It’s noisy out there in search engine marketing. So much so that retailers today are getting lost in big words like “semantic,” “programmatic,” and “machine-learning.”
Then there are the acronyms that are thrown about with little regard to what might be the most important metric E-Commerce business owners need to both know how to measure and incorporate it into their performance measurement.
We’re talking about Lifetime Value or Customer Lifetime Value:
- WHY it is so important
- WHY you need to be measuring it
- WHY you need to connect it with your Google Shopping campaigns
We would like to preface that this article is heavily laden with lots of math.
What is LTV and How to Calculate It
We just said it a few times, but we’ll say it again, the lifetime value (LTV) of your customers is one of the most vital metrics you need to know and know how to integrate into marketing analyses.
It also happens to be very easy to determine, but it also one of the most forgotten metrics. When solved, LTV tells the story of your customers and their interactions with your E-Commerce business. It teaches you how much a customer is truly worth, how much a customer spends, how often they return, and how long they remain a customer for.
The formula itself is quite simple:
(Average Order Value ‘AOV’) x (Number of Repeat Sales) x (Average Retention Time or LTD ‘Lifetime Duration’)
So, in the case of George for example, his store sells sporting goods. Customers spend on average $100 on a first-time purchase. George knows that his customers often return between 10 times to purchase again. George also knows that his customers continue to remain as such for up to 2 years.
($100 AOV) x (10 Return Sales) x (2 Years) = $2000
Hubspotter Ted Ammon (@tedammon) published an excellent piece a few years back all about calculating LTV for E-Commerce businesses. To this day it remains one of the top ranked articles on Google organically for its terms. Ted dove a little deeper into calculations and emphasized the importance of LTV.
Why You Need to Measure LTV
If there is one thing that stands out about incorporating LTV into your measurement, it would have to be its impact on how you can scale your inbound marketing and product advertising efforts.
Invesp CEO Khalid Saleh said it best in an article he published: “it costs five times as much to attract a new customer than to keep an existing one.”
In that single sentence, he summed up how crucial LTV is.
Now ask yourself “Do I know my Customer Lifetime Value?” See, many retailers focus so heavily on Cost Per Acquisition (CPA) or Cost Per Conversion (Cost/Conversion) as it relates to a single purchase, with a specific transaction value, and at a single blended cost. That’s where LTV is lost to the void.
Consider Scenario A: Retailer does not account for LTV
A customer purchases from your store. After advertising and/or marketing costs plus cost of goods sold your business nets $25 from the sale. That customer is worth $25 in net profit per the blended cost.
Now Consider Scenario B: Retailer accounts for LTV
A customer purchases from your store. After blended costs your business nets $35. That same customer returns 7 times to purchase over the course of the average 2-year retention period for your store. The marketing and/or advertising cost to generate those repeat purchases is 0. After only accounting for cost of goods sold, your business nets $55 for each return purchase.
[(Net ARPV $55) x (Repeat Sales 7 Times) x (Average Retention 2 Years)] + (OPV $35) = $805 Net LTPV
ARPV = Average Return Profit Value | OPV = Original Profit Value | LTPV = Lifetime Profit Value
We took the principle behind the equation for calculating LTV and specified it for calculating the Profit generated from just a single customer. From Scenario A to Scenario B, the difference in value is tremendous. Retailer B’s calculation shows that its one customer is 3120% more valuable than that of Retailer A’s.
Connecting the Dots with Google Shopping
An anonymous retailer once told us:
“I am happy losing ten to twenty thousand a month on Google ads because I know exactly what my customer lifetime value is.”
Fast-forward to today and I’m sure they would say the same about Google Shopping. Now, for E-Commerce business owners, Google Shopping is one of the fastest and most cost-effective solutions for generating store traffic and sales.
Unlike marketplaces, there are advantages where Google Shopping holds sway and for example:
- Cost Control: Marketplaces (such as Amazon) offer a platform which is more geared towards moving product and/or clearing inventory. It is harder to be profitable when using a marketplace as compared to Google Shopping. On Google Shopping, your costs are your own. They are your Cost of Goods Sold plus Ad Spend. You aren’t giving up any additional margin that you already have. Plus, with the right strategy in place, you can continuously reduce wasteful ad spend while increasing ad revenue.
However, in relation to Customer Lifetime Value, there is one thing that Google Shopping has that the use of a marketplace like Amazon certainly does not. That is Customer Ownership.
Customer Ownership is an immensely underestimated power to have and it goes together with the importance of Customer Lifetime Value. It is because of Customer Ownership that one may actually use CLTV.
But why should you be thinking about CLTV when dealing with Google Shopping? For that we go back to math.
Consider Scenario A: Advertiser does not account for CLTV
Retailer A spends $10,104.80 in one month and generates $170,458.84 in revenue just using Google Shopping and thus has a near 17 times ROAS (Return on Ad Spend). By not accounting for CLTV, the return value of these campaigns at 680 conversions is still only $170,458.84. After factoring COGS (Cost of Goods Sold) plus ad spend at a sample average margin of 25%, Retailer A nets $32,509.91 in this one month.
Now Consider Scenario B: Advertiser accounts for CLTV
Retailer B spends $82,223.91 in one month and generates $472,823.36 in revenue just using Google Shopping and thus has over a 5 times ROAS. Retailer B has figured that their AOV is $440 from Google Shopping, their average customer returns 15 times to purchase again, and that a they remain a customer for roughly 3 years.
($440 AOV) x (15 Repeat Sales) x (3 Years Retention) = $15,840 CLTV
Let’s now consider a perfect world where Retailer B’s 1,577 conversions were all unique, one-time purchases so that would be 1,577 customers from Google Shopping.
(1,577 New Customers) x ($15,840 CLTV) = $24,979,680.00 Total CLTV (Revenue)
With a sample margin of 30% Retailer B profits $132 on the $440 AOV. Now Retailer B factors in Cost/Conversion at $52.14 and thus their Total Net Profit from one Google Shopping conversion is potentially $80.14.
(Net APV $80.14) x (Repeat Sales 15 Times) x (Average Retention 3 Years)] = $3,606.30 LTPV/Customer
APV = Average Profit Value | LTPV = Lifetime Profit Value
Now, Retailer B can calculate their potential Net CLTV from this one month per the 1,577 customers that came from Google Shopping.
($3,606.30 LTPV/Customer) x (1,577 Customers) = $5,687,135.10 Total Net CLTV
Retailer A VS Retailer B
Retailer B may have had to do a little more math but the result will have a far-reaching impact in how they calculate both gross and net returns from their Google Shopping campaigns.
While Retailer A continues with their one-track mindset they wind up missing the big picture. Whether they look at monthly, quarterly, or yearly returns they will still only see each as a single value. There is really no depth to their return other than that.
Retailer B spent $82,223.91 on Google Shopping to generate not only $427,823.36 in one month’s revenue but because they factor CLTV they can also project further:
- $24,979,680.00 in CLTV Revenue at a cost of $82,223.91 = 303.8X Lifetime ROAS
- $3,606.30 in LTPV/Customer at a Cost/Conv. of $52.14 = 69.16X PROAS/Cust. (Profitable ROAS)
Ratio wise, Retailer B’s Total Net CLTV winds up also being about a 69.16X PROAS.
Though Retailer B’s single month ROAS was just over three times less than that of Retailer A’s, their collection and use of Customer Lifetime Value data puts their Lifetime ROAS over seventeen times higher.
Retailer B’s CLTV Revenue is also over 14 thousand percent higher than that of Retailer A’s single month revenue where CLTV is not calculated.
Retailer A needs to be asking themselves: “Do I want to make $170 thousand or $25 million?”
All Retailer A needs to do is start calculating their Customer Lifetime Value. Even if they were at a negative ROAS and let’s just say they spent $17,000 only to generate $10,000 in revenue from 200 conversions on Google Shopping (a rarity but just for argument’s sake), by implementing Customer Lifetime Value in their performance analysis they could see that a negative can still be a positive.
Sorry, just a little more math, we promise.
Retailer A begins calculating CLTV and finds that their AOV is around $200, their Average Repeat Sales is 9, and they discover their LTD to be approximately 2 years.
($200 AOV) x (9 Repeat Sales) x (2 Year Retention) = $3600.00 CLTV
Now with this data in-hand, Retailer A’s $7000 LOSS may start to look a lot better.
($3600 CLTV) x (200 Customers) = $720,000.00 Lifetime Revenue
Although Retailer A technically lost $7000.00 in one month’s Google Shopping revenue, they wound up with the potential to GAIN $713,000 in Lifetime Revenue from their “lost” investment. This sets their final ROAS from the original 200 conversions and $17,000.00 spend to around 41.9 times.
Notable difference, right? It’s like night and day.
With Great Power Comes…
Incorporating Customer Lifetime Value calculations in your Google Shopping campaign performance analyses can provide tremendous insight into the “hidden potential” behind each conversion.
However, the knowledge and use of the family of CLTV metrics mentioned throughout this article is merely the tip of the iceberg.
Retailers MUST do their due diligence. By neglecting the optimization of their Google Shopping campaigns the chances of consistent or better month-over-month conversions will most likely suffer. Additionally, without proper on-site CRO (Conversion Rate Optimization), one runs the risk of low probability for repeat customers.
So, retailers, ask yourselves:
- How are my Shopping campaigns structured? Campaign structure in Google Shopping can make or break performance. Some structures leave a lot of room for error and can have awful consequences when it comes to return and growth. Learn more about common campaign structures to avoid in a recent post.
- Am I doing everything I can for my Shopping campaigns? You won’t get away with a “set it and forget it mentality.” There are several programs you should be taking advantage of to better your campaign performance outside of basic bid management. This can include anything from Merchant Promotions to RLSA (Remarketing Lists for Search Ads).
- Are my products priced competitively? This is often the last thing retailers even think about and many seldom realize the importance of competitive pricing. If you are consistently priced higher than your top competitors and don’t offer some other form of cost-savings (Free Shipping, Site-wide Discounts) then your clicks and conversion rates could certainly trail behind
- Is my website optimized for mobile? Google is all about their “mobile-first world” and there’s a good reason for it. In a study, we discovered that Mobile Shopping campaigns convert on average 3 and 5 times higher than that of Desktop or Tablet Mobile conversions on Google Shopping should be considered on their own and it is very important that you utilize Segments in AdWords to analyze device-level performance.
Note that these questions barely scrape the surface. There is a whole slew of additional optimizations and best practices to consider. We hope that we have, at least, gotten the wheels to turn.
CLTV is an invaluable metric not only for Google Shopping but for your E-Commerce business as a whole as well.
Start using it today!