In the dynamic landscape of marketing, businesses often dive into testing new paid channels without fully crunching the numbers to ensure a positive return on investment (ROI) for their products or services.
The Overlooked Gem: Lifetime Value (LTV) in Marketing
This article aims to demystify the often-overlooked aspect of Lifetime Value (LTV) for your customers/clients, guiding you through its calculation and explaining how this metric can be leveraged to assess the profitability of LinkedIn ads for your business.
It’s crucial to recognize that no paid media channel guarantees certain results or a positive ROI. While paid social and marketing should be viewed as investment vehicles, it’s equally important to acknowledge the inherent risks associated with running paid activities. Although there are ways to maximize your investment and optimize these channels for better returns, that discussion is beyond the scope of this article. If you’re interested in top strategies to enhance your ROI on LinkedIn, please refer to my previous article linked here.
Decoding Lifetime Value (LTV)
Firstly, what is LTV?
LTV stands for Lifetime Value. It is a business metric that quantifies the total value a customer or a client generates for a company over the entire duration of their relationship with the business. In other words, LTV represents the amount of revenue a customer is expected to generate for a company throughout their lifetime as a customer.
To define Lifetime Value (LTV) more formally:
LTV = (Average Revenue per Customer per Period) x (Customer Lifespan)
The concept of LTV is crucial for all businesses as it helps you understand the long-term value of acquiring and retaining customers. By knowing the LTV, companies can make better decisions regarding customer acquisition costs, marketing strategies, and customer retention efforts. It also allows businesses to focus on high-value customers and allocate resources more efficiently to maximize revenue and profitability.
Therefore, knowing your overall retention rate and understanding your company’s retention strategy could very much help you understand your business figures.
Applying LTV in Real Scenarios: A Practical Example
Now that you know how to calculate your LTV, and you also understand the importance of knowing your retention rate, we can look at an example:
Let’s say your average monthly revenue per customer is £1485, and we need to determine the customer lifetime.
If we assume a customer lifetime of 2 years:
LTV (2 years) = £,1485 x 2 LTV (2 years) = £2970
Now your LTV can be considered a useful reference point for evaluating the potential return on investment (ROI) from running LinkedIn ads. But please also remember that LTV is just one factor to consider in the decision-making process.
The next step is to compare the estimated LTV with the cost of acquiring a customer through LinkedIn ads, often called CPA (cost per acquisition). The cost to acquire a customer (CPA) should ideally be lower than the LTV to make the advertising efforts profitable in the long run.
Let’s assume the CPA for acquiring one customer through LinkedIn ads is £1,000, and the LTV for a 2-year customer lifetime is £2,970:
Profit per Customer (2-year lifetime) = LTV – CPA Profit per Customer (2-year lifetime) = £2970 – £1000 Profit per Customer (2-year lifetime) = £1970
In this example, the profit margin per customer over a 2-year lifetime is £1,970, which is a positive value. This suggests that running LinkedIn ads could potentially be profitable, as the estimated LTV exceeds the cost of acquiring a customer.
However, keep in mind that the actual CPA (cost per acquisition) can vary based on ad performance, bidding strategies, and other factors. Therefore, it’s crucial to monitor and optimize the ad campaigns regularly to ensure they remain cost-effective.
It’s also worth considering the potential for customer retention beyond the 2-3 year estimate. If you can establish long-term relationships with customers and extend the customer lifetime further, the overall LTV could increase significantly.
Is it worth investing in LinkedIn Ads?
As mentioned earlier, the decision to run LinkedIn ads involves various factors, including audience relevance, budget considerations, competition and bidding dynamics, ad environment suitability, and content strategy, extending beyond the estimated LTV for your customers. As a general guideline, consider running LinkedIn ads if your target audience, including your Ideal Customer Profile (ICP), is actively present on the platform, and you have insights into your competitors’ LinkedIn Ads strategies. In such cases, using LTV as a reference point can help solidify your final decision.
If you still have questions about calculating LTV or determining if LinkedIn Ads align with your brand strategy, we are here to help. Click on this link to schedule your FREE strategy session.