Originally posted in r/PPC on reddit.
Question
We sell parts. Our customers are typically purchasing based on an immediate need. This results in a lot of one-time purchasers, even though our returning customers each month are growing (each month we are at about 40% returning customers).
I’ve always had the mindset that our “customer lifetime value” would essentially be our average order value plus a little bit to account for returning customers, because we know a % of them will be coming back and spending more.
The formulas I’m finding require calculating the length of time between first and last order. Often times, a customer has purchased once, so that variable ends up as a 0, and therefore seriously dragging down the average “customer lifespan”.
I end up with an average customer lifespan of much less than a year, multiply that by the average order value, and end up with a CLV that is a fraction of our average order value.
If I were to bid and manage PPC based on this CLV, it just wouldn’t make sense. If our customer base was 80% returning customers each month and they came back multiple times a year, I think this calculation would have some value, but that’s not the case for us.
Maybe I’m not thinking about CLV correctly, or I’m missing something in the calculations.
Curious if anybody here uses CLV in managing PPC, and if so, how do you apply it to your work?
Answer
When it comes to PPC, I think feeding real data on the spot is the best, so using the actual basket value from the very first order. If for whatever reason you’re not able to feed the machine with real data, using AOV (average order value) is probably the second best option.
Returning customers, repeat orders aren’t part of acquisition anymore, they go through another funnel further down, so it shouldn’t be fed back to the PPC platforms.
I think LTV can get quite complicated because there’s many ways of calculating it, depending on your sales cycle, but if PPC is helping you deliver more sales after the first acquisition, I’d argue it’s remarketing, and it shouldn’t be considered as LTV, you should look at returning customer order value vs new customer order value.
LTV matters in reporting, but the platforms shouldn’t see this – in every account I’ve worked on, we use LTV internally to understand profitability, but our acquisition targets are not based on it, e.g. CPA is $100, AOV is $70 but we know we can afford a $70 AOV because average LTV is $440, but target ROAS shouldn’t be 440% but 70% instead we want to break even, and x% more or less if we want to consider growth or scale back for profitability.
There is no magic formula: LTV is LTV. However, what you feed to the platform is another story, and it all comes down to your attribution strategy.
My advice is to feed the most accurate data you can provide to the platform – if your average LTV takes a year to reach, it wouldn’t make sense to feed 1 year worth of data to the platform.
In case of repeat customers who come through PPC, it’ll depend on your strategy once again, but I’d argue they’re no longer part of the same funnel, so they shouldn’t be considered as a newly acquired customer.
Platforms, such as Google Ads, can exclude previous converters.
To make it easier, you’ll probably want to focus on the order value on first purchase because you want to acquire customers who will pay first – retention should not be a problem for PPC to solve, and in the case of repeat purchases, the customer’s already in your system, so you have much more room to work with!