The lifetime value (LTV) of customers, which is also known as customer lifetime value (CLV) is an important analytical tool you should be using on a regular basis, especially when developing your marketing budget. The LTV is basically the estimated amount of money a person will spend at your business over their entire lifetime. Since we do not know how long each person will live, most businesses use a variation model of calculating how much their customers will spend in a shorter periods of times, such as a year, two-years, three-years, and so on.
Understanding the LTV of each of your customers helps you better evaluate another important marketing concept: Customer Acquisition Cost (CAC). The CAC is the amount of money it costs your business to attract new customers and get them to make actual purchases from your business. Together, the LTV and CAC helps you determine how best to maximize the value of your marketing budget.
To better illustrate these concepts, let’s look at some examples related to Pay Per Click (PPC) marketing campaigns often used as part of online marketing strategies. Let’s assume you have $1000 to allocate between Google, Bing, and Yahoo for your PPC campaign and divide this up as follows:
|Ad Location||Budgeted Amount||Customers||CAC|
Initially, your first thoughts might be to not even consider the other two and invest your entire budget into Google since it has the lowest CAC. However, this is where many people make a mistake because they have not also taken into account the LTV of their customers.
|Ad Location||Budgeted Amount||Customers||CAC||LTV||Revenues||Profits|
Taking the LTV into consideration, along with the CAC sheds new light on how to allocate resources for your PPC budget. As you can see, the potential revenues generated from PPC campaigns on Bing is much higher compared to Google and results in higher profits. While the PPC campaign on Yahoo has a higher LTV, and smaller revenues than Bing, the profits still ending up being more than Google.
**Keep mind the above figures are just random figures used for illustrative purposes and do not take into account other costs, like bidding on ads, ad placement, and so on.**
Going back to our original question, “Does the LTV of customers matter?” Yes, it does. From our examples, when you consider both the CAC and LTV, it will allow you to fine-tune your PPC campaigns to convert people into customers and generate higher revenues and profits.