I will go straight to it: when we are talking about a performance based Adwords campaign we need to know our Customer Lifetime Value (CLTV).
WHY IS CLTV ESSENTIAL FOR AN ADWORDS CAMPAIGN?
Having this numbers — yes, they are just the numbers — will help your Adwords accounts reach its maximal potential. Basically, what I am saying is that in order to know how much you can pay for a conversion or how much should you invest on Adwords every day, you will need to know how much money you are making (or possibly making), not just for a sale but for that person (for that customer).
Let me give you an example where CLTV would come in handy (below I’ll explain how to get these numbers):
SAAS Business Example
Adwords Cost per Acquisition/Conversion (CPA): $30
Basic Plan Monthly Cost: $20
What does it mean?
According to the data above, you would be losing money for every new conversion, right? Because you are paying $30 to get a person to buy your basic plan (CPA) and that person only pays $20 (Basic Plan Monthly Cost).
So, that is when you should factor in:
Average Retention Time: 2 years
And calculate your CLTV:
(Basic Plan Monthly Cost)*(12 repeat payments, 1 per month)*(Average Retention Time)
$20*12*2 = $480 ($240 a year)
We can see that, for your CLTV, you generate $480 which now completely supports your acquisition costs (the Adwords CPA of $30).
But let’s complicate it a little bit more:
From these $480, how much do you actually keep? You want your company to be profitable, right?
You can deduct all the tax and maintenance expenses for a year and you can estimate your profit. From that profit, you can deduct your marketing costs (ROI). And you know, exactly, how much you get per every conversion.
If your expenses for a year, buy customer are $100, your profit would be $140 ($240-$100). You will be able to buy every conversion until $139 per conversion, because you would still make a $1 for each costumer.
Buffer has a great price structure example.
WHAT DOES IT MEAN FOR YOUR ADWORDS CAMPAIGN STRATEGY
Knowing how much you are actually making for every conversion allows you to adapt your campaign to the maximum CPA and not be afraid of keywords that fall a little outside of your “leads” keyword or strive to be in the first position every time with a higher bid.
This would allow your campaign to invest more on mobile or micro-momentsthat are not directly connected to conversions.
Images used: https://www.youtube.com/watch?v=TgNI5Yavdig