Applying Lifetime Value to PPC

By — 07.12.11

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A mentor once told me, “The best CEOs are the ones who can predict the future and act on it today.” This is the essence of what lifetime value (LTV) is about: predicting the future value of a customer and making the appropriate investments now to secure that value. LTV is key to retailer success. Managing it well makes the difference between linear growth and exponential growth. And only a handful of retailers do it well.

Zappos (now owned by Amazon.com) does a phenomenal job of managing to LTV. In 2008, CEO Tony Hseih released some striking data on Zappos’ success:

  • More than 75% of purchases are made by repeat customers
  • Over 50% of their customers purchase again
  • Repeat customers have a 27% higher average order value (AOV) and will order 2.6 more times in the next 12 months (3.6 times per year)
  • With a little math, we can see that the 12-month LTV of a customer is over $300—which is 175% higher than their first purchase indicates

Figures like these explain why Zappos’ year-over-year revenue growth resembles a hockey stick. There are many reasons for their high rate of customer loyalty, such as their one-year return policy (on shoes and clothing!), free shipping both ways, and 24x7x365 phone-based customer service.

Retailers like Zappos and Amazon don’t optimize their campaigns to obtain one incremental sale. Rather, they optimize it around obtaining one incremental customer.

Amazon is a master of securing customer loyalty, too, with strategies such as Prime (which gives customers unlimited free two-day shipping and unlimited video streaming for $79/year), the Kindle (an e-book reader that pulls content from Amazon’s vast library), and Amazon-branded credit cards (which provide reward points redeemable toward future purchases on Amazon).

What does this have to do with paid search? Well, knowing what a customer will be worth in the long-run influences what a retailer should be willing to pay to secure the position in search results necessary to acquire that customer. Imagine if, like Zappos, you knew that a customer was worth 3.6X the value you believe they have today. In that case, you would be willing to bid much higher to secure a higher position because ads in the top positions capture significantly more traffic. If you’re not optimizing campaigns based on lifetime value, you’re leaving future revenue on the table. Retailers like Zappos and Amazon don’t optimize their campaigns to obtain one incremental sale. Rather, they optimize it around obtaining one incremental customer.

Most retailers don’t know the LTV of their customers. It’s not always easy to measure (particularly at the point of new customer acquisition), but it’s important to get started. Adlucent realized the importance of LTV early on and was the first search marketing firm to incorporate LTV calculations into DeepSearch™, our search engine program. Other vendors have recently offered a cookie-based solution, but we believe this solution is prone to error. We found that the right strategy was to integrate with the customer databases of our retail partners. By doing this, we are able to report and manage on LTV metrics at the keyword, brand, category, and retailer levels. This helps our retailer clients make more informed decisions about the appropriate ad spend for new customer acquisition. We’re also beginning to see new metrics emerging, such as a shift from the gold-standard metric of ROAS to LTV ROAS.

Managing LTV well means making investments today that will yield multiplier-effect benefits in the future. It’s the difference between slow-growth and hockey stick growth.

One Response

  1. [...] negative margins. Amazon will still aggressively promote it, however, because they understand the lifetime value the Kindle Fire—essentially a consumption device for Amazon’s vast library of digital books, [...]

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