The Importance of Customer Lifetime Value

Understanding the Importance of LTV in Digital Marketing Spend

A common mistake that companies make when planning out their marketing spend is failing to understand the lifetime value (LTV) of their customers. Understanding LTV is critical to determining an appropriate spend for a digital marketing campaign, and also how much to spend per lead. Keep reading to gain a better understanding of LTV and why it matters so much.

Why LTV Matters in Digital Marketing

To understand the lifetime value of a customer, you may have to adjust the way you think about your marketing spend. When your company is running Google Ads, you pay per click. The mistake that so many businesses make is only looking at cost per click as it relates to their first transaction with a customer, without considering the customer’s LTV.

For example, let’s say your average cost per click is around $8. If your website has a 10% conversion rate, this means that you’re spending $80 per lead. At first glance, this looks like a huge amount of wasted money, especially if your average service only costs $100 to $200. However, there’s another factor that needs to be considered here: the potential for recurring transactions with a customer.

While an $80 spend for a single lead may not be worth it for a one-time transaction, it’s a much better deal if you’re able to convert that lead into an ongoing relationship with the customer. If, rather than a single service, you sign the customer up for a recurring service plan that brings in $100 per quarter, you’ve just spent $80 for a lead that’s worth $400 per year, possibly for many years to come. Keep that customer on your service plan for five years, and you’ve made a 6,150% return on your investment.

This is why the LTV of a customer is such an important factor to consider. If you’re able to convert a sizable number of your leads into ongoing relationships that bring in hundreds of dollars per year, the spend to find those customers is negligible and your company will enjoy an amazing ROI from your Google Ads campaign.

Do You Have More Questions About LTV & Leads?

Once you understand the math behind LTV, you’ll be able to properly plan out your digital marketing spend. If you’re still unsure about how to factor LTV into the equation, speak with NorthWing Digital today and we’d be happy to answer all of your questions.

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