It is a fact that in certain periods of the year, more sales can be generated than in other periods. But is it really sufficient to evaluate marketing activities according to conversions, turnover and costs within a time period like Easter or Christmas? Of course every business should gather quantitative and time-related data but the development potential of the customer over a longer period of time needs to be addressed too. This is when the Customer Lifetime Value (CLV) comes in.
It is common practice to allocate and optimise budgets according to marketing activities that deliver better short-term results. In other words, cheaper marketing activities are rewarded. However, this piece will give you more in-depth information into the calculation of the Customer Lifetime Value.
• Conversions (leads, sales, registrations etc.)
The success of a marketing campaign is measured against the number of attributed conversions. The more conversions a campaign generates, the more successful it is.
The success of a marketing campaign is measured against the turnover it generates. The higher the turnover, the more successful the campaign is.
• Cost per order (CPO)
The success of a marketing campaign is measured against the costs incurred per order. The lower this figure, the more effective and efficient the marketing campaign is.
The success of a marketing campaign depends on the ratio of the campaign costs in relation to the turnover. A low figure means that the activity is successful.
• Marginal costs
The success of a marketing campaign is measured against the invested marketing budget in relation to generating the next conversion in the respective channel. A low figure means that the activity is successful.
• Return on Investment (ROI)
The success of a marketing campaign is measured against the return (e.g. profit contribution) in relation to the campaign costs. A high figure means that the activity is successful.
If a marketer only uses these criteria to evaluate and plan online marketing campaigns, an important factor is missed: the customer and his relationship to the brand. It’s not a secret that the success of a marketing activity depends on how well you know your existing and potential target audience. To take into account the development of the customer over a longer period of time, the activities need to be adapted according to the requirements of the different audience segments (new and existing customers).
Customers in different phases of their lifetime cycle should be targeted with marketing activities that are attuned to their individual needs. The development of a customer is of high importance especially when the first purchase leads to additional orders. The proceeds accumulate in the customer’s lifetime which is illustrated below:
Customer acquisition is important for any business and depending on the advertising medium, this can be costly. Once a customer is acquired the retention and re-activation costs are far less.
When using the CLV, the marketing activity for an individual customer is measured against its profit or loss figure.
Rather than just considering the value of a single sale, the CLV shows that it is beneficial to look into the entire customer lifetime. Valuable customers that are targeted with relevant content could acquire new customers by recommending the brand which leads to cheaper customer acquisitions. The Customer Lifetime Value analysis is an essential marketing tool that helps businesses to allocate their budgets effectively. Businesses need to continuously document the entire customer activity. The objective is to devise a marketing strategy that targets different audience segments in an effective way.
The Customer Lifetime Value is discussed in detail in QUISMA’s recent whitepaper ‘The Customer Lifetime Value in Performance Marketing – Efficiently Adjusting Long Term Marketing Budgets’ – you can download it free of charge here.