As a marketer, there is a wide range of KPIs demanding your attention. One KPI that many marketers tend to focus on above all else is the cost per acquisition (CPA).
CPA tells you how much it costs you to acquire a customer, and is no doubt an essential metric since it helps you determine whether or not your marketing efforts are profitable. However, looking at CPA alone doesn't tell the full story: There is another, highly important KPI that is often overlooked — customer lifetime value (CLV).
What Is CLV and Why Does It Matter?
CLV is a KPI that tells you the total lifetime value of a customer that you acquire. In other words, it tells you how much money, on average, a customer will spend on your products or services over the entire course of their lifetime.
This metric can be determined based on a range of data, including the average order value (AOV) of your customers, the percentage of customers who become repeat customers, and the frequency in which repeat customers place orders with your business.
How CLV Helps You Set Marketing Budgets
When setting a marketing budget, many marketers make the mistake of using CPA alone to set the upper limit of the budget rather than using CPA in tandem with CLV. To understand why this is a pitfall, let's take a look at a hypothetical example.
Let's say a company selling custom candles develops a Facebook advertising campaign, and they determine that this campaign will cost $40 for every customer that they acquire. Therefore, the CPA of this campaign is $40. However, the company's AOV is only $30.
Unfortunately, many inexperienced marketers look at these numbers and determine that the campaign is not profitable. After all, if you're spending $40 to acquire a customer who only orders $30 worth of products initially, you are losing money up front.
However, if our hypothetical company dug a little deeper into their data, they would realize that their CLV is much higher than their campaign's $40 CPA. Let's say for the purpose of this example that customers, on average, purchase $500 worth of products from the candle company throughout their lifetime.
Now that our hypothetical marketers have moved beyond CPA to look at CLV, the advertising campaign that they have created becomes much more promising.
The campaign may lose money up front since the average initial order of the new customers that it brings in is lower than the campaign's CPA, but it is a very profitable campaign over the long-run when you consider the CLV of the new customers that the campaign is creating. In this example, a marketer looking only at CPA would wrongly determine that the campaign is costing the company $10 for every new customer while a marketer looking at CLV would rightly conclude that the same campaign is profiting the company $460 for every new customer.
This example may be hypothetical, but it is a very realistic portrayal of what small- to medium-sized businesses must consider as they go about setting budgets for their marketing campaigns. If you are only focused on CPA, you may be missing out on a lot of long-term profits. That's not to say that CPA isn't an important KPI. However, the CPA must be considered in tandem with CLV for businesses to draw accurate, beneficial conclusions from the metric.
How to Take Advantage of CLV
It's easy enough to understand why CLV is important, so why do so many marketers overlook this vital KPI? In most cases, the reason why CLV is overlooked is that CLV is a KPI that is buried much deeper in your data than CPA, and many businesses don't have the time, tools, or access to the necessary information to really analyze what their data is telling them.
If you want to take advantage of CLV and use it to set your marketing budgets, you'll first need to determine what your CLV is, and doing this requires a more in-depth analysis of your data than what is required when calculating CPA. Unfortunately, this is a challenge that many businesses shy away from.
The good news is that we at DataQ can help. Through our industry-leading software, we help e-commerce retailers and agencies easily unify and organize their data in a way that makes determining things such as CLV simpler than ever before. If you would like to see for yourself how DataQ can help you make the most of your data and take advantage of vital KPIs such as CLV, we invite you to sign up for a FREE TRIAL today.