Incorporating Customer Lifetime Value Into Paid Search

Should CLTV be integrated into a businesses approach to paid search?

It depends on the vertical, and the customer behavior. If a given customer this year is only 15% likely to place another order with you next year, then the LTV rolls off so quickly as to be almost meaningless. At about 20% annual return customer rate, an interesting phenomenon happens--no matter how many orders a customer has, you've already collected 80% of the revenue you'll ever get from them. This is because by placing the second order, they've self-identified as someone more likely to shop with you, and graduate to a higher LTV bracket--but their revenue total is still 80% behind them here, too. Further, you should take a look at what channels are driving subsequent purchases. If it's something like email, where the costs are minimal, then more of that revenue could be considered eligible for subsidizing customer acquisition. However, if customers always come in via the same paid inbound channels regardless of their order count, then you have to pay for each order on its own merit. Don't forget that even if you have a 50% returning customer rate, that coefficient stacks, and the roll off is very quick--you generally can only count fractions of second or third orders at most before you're splitting pennies. However, if you have a huge number of orders per customer per year, and your customer re-acquisition is clean (email, etc.), then you can theoretically calculate an acceptable loss on a first-time order. Few have the retention to support this, but I've seen it in action before.

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