Customer Lifetime Value and Cost Per Acquisition

1 replies
Hi There,

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.
#acquisition #cost #customer #lifetime
  • Profile picture of the author capri83
    Hi,
    I am in a similar position and am having some issues myself. From my understanding of this model, it does not allow for retention costs. I would suggest working out what the average retention cost would be per customer, you could look at how many repeat orders were received within a set time period vs what marketing campaign generated those etc. Retention costs are almost always significantly lower than acquisition costs.

    Average CLV is a very useful metric however it needs to be a part of your strategy, not the determining factor on your CPA, for example, if you look at segmenting your customers, you may find that social traffic converts more and has a higher retention rate where as CPC traffic has a lower retention rate and a higher AOV, therefore the CLV for each channel will be different and your CPA will change.

    I think the key take away would be to ensure that you have a solid retention strategy in place that includes targeted email, loyalty schemes etc. I do not think that having a customer return through organic would incur any additional costs, if anything it would improve your ranking due to returning customers with good landing page experiences.

    I would say that if you have historical data, analyse this in more detail and try to identify retention costs, these can then be included in your CPA, if you do not, I would not worry too much about retention costs through repeat customers via Adwords etc, if you are targeting them with the right messages at the right times, you should see them return through those channels.

    On a side note, if you are using Facebook marketing, you can also use the Facebook pixel to exclude previous customers from your marketing

    Hope that helps
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