- [Instructor] 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 more.
Which customer is more valuable to you?
Well, the second group, of course,
but you need to be measuring customer lifetime value
in order to know that.
This measurement is also known as LTV or CLV
and it defines the total value of a customer
over the lifetime of their relationship with your brand.
Knowing your lifetime value
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 can be relatively complicated
and I encourage you to explore LTV calculations
in more detail, but in general,
you can get pretty close with the following data.
Your average annual purchases per customer,
your average markup,
and the average number of years that you retain a customer.
Let's say we're selling dog toys online
and we pull up our e-commerce data
and we see that most of our customers
have made two transactions over the last several years,
and we'll say that 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 LTV on revenue.
It has to be calculated on profit.
So let's assume that our markup is 25%.
In this case,
we'd profit $16 per sale or $32 for both transactions.
What this brings us to is a customer lifetime value of $32.
Essentially, how much a single customer
is worth to our business.
Now we can use this information
to 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'd spend up to $10 to bring in that customer,
and for every $10 we spend, we'd profit 22.
So now you can start running paid ads
and work to optimize those to a customer acquisition cost
no greater than $10.
LTV is an important metric to have on hand
and it's one that you'll use quite often
in your paid marketing endeavors.