As a marketer, you may at times have an intuition that you are not measuring the full-value of your customers beyond the first purchase. For example, the value of a customer to a car dealer is probably much more than the initial purchase price of their car, as additional value will be released through extended warranties, maintenance, and accessories during the ownership of the car.
The Boston Consulting Group’s Digital Maturity study highlighted that only two percent of advertisers have achieved full digital maturity, with only 42% of advertisers having data integrated across channels.
According to Salesforce Research’s fifth edition “State of Marketing” report, 43% of marketers are now tracking customers’ overall lifetime value (LTV), while 49% track mobile analytics.
As digital grows and marketing activities become cross-functional, there is now an increased focus to fully measure the value of a customer past their first purchase with a brand and realise the forward value of this customer. LTV is becoming a key ad spend optimisation metric for marketers shifting their focus on short-term profit to increasing value generation in the long run.
In this blog, we are going to explore:
- If LTV is a good metric that you should consider and why you should consider it
- How you can measure LTV
- How to activate this data for your paid search activity in Search Ads 360 (SA360)
Is LTV a good metric for you and should you consider it?
If we consider all marketing goals the same – to drive revenue – then the simple answer would be yes. However, I believe there are a few industries or business models that should focus on LTV as a priority to measure their business performance accurately. Below are a few examples:
- Your business model is based on a subscription model (streaming services, information technology products, loans, insurance)
- Your product is either free or has a small initial fee with multiple add-ons after the first purchase (mobile apps, premium subscriptions, gambling)
- Distinct customer segment with marked differences
High-value users tend to return more frequently, make multiple purchases and spend a higher amount over a specific period. As a result, they generate more overall value to your business, so you may want to pay a bit more to acquire those valuable customers.
With this in mind, bidding to cost per acquisition (CPA) or return on ad spend (ROAS) will only focus on short-term profit. It will allow for very limited information about the specific actions/products that are more valuable long-term (i.e free trial vs annual commitment). For those reasons, LTV is a key metric to accurately measure the performance of your marketing activities and build better business cases.
You may already have a rough understanding of the value of your customers – although it may not be quite formalised yet. In fact, many of your systems and current marketing strategy may already be influenced by the expected value or past value of certain customers. This is often the case for email marketing activities where you already segment users into different buckets based on their value. These insights are already influencing how you plan your marketing budget based on an “expected return”. However, that value is probably not used as a key performance indicator (KPI) or a key metric in your reporting, and remains an assumption.
Create segments based on value
Therefore, the first step to look into is creating different customer segments based on their value to the business. In order to inform your calculation, you can use different sources already available to you. An easy one is to look at the segment you have already created in your customer relationship management (CRM) software, or analyse data and purchase behaviour in Google Analytics (GA). In addition, explore the Lifetime Value beta feature in GA under the audience tab that can help you build this calculation.
Create a simple calculation
You can also do a simple calculation if your product offering is straightforward (i.e a subscription based business model with simple monthly payments). It’s important here to consider your business holistically regardless of the digital channel. Once you have done this, you can start identifying different segments of customers based on their value. Those are usually as noted below, but you may refine them based on your business needs. It’s worth remembering that over segmenting will add to the complexity of your research and will make activation of this data in your digital channels more challenging.
Below is an example for an airline company:
- Business traveller – Frequent travels for professional use
- Leisure traveller – Travel to a holiday destination once or twice a year
- Budget traveller – Budget and affordability is the key unique selling proposition (USP) to purchasing a ticket (may travel once or less in a year)
Refining bidding data
When you are considering LTV, there are multiple data points that are taken in consideration, often combining both direct revenue and offline data. Below are the different revenue sources that you should consider when looking to bid toward LTV/profit:
- Online revenue only
- Online only profit/margin
- Omnichannel profit/margin
- Omnichannel profit/margin + LTV
Activating LTV in SA360
In order to activate LTV, there are few steps that can be taken in SA360:
- Start measuring LTV in SA360 as a new metric
- Start reporting on LTV as secondary KPI alongside your current CPA or ROAS
- Once you have realised the full value in SA360, you can start bidding toward LTV directly
In order to start bidding toward LTV in SA360, you can choose different options which are listed below from the easiest to the most complex solutions
1. Use a simple calculation
The first step towards LTV is to make a simple calculation, such as calculating your average order value and total purchases made per year. If we take the example of an airline company, we could have this simple calculation set in a formula column in SA360:
This new column can be used as secondary KPI to report on LTV alongside your revenue and CPA.
Using a conversion value is very easy to have a view on LTV directly in SA360 for each conversion.
Below is another example of an insurer selling different types of insurances:
Each of those products is likely to already be tracked either through your floodlight data or in GA.
2. Refining your calculation per segments
Using the first method, you can refine your approach by taking additional signals to create a more complex LTV calculation. Using our example of the airline company, we can add signals that will help us understand if the customer is a business traveller or a leisure traveller.
Each of these can be in SA360 based on a number of signals that can be brought through custom floodlight variables for high-, medium- or low-value conversions, and actioned through a weighted revenue column like below:
(High LTV * 4 + Mid LTV * 2 + Low LTV)
3. Use offline upload
This step will require additional data science and development resources in order to activate LTV in a more complex and automated way. There are fortunately different tools that can help in this process within the Google Marketing Platform (GMP) stack such as GA and Google BigQuery. In most cases, you will need to set up the following data flow:
- Activate the BigQuery Data transfer service for SA360
- Create a BigQuery conversion table with:
- Floodlight activity
- Google Click Identifier (GCLID)
- Lead/sale ID
- Import CRM data to BigQuery and assign LTV value at floodlight level
- Import your lead to sale at category/product level (optional)
- Use GMP’s application program interface (API) to upload conversions into SA360 to track total estimated LTV and ROAS
A similar process can be taken with GA360 by connecting your CRM data using a unique ID. Remember that data should be uploaded at least once a day in their respective order (with a timestamp).
4. Use advanced machine learning to predict LTV
Using machine learning, you can create a model that can predict LTV at the time of bidding based on a number of signals set in your model. With this approach, you will be able to automatically measure the future value of each transaction and bid toward this. This approach will require data science and development resources to implement this advanced solution for your paid search activity and also inform the rest of your channels.
Most advertisers are now realising the importance of LTV for their business in an increasingly competitive auction impacting CPA and return on investment (ROI). However, as pointed out by the BCG digital marketing study, only 2% of advertisers are mature enough to dynamically predict the value of a customer. The key takeaway is that every advertiser should start considering LTV as one of their KPIs, and begin measuring and reporting on this value. This will help you shift your strategy from being focused on short-term revenue generation, and instead focus on a long-term, advanced approach that will help increase the profitability of your digital activities.
If you’d like to learn more about leveraging LTV with SA360, or if you’d like to speak with someone on our PPC team, please get in touch.