The impact of customer lifetime value on your ad spend

New vs. retained customer

Gaining new customers is always exciting and brings satisfaction to sales and marketing people. New customers are thrilled to receive a great product or service, hopefully after clicking on your product's shiny new ad, and your company benefits from the new client's estimated future spend.

Customer retention is crucial for business growth. The longer a company can keep a customer, the higher the profit—be it direct (spend, data) or indirect (social network, new users, friends of friends). Ronald van Loon describes in further detail how to increase revenue from an existing customer by understanding their behaviour and preferences.

The analysis that surfaces the profit each user brings to the product is called customer lifetime value. Having insight into the value of each client of the business has enormous benefits for companies of every type and size, from hotel bookings to online single-player gaming apps.

Given that, finding new customers costs, on average, five times more than retaining an existing one.

Estimating the value of a potential new user can be done either before the acquisition—in the case of audiences—or quickly after that in the case of advertising bidding. Google created a tool called smart bidding that does this automatically.

Know the customer lifetime value

Customer lifetime value can be defined as the revenue the customer brings to the business during a period minus the costs of acquiring that customer. For small companies, where the product portfolio and scope is relatively compact, the value is easy to calculate. In contrast, it gets more difficult for bigger organisations working with more data sources, mainly if their data is spread across multiple touch points and is not well integrated into one place.

Depending on the company's industry and business model, customer value can be calculated in various ways. First, the business owner must be able to estimate the value of the average sale, the average number of transactions, and the duration of the business relationship with a given customer. CleverTap discusses more options for calculating the CLV here.

Source: CleverTap

Predict the customer lifetime value to adjust your ad spend

Take online gaming, for example. A variety of people play a game like Candy Crush. Depending on how long the players stay in the game, how much they spend, and how many new users they bring from their network into the game, they create a particular value or profit for the company. More often than not, the user base is so large, that it is easy to build groups or segments of similar players.

After the CRM data is analysed, a revenue value can be attached to each customer group. This information can then be sent to the marketing team which needs to make sure that any newly acquired users are worth more than the campaign's costs per new user acquisition.

Let's say the company needs to grow their users base or enter a new market, as acquisition in gaming is constant, and decides to run a marketing campaign to promote its product to new potential customers. Using the historical data from other countries and their well-known customer behaviour patterns, one can predict the customer lifetime value within the first seconds of the consumers' playing behaviour. Then they stop or continue the ad, adapting their campaign spend accordingly.

The acquisition marketing team always wants to know which ads performed the best, brought the highest spenders or the most engaged ones. Using recent data on newly campaign-acquired users and the LTV models, they can stop underperforming campaigns fast.

Conclusion

When the first party data is connected with the marketing data - such costs saving decisions can be easily made. And today, one can do the work above even better: with smart algorithms and massive knowledge in users' online behaviour, Google's smart bidding algorithms perform precisely the work described above in a matter of milliseconds.

Treating all customers the same might result in a waste of time and energy. Instead, you can focus on identifying the value your customers bring to your business and run marketing campaigns to increase revenue. 

Crystalloids is a leading partner in the Netherlands that specialises in both Google Cloud Platform and marketing activation on owned and paid channels. We can help you integrate the data sources and applications which enable low implementation cost and fast time to market.