Customer Lifetime Value and Cost Per Acquisition
I am the Marketing Manager for an eCommerce store. I have been reading a lot about basing CPA off customer lifetime value. However, I'm pretty confused about how this works. I understand the methodology, but it doesn't make sense to me. To give you some background our AOV is $70 and on average a customer will purchase from us 2.86 times in a year. Gross profit margin is 40%.
Using a relatively simple CLV model this means Customer Value for the 12 month period is $80. Using a 3:1 ratio, this would give me a target CPA of $26.69. Ok that's great.
But it presupposes that you only incur costs of acquiring a customer once. Let's say I go and get some customers at $26.99 per conversion with Adwords. Then I should be laughing.
But this is only effective in the case that they purchase the first time through AdWords and the other 1.86 times are directly incurring no cost. But this is not the way consumers behave. There's a good chance they will go and convert through adwords again a second and a third time. Which means you will incur the acquisition cost over and over again. Similarly, if they don't go through adwords, they may go through organic search the second time meaning I'm incurring SEO costs attributed to that second conversion.
This is why I currently base marketing spend on a cost per conversion basis. Under those constraints, I could only spend $9.30 per conversion on Adwords to get my 3:1 return.
So, am I doing things correctly? I'm a bit confused. Any help would be greatly appreciated.
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capri83 -
Thanks
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