You might find it surprising, but in my experience when asking an advertiser the question:
“What is the Lifetime Value of a Customer to Your Business?”
The answer is “I don’t know“.
A completely unacceptable answer. It’s sad really. I implore you, before you start any marketing, especially PPC, make sure you know your Customer Lifetime Value.
Let’s explore how to calculate Lifetime Customer Value for PPC.
Customer Lifetime Value (CLV or LTV in marketing circles) is absolutely the most important number you need to know to help determine if PPC marketing is the right fit for your business.
If you cannot figure out or reasonably estimate what the lifetime value of a customer is to your business, you should not advertise via pay per click.
As a responsible business owner, manager, marketing professional and advertiser ,you should really know the lifetime value of a customer to your business.
In short, quantifying Customer Lifetime Value for your business is of the utmost importance for PPC marketing success from a return perspective. Take the time before you start any marketing, to know your Customer Lifetime Value.
Knowing the Lifetime Value of a Customer for your business will allow you to evaluate your campaigns from a Cost Per Action perspective.
If you don’t have this principal information to utilize when reviewing performance, you are saying “I am not going to worry about the results of my campaign and I am giving up the ability to view success from a value perspective“.
Such a simple calculation to do, that has far reaching effects on your marketing and business efforts.
I will say it again to hammer the point home. If you don’t or won’t know your Customer Lifetime Value, then don’t do any pay per click marketing (at least from a Cost Per Action perspective).
Now that I have said my piece about how important it is to know Customer Lifetime Value, let’s get into how to calculate Customer Lifetime Value for PPC marketing purposes.
Before we actually start to calculate, we need to get some data together to feed into the basic Customer Lifetime Value for PPC formula.
We need to know:
- The average revenue per sale.
- How many sales a new customer will have through their lifespan as a customer for your business.
Once you have those pieces of information, you can plug them into the basic Customer Lifetime Value formula for PPC:
Average Revenue Per Sale * Lifetime Sales = New Customer Lifetime Value
Lets use a dentist as an example to show how the above formula would work:
Average Revenue Per Sale = $300, Standard cleaning, x rays, any additional dental work a person may need.
Lifetime Sales = 6
$300.00 * 6 = $1,800.00
New Customer Lifetime Value = $1,800.00 revenue.
*Please note the numbers used are for illustration purposes only.
An easy bit of math I think. This is the most straightforward Customer Lifetime Value formula for use with PPC marketing. You might be surprised to know that most advertisers don’t do even this simple calculation!
There are plenty of different formulas available to calculate Customer Lifetime Value. If you need to get more complex to be accurate, go for it.
The more accurate you can be with Customer Lifetime Value, the better it is for calculations down the road.
At the minimum, use the formula above to calculate Customer Lifetime Value for PPC .
Once you know the Customer Lifetime Value you know really how much a customer is worth to your business. From there you can start to figure out how much you can pay to get a customer.