Don’t Let Cost Per Acquisition Tank Lifetime Value
By Nate Hartmann | 9.12.17
When you’ve been in digital marketing for as long as I have, you learn a few tricks about optimization. The one that I’ve found to be most successful is transparency. I can’t remember a single pitch I’ve gone through where, at some point, I don’t break out something along the lines of:
Remember that old saying that “half of my advertising budget is wasted, I just don’t know which half?” Well, you don’t get that issue in digital. You know what’s working, when it’s working, and to what extent it works.
But there’s a flipside to that transparency: When a marketer obsesses over tracking AdWords, Google Analytics, social media analytics, etc., they start to microfocus on the initial costs of acquisition. The problem with that obsession is it directs attention away from the value of the customer over the lifetime of the relationship she’ll have with a business.
So how much is a customer worth?
If it costs $10 to make a $100 widget, you’d probably be comfortable spending another $10 to $20 to make a sale. After all, selling a lot of widgets and making $70 to $80 for each one is better than making $90 on a widget that never picks up steam in the marketplace.
But what happens when customers spend $100 on the widget, and then they spend $100 monthly for the next two years on a service that supports the widget? Keeping that cost per acquisition (CPA) down at $10 to $20 is great—especially when looking at the lifetime value of the customer (Spend $20 to make $2,400? Sign me up!)—but it might not be realistic.
Why not? Well, you don’t buy coasters the same way you buy phone plans.
I say this because everyone buys coasters. Can you think of the last time you bought coasters? I can’t. I’m using one right now, though, so, clearly I’ve made that purchase in the past.
Like our widget, coasters are a simple, one-time purchase. There aren’t really coaster brands, and consumers don’t research them. They have them, and they’ll probably buy more, but who knows when. The marketers at that coaster manufacturer need to keep the CPA down for those inconsistent, one-off purchases.
But, what happens when you buy a phone and a service plan?
Let’s use my cell phone plan as an example of an ongoing service that, like our example, is about $100 per month. AT&T has made thousands of dollars from me over the past decade on my plans alone. Although I could leave AT&T when my contract is up, I don’t. Sure, I could save money with Sprint; I’m just worried about network coverage with all the traveling I do. So, what is Sprint willing to spend to finally woo me? The $20 that a coaster or widget company might spend?
Sprint isn’t going to look at one month’s fee of $100 and say, “Well, that’s all Nate’s good for in September, so make sure we spend less than $20 to get him as a customer.”
Sprint is thinking long term. Its rationale is this: “Our customers spend about $100 per month. We’ll spend $2,400 to acquire a new customer, because, sure, that’s equivalent to a two-year contract, but our average customer stays with us for eight years. So, really we’re spending $2,400 to acquire $9,600.”
Again, sign me up.
What many marketers don’t get
Too many marketers look at that initial transaction: Did they make money from that first sale? In month one? In quarter one? Instead, they need to be looking at their cost per acquisition stacked against the lifetime value of the relationship they’ve just won.
Digital is often harangued as the demise of the relationship; as a tool that enables people to silo themselves off and obsess over selfies. But when it comes to businesses, the data that digital offers enables relationships that could have otherwise only been dreamt up in a Philip K. Dick novel.
Marketers don’t have to look at shelves and guess at why people didn’t buy certain items, they can segment out who’s leaving what items in their cart in favor of others and test price points, descriptions, and images. They can tell what whitepapers or guides prospective customers download, how long site visitors spend on which pages, and at what point viewers stop watching a video.
The data that digital captures empowers relationship building between brands and their customers. It’s that relationship that marketers need to keep in mind when weighing CPA.
Balancing cost per acquisition and lifetime value
Once you determine your average customer’s expected spend over a given time frame, you can figure out what that target CPA should be. From there, you can see how average customers interact with the brand, and leverage those specific touchpoints to increase customer retention and purchase frequency.
After an initial conversion, what you have is a conversation starter. You know that John Johnson needed a widget and spent $100 for it. Now, what else should John be thinking about? Is there a way to use that widget more effectively than he knows how to right now? Is there a way to make that widget last longer? Is there a service you provide that will help him to get the most from that widget?
These are pieces of an ongoing conversation that keeps customers engaged, and potentially increases lifetime value as you market to them (and those like them) more effectively.
What I’ve found that works best for us at Yellow Box is reporting on cost per acquisition, as well as lifetime value. Track what you’ve spent to build an ongoing relationship, not just what you’ve spent for that initial conversion.
I’ll use an example from a few months ago.
We have an ecommerce client that was worried about their pay-per-click return on ad spend (ROAS) dropping below their ideal 5-to-1 ratio as we broadened their campaign targeting to non-brand keywords. While totally understandable, they were looking at the cost of each initial sale, and didn’t focus on the whole story: that the average customer buys 2-3 times a year for 3-5 years.
Once they considered that lifetime spend, they were able to see the value of the relationship built compared to the cost of the acquisition. They were making a little less revenue on that first sale than they considered ideal, but the broader match keywords effectively attracted new customers who otherwise would have never been part of the campaign based on target ROAS.
When all is said and done, digital enables you see exactly what you’ve spent on which channels, and assess whether that spend leaves your margin where you want it to be. With so much data, it’s easy to get caught up in that initial revenue compared to overall acquisition cost, but it’s most important to look at the rest of the story your data is telling you.
When focusing on the value of the relationships you’ve built, instead of the price of acquiring a transaction, you do two things as a digital marketer: you avoid commoditization, and you better understand your business. Accomplishing that will enable you to create a virtuous cycle of building value for customer that builds your business.
About the Author
Nate received a master’s in advertising from the University of Illinois Urbana-Champaign, where he concentrated his research on social media and purchase intention. He’s taught digital advertising and public relations classes at the Charles H. Sandage Department of Advertising, and currently advises on digital strategy curriculum for several programs.