Companies that Understand Lifetime Value

We often work with companies to decrease their cost per acquisition (CPA) and optimize their lifetime value (LTV). Many companies do not quite understand how to obtain either the CPA or the LTV nor understand how to optimize them. Those companies that do understand how to track them and how their efforts can impact them seem to optimize their marketing better and be much more forward thinking.

Customer Metrics

Those are the two major customer metrics, the cost per acquisition and the lifetime value. Lifetime value can be much more valuable than you might imagine yet few companies seem to track it. From what I have see GoDaddy understands the importance of life time value very well. More below.

Understanding Cost Per Acquisition

customer valueQuite simply the cost per acquisition is the cost it takes to acquire a new customer. In monetary terms it would be a dollar value. When it comes to online marketing let’s assume you spend $1,000 in a month on banner advertisements and you have used tracking links to associate customers to that marketing campaign. You then query your database and realize that 50 new customers came via the marketing link. Through simple division it is determined that the cost per acquisition is $20 per customer. This cost is a sunk cost and fairly simple to determine with respect to each marketing campaign. It is straightforward to calculate and to understand why it is so valuable to calculate. A smart business understands this. Now let’s discuss Lifetime Value.

Lifetime Value

Cost per acquisition can be looked at as a sunk cost when it comes to marketing. That cost relates to the cost of first obtaining a customer. Additional costs after you have acquired a customer a related to retaining the customer. How much you want to spend on acquisition and retention combined depends on the overall lifetime value. If the LTV is $80 you obviously do not want to spend more than a combined $80 or you are losing money, not to mention all the other costs and you ideally do not want to spend more than your net profit per customer.

Here is an example of how a company attempts to decrease their LTV and customer retention by providing a godaddy promo code for new and current customers. The key is to provide the coupons for current customers. Many companies only provide deals to new customers. Their idea is to decrease their cost per acquisition by increasing the likelihood of conversion when they offer a discount. That is been shown over time to work very well. However very few companies consider decreasing their cost of retaining customers to increase the overall lifetime value. The longer you can keep a customer and the more they purchase your service or products the greater your overall lifetime value and hopefully your profits increase.

GoDaddy Understands LTV and How it Effects their Bottom Line

By providing godaddy promo codes that current customers can use shows Go Daddy understands how to effect their LTV positively. If you can keep current customers happy they will continue to be a customer. It has often been shown that it is much cheaper to sell to a current customer than it is to obtain a new customer. We should all take notice of those companies that are at the top of their industries and market online. These are excellent case studies, studying those that are successful can be very enlightening.