Customer Lifetime Value (CLTV) refers to the total value or profit generated by a customer over their entire engagement with a business. Calculating CLTV can be straightforward for some businesses, while it can be incredibly complex for others. However, one fact remains true: many factors influence CLTV, and there are various levers that can be adjusted to change it.
Cost Per Acquisition (CPA) has long been a key metric in marketing, especially in digital marketing, due to tracking technology and data transparency. However, this approach has faced criticism for being overly simplistic. For instance, if you know that a customer spends $100 on a product with a margin of $50 and that it costs you $40 to acquire them, you might feel satisfied that you’ve made a profitable acquisition. But if that customer never returns, the initial figure is misleading. Conversely, if the average customer makes an additional 3.2 purchases and contacts your call center twice for each purchase, there are additional revenue and costs associated with that customer that aren’t accounted for.
The CPA model remains popular in channels like affiliate marketing because it allows businesses to mitigate the risk associated with cost-per-click payments, where conversions are uncertain. It would be impractical in most situations to require affiliates to adhere to your CLTV model, as many of the influencing variables would lie outside their control. However, CLTV can be useful in identifying the most profitable customers and segmenting them accordingly for targeted marketing efforts.
What does Customer Lifetime Value mean for digital marketing?
In digital marketing, various models are often imposed on us. As previously mentioned, cost-per-acquisition and cost-per-click models are very common. There are also cost-per-impression (sometimes referred to as cost per mille), cost-per-action, and cost-per-lead models, among others. While these payment methods are standard, it’s easy to overly rely on them as the primary key performance indicators (KPIs) for managing marketing channels.
Customer Lifetime Value is not something that can be confined to just one area of your business; if it’s an appropriate model, it can and should be integrated into digital marketing along with other areas. Digital marketers have access to exceptional amounts of data, giving us the opportunity to understand our customers and the variables that influence their behavior in greater detail than other business areas. This opportunity is invaluable and should not be overlooked.
Source: Digital Marketing Strategy by Simon Kingsnorth
