Why Customer Lifetime Value is important when calculating ROI

Today we are going to talk about Customer Lifetime Value, and why it is essential. Before we get to CLV, let’s do a quick refresh. Digital Marketing requires results, and a key performance indicator (KPI) used for this is the return on investment (ROI). This measurement is common knowledge for many, but I still see people making the mistake of calculating ROI against gross profit, which can be a false sense of success in many cases.

Calculating ROI For Digital Marketing Campaigns

The proper way to calculate ROI is: advertising dollars / net profit

If you spend $1,000 and you sell $4,000 worth of products, but your profit on $4,000 value of sales is $1,000, then you broke even with a traditional ROI. Businesses typically want to have 2:1 or higher ROI, which is not uncommon with some of our clients. However, what if you are breaking even or perhaps a little under the break-even mark? Does that mean you should change your advertising strategy or stop advertising? Not always. If you are confident that you are maximizing each part of the funnel for new customer acquisition, it may be acceptable to have a slight loss for a new customer if you use the customer lifetime value (CLV) as justification.

Calculating CLV For Digital Marketing Campaigns

CLV = average value of a purchase X number of times the customer will buy each year X average length of the customer relationship (in years)

We need to consider what the customer lifetime value is worth to you. If they are going to come back over and over again and you don’t have to invest as much money for them to return, then your margins will ultimately go up.

A Word of Caution

Do not use CLV as an excuse for an under-performing ad campaign on Google Ads, Facebook, Instagram, and other platforms. CLV can be a significant factor in growing your business, but you should always strive to optimize each step of the process for maximum results.

Our team of experts will help you determine the best plan for new market growth with customer lifetime value in mind, increasing customer frequency, and ultimately help your business grow.

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