- In order to invest in paid marketing,
really, any marketing you'll need to understand
the value of your customer.
Your business has customers,
but they're not all created equally.
Some customers might purchase one product and leave,
while others become loyal to your brand
and purchase many products over the course
of a year or two or even more.
Which customer is more valuable to you, then?
Well, the second group, of course,
but you need to be measuring lifetime value
in order to know that.
This measurement is known as your CLV,
or customer lifetime value.
Knowing your CLV lets you not only grow
around the right audience,
but it lets you know how much you can spend
in advertising to acquire this customer.
Now, arriving at this number
is actually relatively complicated
and I'm going to encourage that you explore CLV calculations
in more detail, but in general,
you can get close with the following data.
You'll need your average annual purchases per customer,
your average markup, and the average number of years
you retain a single customer.
Let's say we're selling dog toys online.
So we pull up our e-commerce data
and we see that most of our customers
have made two transactions over the last several years.
Let's say the average order is $80.
So we'll multiply that by two,
which reveals our revenue is $160 from an average customer
over the lifetime of their relationship with our store.
But we can't calculate lifetime value on revenue.
It must be calculated on profit.
So let's assume that our markup is 25%.
In this case, that would mean we'd profit $16 per sale
or $32 for the two orders.
So now we know, our customer lifetime value is $32.
This is how much that single customer
is worth to our business.
And with this, we can start leveraging that data.
We can work to retain the customers,
so if they stick around another year,
well, we'll make more money.
We'll increase that value.
Email marketing, sales, special offers, and so on
can really help move the needle.
We can also try to increase the average transaction value
by upselling or even recommending other products,
but we can also use this number
to help identify budgets for our advertising.
If a customer is worth $32 to us,
how much are we willing to spend to acquire them?
Perhaps we would spend up to $10 to bring in that customer.
So for every $10 we'd spend, we know that we profit 22.
So now you can start running paid ads
and work to optimize those to a customer acquisition costs
no greater than $10.
Now, you may even have your lifetime value
broken into segments by product type or acquisition channel
and it's important that you continue
to recalculate this metric.
Customer lifetime value is an important metric
to have on hand and it's one that you'll use quite often
in your marketing endeavors.