Cost per Acquisition)

But you don’t stop there. You realise that some people spend 200 Mz or more on their first purchase. So of course, you’re ready to pay more to get those kinds of people onto your website.

You’re smart and you realise you can import that information from your website tracking into your ad accounts. Now Google and Facebook and colleagues know exactly how much a person spends on your website when they make a purchase after clicking on an ad. 

That allows you to go to Google and be like “Seriously G-Dog, spend as much as you like per purchase, just make sure that for every 1 Mz I spend with you, I earn 5 Mz in return”. That’s what we call a Return on Ad Spend (ROAS).

So far so good. Now you have your campaigns running on a 500% ROAS objective, making sure that you earn more than you spend. However, the problem with that is: if you’re only looking at how much you earn from a person on the first sale, it still MASSIVELY limits how much you can allow yourself to spend to recruit that person.

Because actually, the person who buys tea from you for 100 moneys the first time around, might like your Orange-Peach-Morning-Dew Blend so much that they never want to drink another tea ever again in their life. So after the first 100 Mz purchase, they come back every month and spend 30 Mz with you to restock. For at least another year, before they start getting tired of the same old tea flavour day-in day-out.

So that means, this person isn’t worth 100 Mz, but 100+(30*12) = 460 moneys!!

And if your Return on Ad Spend (ROAS) target is 5 (for every 1 spend), instead of spending 20 Mz to acquire that client (based on the 100 Mz first purchase), you can actually allow yourself 92 moneys while still being profitable (460:5 = 92).

And that. changes. everything.

Ready to manage your campaigns with a Customer Lifetime Value objective?

Now that you are master of your LTV and your profitability you can go outbid the hell out of your competition. Later losers!

By Lorena Sassman

24 Mar, 2022