If you’re a marketer then you’ll already be familiar with the concept of using cost per acquisition (CPA) metrics to define the success of digital campaigns.
But increasingly, marketers are looking at how CPA and other targeted marketing costs interact with Customer Lifetime Value (CLV) to establish the true value of their digital marketing strategies.
Ultimately, what you really want to know is whether you made more money from a customer over the lifetime of a customer than you spent to acquire them. And you need to understand what strategies are most cost effective at finding and keeping customers.
We call this the Display Marketing Ratio (DMR). And to work it out you simply divide the customer lifetime value (CLV) by the cost of acquiring that customer (CPA), plus any additional post-sale marketing activity (the Total Marketing Cost or TMC). Or DMR = CLV/TMC.
Using basic marketing data and a common-sense approach to calculating cost and sales value, it’s possible to arrive at one number that shows the effectiveness of different display strategies.
With this information you can addresses basic questions every marketer should be able to answer:
- Are you finding your most valuable customers?
- Are you targeting them effectively?
- Are you making the most of the relationship once you win their business?
How to calculate your CLV
To calculate your CLV, you need to segment your customer into a few large groups – this will usually be by product category. Then follow this calculation:
It’s important to include all sales revenue for customers over the first year. Marketers who calculate customer value based only on the first sale lose the ability to measure the success of ongoing marketing campaigns, such as upsell and cross-sell programs, and many other tactics designed to increase revenue.
Be aware that the CLV will be different between different customer groups, and that the CLV with change over time. As Rebecca Lieb, strategic advisor, author, and columnist specialising in digital marketing, says:
“Customer lifetime value has long been used to determine not just campaign effectiveness, but also to determine how much should be spent on marketing investments… however, it’s important to know that customer lifetime value is not a static figure, and customer lifetime value changes as products and pricing changes.”
One other important segment to look at are your ‘best’ customers (measured by whatever criteria is most important to your business) and establish the CLV for this group compared to the average CLV
for your entire customer base. When you know the true value of your ‘best’ customers you can calculate how much to invest in acquiring them and keeping their business.
How to calculate your TMC
Many marketers have been using CPA as their primary display campaign effectiveness metric for some time. However, when you look at CLV you need to add in any display campaign costs for upselling or reactivating lapsed customers to establish the TMC for each target group.
Again, it’s important to calculate separate TMCs for each specific display marketing strategy over time to establish which is the most effective. For example, targeting different devices, audience segments, geographic regions and contextual environments can significantly affect the initial CPA and, over time, the TMC.
Understanding your Display Marketing Ratio
The DMR is a ratio that supports the decision-making process and allows a marketer to assess marketing performance.
If you spend as much on your display marketing to targeted customers as you earn from those customers, the DMR will equal 1. So if your DMR is at or below this level it’s time to take a look at your marketing effectiveness.
How DMR can help you build a more valuable customer base
By using DMR to guide your marketing investments you’ll gain a more complete view of how much you can invest to acquire more valuable customers.
It’s important not to see your DMR as a one-size-fits-all number, but as different ratios for different customer segments. You can segment customers in any number of ways to uncover the highest value customers, such as location, time of day, demographics, device, interests and many other variables.
Calculating the CLV and TMC for each segment doesn’t necessarily make DMR more complicated, but it does require the ability to apply the same metrics to different customer segments – and that generally requires investing in marketing technology that delivers this capability.
When you’re assessing the value of your customers and deciding which audiences to target with your marketing budget for best effect, the DMR cuts through the noise and complexity to give you a clear view of your marketing options.
We’d love to discuss how we can segment your audiences and improve your DMR. Find your nearest Crimtan office here.