Marketing is one of the most crucial things for the success and growth of your business. It allows you to acquire new customers and improve sales. However, spending a lot on marketing can reduce profitability. Therefore, you should put efforts into optimizing your marketing spend.
The most crucial metric that can help you regarding this is customer lifetime value. It allows you to identify high-value customers and spend your marketing budget accordingly. Now, the main concern is how to use it to optimize marketing spend. Don’t worry! We are here to help you regarding this.
A Stepwise Guide to Using LTV to Optimize Marketing Spend
Step 1: Calculate LTV
Before you do anything, you need to calculate the customer’s lifetime value. However, it’s a tricky metric and most business owners don’t know how is LTV calculated. You need to track two additional metrics to calculate it. These are:
- Average Revenue Per User
- Churn Rate
Once you track these metrics, you can calculate lifetime value using the following formula.
LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
You can also calculate it using the churn rate. The formula will be:
LTV = ARPU / User Churn
It’s often considered the most convenient way to track these crucial metrics as churn rate is readily available. The most convenient way to calculate and analyze it is by using Baremetrics. It’s a trusted tool with a user-friendly interface.
Step 2: Make Cohorts
Once you manage to calculate lifetime value using the aforementioned formulas, the next step is to make cohorts. You have to segment them based on the value they add to total revenue. Not all customers contribute equally to your revenue. Some may only buy once, while others will make frequent and high-value purchases.
You can segment them into three groups.
High-value Customers: They have a high LTV which means they help you generate significant revenue over time. They have high transaction values and stay loyal to the brand for long periods. Above all, these customers don’t churn frequently.
Mid-value Customers: They have a moderate LTV, contributing steadily to the business but with lower frequency. They make smaller average purchases than high-value ones. You can turn them into high-value customers with the right engagement. Otherwise, they can churn.
Low-value Customers: They have a low lifetime value which means they contribute the least to overall revenue. They may make infrequent purchases, spend less per transaction, or churn quickly. Low-value customers are price-sensitive and churn more frequently.
Based on these cohorts, you can optimize your marketing spending. For instance, you can spend more on targeting high-value customers and make them stay longer. For medium LTV customers, you can focus on increasing engagement to raise their value.
Step 3: Identify Profitable Acquisition Channels
After making cohorts, it’s time to assess which acquisition channels are bringing in your most valuable customers. Some marketing channels may drive high-value customers. Meanwhile, others may bring in lower-value ones.
By tracking which channels are leading to high lifetime value, you can focus your marketing spend on the most profitable sources. For instance, if Facebook ads consistently bring in customers with a high CLV, you might consider increasing your budget for that platform.
Step 4: Adjust CAC Based on CLV
Customer acquisition cost is how much you spend to acquire a new customer. LTV allows you to determine whether your CAC is justified by the value a customer brings. If LTV is significantly higher than CAC, it means you are generating good revenue. As a result, you will be in a good position to invest more in marketing over time. However, if CAC is too high relative to LTV, you need to optimize your acquisition strategy. The main thing you need to focus on is to invest more in acquiring high-value customers.
Step 5: Retarget High-Value Customers
Once you’ve identified your high-value customers, it’s crucial to keep them engaged through retargeting efforts. It ensures that they remain loyal and continue to make repeat purchases. This can include personalized email campaigns, special promotions, and loyalty programs. The cost of retaining a customer is lower than acquiring a new one. By doing so, you will maximize the return on your marketing spend.
Step 6: Use LTV to Personalize Marketing Campaigns
Personalizing your marketing campaigns based on LTV is a powerful way to optimize your spending. It also helps in improving customer satisfaction. By tracking and analyzing lifetime value, you can gather data on customer behavior. This will allow you to create more relevant and targeted marketing messages. You can offer exclusive offers or VIP experiences to high LTV customers. Similarly, you can offer general promotions to increase the engagement of low-value subscribers.
Final Words
Now you can optimize your marketing efforts by using customer lifetime value. All you need to do is to follow the aforementioned steps. You can track and analyze LTV by using Baremetrics. It will provide you with actionable insights.