Wrangling Up Your Customer Lifetime Value

Data Wrangling

In paid advertising when evaluating the success of your campaigns, you typically look at key metrics such as ROAS (return on ad spend) or ROI (return on investment). These metrics are both important when calculating the success of your paid advertising although they do not provide advertisers with the full picture in terms of profitability.

There is another important advertising metric that is often overlooked, yet important to calculate when evaluating the profitability of your paid advertising. It is the CLTV or Customer Lifetime Value.

The Customer Lifetime Value is calculated when you multiply your average order value by the average times a customer purchases from your website.

Example, if your average order value is $100 and on average customers will make two purchases over time from your website, your CLTV is $200 (100 x 2).

Although it is important to calculate your CLTV when evaluating the profitability of your paid advertising, increasing this metric has very little to do with actual paid advertising.

A simple formula that dictates to increase your CLTV, you must either increase your average order value or increase the average number of times a customer will purchase.

There are ways to increase both of course. To increase your average order value for example, you may look at anything from adjusting prices to bundling products to increase order size.

Similarly, to increase the average number of times a customer will purchase there are ways in increase the average such as staying in touch after the initial purchase through email or social media.

However, for follow up campaigns to be effective something must happen first whether you are an ecommerce or a professional service business, the customer must be happy with the initial deliverability.

To illustrate my point, I am going to share two stories one of a professional service (a recent visit to a dude ranch) and one of an ecommerce order that I recently placed for some fancy lightbulbs.  

A Recent Stay At A Dude Ranch

Last weekend, to celebrate the end of school our family decided to take a weekend vacation. Inspired by the movie City Slickers, I did a Google search for ‘dude ranch’ about a week before our desired trip.

As most do, I clicked on the first paid ad that appeared on Google which happened to be for a dude ranch outside of Santa Barbara (about 100 miles away).

After reviewing their website, reading reviews (paying particularly close attention to the negative reviews) and confirming availability we made the reservation.

This process highlights many key elements in producing good conversion rates using paid ads:

  1. The keyword they were advertising was relevant.
  2. Their bid was high enough to put them in the top space in Google Ads (high ad rank).
  3. Their ad was well-written earning the click.
  4. Their website was easy to navigate showing off their services and facilities.
  5. They had a good number of reviews with the 5-star outnumbering the 1-star by a ratio of approximately 10 to 1.

Add it all up and they earned the conversion of a weekend booking. With a conversion value in my case of around $1,200, I would imagine that their Return on Ad Spend and their Return on Investment must be particularly good.

However, as we discussed earlier these metrics are just the beginning and not the end. In order to see the entire picture, a business owner must calculate their CLTV.

For this stay, the hotel CLTV would be determined by increasing the order value (how much additional money do guest spend during their visit) and increasing the average number of times guest will return for future stays organically without doing a Google search.

At the hotel, the horse riding was separate so little opportunity for the hotel to increase their average value and all the meals were included with the stay, so again little opportunity there. In fact, the only things that I could see to increase the average order value were the bar and the vending machine.

Now, there are creative ways such as partnering with other experiences in the area other than the horse riding that may be able to increase value, but overall, there was little for the hotel to work with.

For this hotel then, the CLTV would be highly reliant on increasing their profitability by the increasing the average number of return purchases aka the average times that guest are going to return in the future.

The hotel was owner operated and they were friendly, in addition the hotel included nice accommodations. When not riding horses, there was a small, but nicely maintained swimming pool and a game room that the kids enjoyed.

However, there also were a few things that downgraded the experience. The included offenders included that the meals were not as quality as advertised; the dining room was setup using cheap folding tables and matching cheap plastic folding chairs; the mattresses and bedding was very old with springs poking through and both the eating area and cabins had ants and spiders roaming freely.

Now I realize this was a rustic experience and would have been fine at 2-star prices, but when you are charging 5-star prices your customers expect 5-star service and 5-star accommodations. With just a few changes, a 5-star experience could have been fairly easily achieved as most of the groundwork was already in place.

The stable on the other hand (which was not connected) went out of the way to provide a great experience.

My wife and son went on an hour and a half horseback ride. Distraught that she was not old enough to go on a ride, my 5-year-old daughter was overjoyed when the manager of the horse stable put her on a horse and walked her around the paddock for 10 minutes.

The bottom line was that as we drove home, I asked my wife if she would like to stay at the dude ranch again. Her answer was this, next time we should stay at a different hotel in Santa Barbara and come up and ride the horses at the stable. OUCH!

I would think that this answer is a common one and is definitely dragging down the CLTV of the dude ranch. With some easy fixes and taking into account what their customers want, this hotel would most likely see their CLTV and profit levels skyrocket.

Some Fancy Lightbulbs

When my office was constructed a few years back, the contractor had ordered these big round decorative lightbulbs as a finishing touch. As with all lightbulbs, one day it blew out and I had to search for another.

Like with the dude ranch, I again did a Google search. This time it was a search for the model number of the lightbulb. Through Google Shopping, I found 3 stores that carried the specific lightbulb that I needed all at the same price.

I clicked the Shopping ad from the first retailer (showing the importance of ad rank) and placed my order.

During the checkout process, I was offered a 4-pack of standard lightbulbs for $4.99 with no increased shipping. This sounded like a good deal as typically a 4-pack in the store is closer to $10. I therefore added the lightbulb back to my order thus increases my order value (which is as you remember one of the ways to increase the CLTV as well as a way to increase the ROAS and ROI).

My order took about 2 weeks to arrive, which in this day and age is a bit excessive for shipping time, but I had 5 other lightbulbs that were working in my office so I did not mind too much.

When I received my order, it was in a plain brown box and within the box nicely packed were my lightbulbs that I ordered.

What was not in the box was anything else. No catalog, no offer for more products, no card thanking me for the order, no offer for a discount for a future order, nothing but the order.

In fact, they did not even include a receipt or invoice for the order. The only way for me to see who the merchant was with whom I placed the order with was to look at my email or my credit card statement.

This company again had a great paid shopping ad campaign and great website and did a good job getting me to increase my order value. However, they missed a big opportunity to better connect during their most important piece of the initial experience, the deliverability.

In the restaurant business, it is a proven fact that if someone dines with you there is a 25% chance they will return. If they dine with you a 2nd time, there is a 30% chance they will return. If they dine with you a 3rd time, there is a 90% chance they will return!

I’m not sure of the exact numbers for ecommerce, but in my experience it is something very similar.

And if you know that the percentage of likelihood for repeat busines goes up drastically with each purchase, shouldn’t you do everything in your power to try to get that 2nd or 3rd order?

They paid for the initial conversion when I made the purchase. However, remember the CLTV is determined by the average number of times a customer purchases in their lifetime.

I’m going to need more fancy lightbulbs in the future, it is just a matter of time (although I did buy 2). However, when I need those fancy lightbulbs, I’m going to do another Google search for the model number. Even now a week after my initial order, I do not know that name of the merchant whom with I placed my order.

If I knew the merchant’s name, I would very likely go directly to their website because I know they have the light bulbs that I need. Now, I may very well end up with one of their competitors simply because when I place the order I’m not sure who fulfilled the first order and to be frank don’t really care.

This fact is where this merchant could do better and could find an opportunity to increase their CLTV and thus their overall profitability.

Final Word

As a business owner your business is increasing your profitability and a sure-fire way to do this is by increasing your customer lifetime value (CLTV).

Remember, to increase your CLTV you need to increase either the average order value or increase the average number of times that a customer will purchase from you.

Here are two rules to consider when providing a deliverable:

  1. Deliver your goods or service as if it was your mother who ordered it.
  2. Do everything in your power to make it easy for a customer to order with you again.

For both the dude ranch and the fancy lightbulb retailer they both missed an opportunity to increase their CLTV through their deliverable as they did not follow those two rules.

Take a few minutes, write down those rules where you can see them and take a look at your own deliverables. Are you following those rules or would your mother not place a 2nd order:>

Remember to stay safe and stay healthy!

Looking for More Information on Google Advertising?

Check out the all new The Academy of Internet Marketing (www.theacademyofinternetmarketing.com), the premier online marketing destination for small to mid-sized e-commerce businesses serious about substantially growing their online sales plus exclusive access to me, author of Make Each Click Count book series.

Complete Access To The Academy of Internet Marketing For $1

If you have the dedication and are ready to take your online sales to the next level, then The Academy of Internet Marketing was created for you. It provides the tools in the form of knowledge of what works today. Join us and see what makes us special and together we will grow your business.

If you are ready to take your online advertising to the next level, I welcome you to take a trial. It only costs $1 for access.

Happy Marketing!
Andy Splichal

ABOUT THE AUTHOR

Andy Splichal is the founder of True Online Presence, author of the Make Each Click Count book series, founder of The Academy of Internet Marketing and certified online marketing strategist with twenty plus years of experience helping companies increase their online presence and profitable revenues. To find more information on Andy Splichal, visit www.trueonlinepresence.com or read The Full Story on his blog, blog.trueonlinepresence.com.