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Lifetime value, or LTV, averages the total revenue generated by a customer during the entirety of your relationship.
While the KPI often sounds cool and dandy, it can be difficult to improve. Doing so requires long term thinking, commitment and a deep understanding of your customer database.
This article will dive into concrete ways PPC marketers can improve LTV using four levers.
Why is LTV important?
Customer lifetime value is an essential metric for businesses across various industries for several reasons,
LTV evaluates your potential
Even before starting any business, LTV has value. It allows you to understand your average customer in greater depth, which can basically be translated into your growth potential.
For example, let’s say you want to start a business. And you hesitate between a real estate agency and selling coffee machines. (It’s quite a split but that’s just to make my point.)
You could assume that the LTV of a customer for a real estate agency is significantly higher than that of a coffee machine seller.
But let’s say your average client buys one coffee machine for 50 employees, each taking two coffees a day (at $0.20 per coffee because you price them that low). Say that such clients last for 30 years (with 228 working days per year). That means your LTV is close to $137,000. Not bad right?
Unfortunately, for real estate agencies, clients “only” buy a primary residence once in a lifetime (on average). And since real estate agent commissions are not extravagant enough, you can bet you will not exceed $137,000.
Bottom line: LTV just helped you gauge two different markets’ value.
LTV paves the way for growth
LTV basically helps you steer away from transaction-based thinking to the long-term value of repeat customers.
Higher LTV = higher profits (in the medium and long term). A higher customer value directly impacts the bottom line.
But it also means peaceful, long-lasting business relationships. And those are less costly for tons of departments (HR, finance, logistics, customer support, etc.).
At an audience level, you can use LTV to identify structural weaknesses.
For example, if customer type A churns faster than customer type B, it’s likely that your service (or product) is not competitive/good enough for type A. Why is that?
Conversely, LTV can also help you find your best customers, which can translate into your best services/products. Is there any best practice to take away from this insight?
Finally, LTV helps determine your target customer acquisition cost (tCAC). If you know how much revenue you will generate with an average client, you can easily derive that into a target CAC. You “only” need to subtract the cost of goods sold (COGS) and so on.
How to calculate LTV
If you Google “LTV formula”, you’ll probably see something related to customer lifetime.
This makes sense but is harder to find in a marketer’s usual datasets (analytics, CRM, etc.).
So let’s start with basic KPIs we all understand:
Lifetime value (LTV) = average order value x total transactions / unique customers
As you can see, it’s fairly simple to start with. (It’s also worth looking up “LTV enhancements” as they provide interesting additional value.)
‘LTB’: Benefits instead of revenue
LTV is interesting. But if you ask CFOs, they will tell you that benefits trump revenue any day.
With benefits, you can understand the “real” value of each new customer, product line, etc.
Here is the formula to turn LTV into what I call LTB, or lifetime benefits (not a real KPI name, just my take on it):
Lifetime benefits (LTB) = LTV – CAC – COGS
With CAC being your average cost to acquire one net new customer. And COGS being your cost of goods sold.
Define customer relationship length
You may be asking yourself how to define “lifetime.”
In other words, when do you stop counting “total transactions”? When can you confidently consider a customer churned?
Just like for churn rate, you have several options:
If you’ve been around long enough: Use historical data and remove those outliers. That will give you the average lifetime of an average customer.
If you haven’t been around long enough or you lack the data: Use scenarios based on whatever you have. It’s a bit rough, but at least it’s a starting point.
4 levers PPC pros can use to improve LTV
You can now use your LTV formula to come up with creative ways PPCs can improve overall business performance. Let’s break those formulas into four elements:
Average order value (AOV)
Total transactions per unique customer
Lifetime
Costs (CAC and COGS)
By pulling and pushing those levers, you can improve your LTV. So let’s explore them one by one:
1. Improve AOV
Too many marketers want to slash prices, thinking it will improve conversion rates and revenue.
It can be true in some cases, but often, it simply decreases AOV, which hurts businesses’ bottom line. Remember: benefits trump revenue every single day.
How can you know if you could make improvements here?
One way to do so is to use your historical data to map sales periods (lower AOV) with conversion rates.
In some extreme cases, I observed flat conversion rates and lower AOVs, which should make you question sales’ relevance.
If that’s your case, you have all the data you need to make CMOs and CFOs understand they need to switch strategies.
Reviewing account basics
Another operational alternative is to review media spend with an AOV lens:
How does performance look for search terms containing “bargain,” “discount,” “cheap” and so on?
Are low-cost products cannibalizing your Shopping budget?
Does your copy include pricing terms? If so, how does it perform against other copies?
Could you AB test landing pages? Single product against bundles, for example.
Is your purchase value tracking taking into account discounts and taxes? Or are you inflating your results?
About price increases
Another very obvious way to increase AOV is to increase prices. Don’t go all out at once; a 5% increase will probably go unnoticed by your customers. At the very least, you want to align your prices with inflation.
And if you don’t control prices, try removing those Shopping SKUs priced slightly lower than similar products so you can focus your budget only on the slightly more expensive ones.
Ultimately, don’t think that low-priced items don’t have their place in your product mix. But make sure they don’t steal higher-priced items’ thunder.
2. Improve conversion rate
Upselling existing customers
PPC marketers often skim customer retention because their management pushes them to acquire new customers. Forgetting that existing customers are often much easier to sell to.
To fix this, you can target existing customers using a Customer List in Google Ads, Meta Ads, etc. and provide additional value to them:
A different ad copy that highlights deeper features
A different landing page that makes them convert faster
Maybe a different product, one that features extra accessories they haven’t purchased yet
Here, be creative: you have so much more transactional data it simply can be a goldmine for PPC marketers.
Cross-selling to warm prospects
Use similar tactics with cart abandoners. For example, are you using dynamic retargeting campaigns?
You know, those campaigns basically use your shopping feeds to display the exact products people added to cart.
It’s an interesting feature for sure but it provides very little value to your customers other than staying top of mind.
Instead, try cross-selling and advertise additional products that fit the product category your prospects visited or added to cart.
3. Review your customer journey
Another tactic is to review your purchasing journey and spot if you could shorten it.
Are you sending your PPC traffic to the best landing pages for example?
Could you send those same people to a page further down the funnel or more specific to your keywords / audiences / products / etc.?
In the end, there are plenty of ways to improve conversion rate. Here are other Search Engine Land articles to dig deeper:
5 tips for creating a high-converting PPC landing page
3 crazy PPC CRO hacks to boost conversion rates right now
3 powerful micro-conversion strategies for paid social
Make clients come back
I’ve written a short guide on retention so make sure to check it out. In more general terms, retention directly correlates with your product (or service) and its perceived quality.
One very operational thing you can do is to review the churn rate per product line.
If most of your media spend is directed at high-churn product lines, you might want to adjust your campaign structure or product feed to redirect more of your budget toward higher revenue in the long term.
Another tactic you can use is ensuring that extensive PPC data flows through to your CRM (or your ERP if you can).
That way, you can identify what product, audience, copy or landing page generates repeat customers and fuel those insights into your operational strategies.
Ultimately, this is about identifying your best customers and your worst ones. You want to steer away from the latter and find more people who enjoy doing business with you.
4. Lower your costs
Here, you improve LTV by reducing CAC. There are several options, but the easiest and most impactful is probably to review your media mix.
I have onboarded many clients who used costly channels without measuring incrementality.
In a nutshell, it means they didn’t “really” measure their marketing’s impact. Since it’s quite a topic, here are additional resources to get you going with incrementality measurement:
Efficiency vs. volume in PPC: 4 tips to strike a balance in incremental conversions
Solving an age-old SEO-PPC issue: How to bid on your brand name based on incrementality
Simply put, you want to review acquisition sources and reduce or even cut budgets that have a negative impact and fuel more budget to top-performing channels obviously.
Another straightforward tactic I recommend is to review Quality Score (and its equivalent in Meta Ads: Ad Relevance). The higher those metrics, the lower your CPC (and CAC).
Here are further articles to dig further:
What is Quality Score and how to use it in PPC
Quality score in paid search: Vanity or valuable?
I’m not talking about COGS since it’s a much wider topic than just PPC. But it naturally fits in the discussion.
Maximize customer lifetime value and drive profitability with PPC
LTV is a moving target but is critical for any business. If you want to gauge the skill level of a marketing team, ask them about their LTV.
If they talk to you about OLED displays and 4K screens, you’ll know where you stand!
I strongly recommend setting up a dedicated LTV dashboard with its various factors: average order value, transactions per customer, retention, and CAC.
This way, you can easily prioritize your efforts and make LTV improvement a recurring theme for your marketing team.
The post How to increase LTV with PPC appeared first on Search Engine Land.
