In the realm of Pay-Per-Click (PPC) advertising, understanding your Customer Lifetime Value (CLV or LTV) is paramount. It provides insight into the long-term value each customer brings to your business, allowing you to make more informed decisions about your ad spend. But how do you accurately calculate PPC Customer Lifetime Value? Here’s a step-by-step guide:
1. Determine Average Purchase Value
Begin by calculating the average amount a customer spends during a single purchase.
Formula: Total Revenue / Number of Purchases
2. Calculate Average Purchase Frequency
Determine how often, on average, a customer makes a purchase within a specific time frame (e.g., annually).
Formula: Total Number of Purchases / Unique Customers
3. Compute Customer Value
Using the previous steps, calculate the value of the customer over your chosen time frame.
Formula: Average Purchase Value x Average Purchase Frequency
4. Estimate Average Customer Lifespan
Determine the average number of years a customer continues purchasing from your business.
5. Calculate Customer Lifetime Value (CLV)
Multiply the Customer Value by the Average Customer Lifespan. This gives you the total projected revenue from a customer over the course of their relationship with your business.
Formula: Customer Value x Average Customer Lifespan
6. Factor in PPC Costs
Subtract the cost of acquiring the customer via PPC from the CLV. This includes ad spend, agency fees, and any other related costs.
Formula: CLV – PPC Costs = Net CLV
7. Regularly Review and Update
Customer behaviour, platform costs, and market dynamics can change. Regularly revisit your CLV calculations to ensure they remain accurate and reflective of current trends.
Conclusion
Understanding your PPC Customer Lifetime Value is essential for assessing the long-term profitability of your advertising efforts. By regularly calculating and reviewing your CLV, you can make data-driven decisions, optimise your ad spend, and ensure a sustainable and profitable e-commerce venture.