The impact of customer lifetime value on your ad spend
by Irina Brudaru & Veronika Schipper, on Jul 2, 2019, 2:22:25 PM
New vs. retained customer
Gaining new customers is always exciting and brings a level of satisfaction to sales and marketing people. New customers are thrilled to receive a great product or service, hopefully after clicking on your product's shiny new ad, and your company benefits from the new client's estimated future spend.
Customer retention is crucial for business growth. The longer a company is able to keep a customer, the higher the profit for the company - be it direct (spend, data) or indirect (social network, new users, friends of friends). Ronald van Loon describes in further detail how to increase revenue from an existing customer by understanding their behaviour and their preferences.
The analysis that surfaces the profit each user brings to the product is called customer lifetime value. Having insight into the value of each and single client of the business, has an enormous benefit for companies of every type and size, from hotel bookings to online single player gaming apps.
Given that, finding new customer costs on average five times more than retaining an existing one.
Estimating the value of a potential new user can be done either before the acquisition - in the case of audiences, or in case of bidding in advertising quickly after that. Google created a tool called smart bidding that does this automatically.
Know the customer lifetime value
Customer lifetime value can be defined as the revenue the customer brings to the business during a period, minus the costs of acquiring that customer. For small companies, where the product portfolio and scope is rather compact, the value is easy to calculate whereas for bigger organisations working more data sources it gets more difficult, especially if their data is spread across multiple touch points and are not well integrated into one place.
Depending on the type of industry the company is in and their business model, the customer value can be calculated in various ways. In the first place, the business owner must be able to estimate the value of the average sale, the average number of transactions, and the duration of the business relationship with a given customer. CleverTap talks about more options on how to calculate the CLV here.
Predict the customer lifetime value to adjust your ad spend
Take online gaming, for example. A variety of people play a game like Candy Crush. Depending on how long the players stay in the game, how much they spend, and how many new users they bring from their network into the game, they create a particular value or profit for the company. More often than not, the user base is so large, that it is easy to build groups or segments of similar players.
After the CRM data is analysed, a revenue value can be attached to each customer group. This information can then be sent to the marketing team which needs to make sure that any newly acquired users are worth more than the campaign's costs per new user acquisition.
Let's say the company needs to grow their users base or enter a new market, as acquisition in gaming is constant, and decides to run a marketing campaign to promote its product to new potential customers. Using the historical data from other countries and their well-known customer behaviour patterns, one can predict the customer lifetime value within the first seconds of the consumers' playing behaviour. Then they stop or continue the ad, adapting their campaign spend accordingly.
The acquisition marketing team always wants to know which ads performed the best, brought the highest spenders or the most engaged ones. Using recent data on newly campaign-acquired users and the LTV models, they can stop underperforming campaigns fast.
When the first party data is connected with the marketing data - such costs saving decisions can be easily made. And today, one can do the work above even better: with smart algorithms and massive knowledge in users' online behaviour, Google's smart bidding algorithms perform precisely the work described above in a matter of milliseconds.
Treating all customers the same might result in a waste of time and energy. Instead, you can focus on identifying the value your customers bring to your business and run marketing campaigns to increase revenue.
Crystalloids is a leading partner in the Netherlands that specialises in both Google Cloud Platform and marketing activation on owned and paid channels. We can help you integrate the data sources and applications which enable low implementation cost and fast time to market.