Swapping ROI for LTV: Optimizing the Return of Your Best Customers
Most of us who manage marketing campaigns in ecommerce get caught up in the daily grind of writing ad copy, tweaking creative, and managing ad spend. If you’re running direct marketing campaigns (search, affiliates, display, comparison shopping, etc.), you’re likely to be highly focused on measuring ROAS, number of new customers, or AOV.
While these tactics are valuable for building a solid customer base, none of them sufficiently address an equally important challenge: managing the customer life-time-value (LTV). Within most marketing channels, ALL customers/orders are created equal, which means you’re paying the same amount to acquire customers–regardless of quality. The best way to approach this problem is to ask a simple question: “which customers are going to keep me in business for years to come, and who’s sucking cash from my bottom line?” In other words, what’s a given customer’s true lifetime value, and how is s/he driving the future of my company? In this case, it’s more than likely that the 80/20 rule applies to most companies.
Retailers know that LTV is a great way to measure a customer’s net worth to a business. However, given the fact that we don’t all measure it, how many of us actually use it to optimize our marketing campaigns? With the spotlight on ROI, most marketing managers get stuck continuously answering the question “what was your return on ad spend for that campaign?” Instead, execs should be asking “how many high-LTV customers did you create?” By not asking this question, we limit ourselves to immediate ROI instead of long-term value, resulting in acquisition of customers who continue to absorb expensive services long into the future. Consider what you’d be able to accomplish if you only spent your marketing budget on customers that added long-term-value to your company.
Only a few years back, the web portals were all the rage (Yahoo.com, MSN.com, and AOL.com) and captured a significant portion of retail online spend. When I studied the LTV of consumers coming from each of these portals, one thing was strikingly clear. There was one portal that stood head and shoulders above the rest. Which one was it?…….Drumroll….It was AOL! (Wow, really? Dial-up? Are you kidding me?). We came to discover that not only were those consumers loyal to their dial-up connection but they were also creatures of habit with their shopping. Once you captured a loyal AOL consumer, they would come back again, again and again. Finding these types of nuggets was always eye-opening.
Only a few companies have incorporated LTV into their marketing approach. For the many that haven’t, here are a few questions to consider when getting started:
- Have you established metrics to separate your good customers from the bad (profitability, revenue, repeat purchases, etc.)?
- When was the last time you reviewed each marketing channel to see which one sent you the most high-LTV customers?
- How do you treat these customers differently when they interact with your company (website, customer service, etc.)?
Optimizing LTV is not a perfect science, but what matters is that you start somewhere and refine your process as resources allow. Ad exchanges now offer display inventory through an impression-by-impression auction-based system. This is one example where it’s imperative to value customers separately from one another in real time. In the meantime, bring your marketing team together and develop a plan to optimize your marketing campaigns, so that you can capture those customers who will pay your bills for years to come.