Marketing crash course: Examining the importance of customer lifetime value

Posted on October 23, 2018

As we move towards the end of 2018 the cost of user acquisition is continually rising, and your marketing strategy around ad performance should be evolving as a result. We all remember the days when the cost per purchase on new user acquisition was $5, but now it’s $20 or $30. That trend is going to continue, which will only make it more difficult to turn a profit on new user acquisition. So we have to play by a different set of rules to survive.

Let’s not beat around the bush, your e-commerce store can’t compete with those who can afford to meet these rising costs. Amazon, for example, can afford to not turn a profit from a newly acquired customer for years, and in the process of learning from each member, they are gaining an understanding of consumer buying habits. For Amazon, that knowledge is far greater than taking a loss on the average Amazon Prime customer. Going forward, they are using that data to push businesses out of their marketplace.

Basically, companies like Amazon can afford to not make a profit on a customer for years. When those companies come into the digital ad space, they’re going to push you out. It’s for this reason you can’t focus on fighting that battle. You will lose unless you alter your marketing strategy accordingly.

The person who can spend the most to acquire a customer wins.

Instead, consider your customer lifetime value to be the most essential element of your ad performance funnel. Don’t stop your funnel at your return on ad spend or even your return on investment. Go beyond that and also consider whether or not you’re acquiring quality customers.

Marketing ad funnel

Look at the funnel above to gain a visual understanding of what metrics are most important. Most e-commerce companies will stop their funnel at return on ad spend. But stopping there means you’re likely cashing in a gold coin, instead of pursuing the pot of gold that is further down the line. Your return on ad spend may look like a success in the interim, but you’re not setting yourself up for long-term success.

You must look to customer lifetime value as your guiding metric. Otherwise, you’re going to make decisions based on short-term metrics that will hurt the welfare of the company. This entire conversation has to be rooted in who your best customers are and how to acquire them. That’s how you’ll gain valuable foresight and avoid leaving yourself vulnerable for the future.

If customer lifetime value is at the bottom of your funnel, you must plan accordingly. Let’s say for every $1 you put into your marketing, you want $5 back. You need to establish a win-back period to accomplish this. Your win-back period should allow you adequate time to build a relationship with quality customers. You’re building for long-term customers, not the short-term victory of a single transaction. If your win-back period is a year, you have to figure out how to optimize for a 12-month relationship with a customer.

This isn’t to say return on ad spend and return on investment aren’t very important pieces of the funnel. Both are essential metrics to optimize against. Beyond that, cost per purchase, cost per add to cart, and cost per viewed content are in another tier of importance.

Finally, you have the soft metrics (cost per click, click through rate, and cost per mille) to consider. But remember these soft metrics don’t matter if you’re acquiring bad customers by not placing the ultimate importance on lifetime customer value. It’s only when you know you’re targeting good customers that you should start dialing in on softer metrics.

Ultimately, this is about moving beyond individual transaction sales and building relationships with customers. You can still build a good company by anchoring return on investment or return on ad spend at the bottom of your funnel. But you can only build a great company by making customer lifetime value your highest priority.