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What to look at in order to increase revenue from your paid marketing efforts in e-commerce. How to make sure you are not cutting away profitable customers.
Understanding Customer Lifetime Value (as often abbreviated CLV or LTV) can be tricky but nevertheless one of the most important metrics in business and especially e-commerce whenever trying to understand where the profitability in customer acquisition lies.
As the name implies Customer Lifetime Value shows the accumulated revenue you recieve from a specific customer over time, during the entire period the customer engages with your business. The tricky part is measuring this right and understanding how much is your business ready to spend to acquire this customer. This especially becomes relevant discussion in relation to Paid Marketing or Advertising like Google Ads or Google Shopping.
So let's look at a simple way of calculating historic customer lifetime value:
- Historic CLV = (Transaction1+Transaction2+Transaction3…) X AverageGrossMargin
Now another metric often used when looking at return in an e-commerce paid marketing is of course ROAS or simply put = Return on Ad Spend. The calculus of that metric is below:
- ROAS = Revenue from Ad Spend/ Cost
This is a very important metric to keep track on, especially when considering acquisition cost however, important to note that without taking into account the CLV/LTV you are only seeing half of the picture. ROAS is all about winning that first conversion, but it doesn’t take into account the ultimate business measurements of profitability, margins of returning customers.
Consider this; the customer acquisition cost for a first time buyer of products with low margins may be very high. However, if you are able to win the loyalty of that customer long-time the customer acquisition cost is far presided by the value of the customer loyalty. Therefore keeping track of the individual purchase journey is crucial in order to understand where the cut-off for investment should lie. The customer may only be profitable on its 3rd repeat purchase and therefore it is important to have that consideration in your bidding strategy.
A good advertising agency in paid marketing should always look together with you at your Customers Lifetime value and present the purchasing path from organic and paid search. Together you should establish where you see the profitability and growth coming from in order to make sure you are not cutting away future profitable income. Any eCommerce business should always looks to the metrics of ROAS and CLV/LTV to fully understand and take use of the best strategic implementations in order to grow their business even faster.