17/02/2023 • Andrew Lowdon
We live in the golden age of performance marketing. Over the past decade, e-commerce has become one of the fastest growing industries in the world. Local businesses are especially benefiting from the use of performance marketing tactics.
The greatest benefit of performance marketing is it’s trackability and ability to easily understand the return on investment. But this measurability is also it’s biggest limiting factor.
Most brands will judge performance based on either a CPA or a ROAS model.
A CPA model can be useful if you have a product or service that is a single item one-time purchase, but the majority of businesses have a diverse product set and are looking for repeat customers. A CPA model is basically saying any customers acquired above the target are an inefficient use of marketing budget.
ROAS is a better model for ecommerce businesses, as you have a clearer view of the return you are getting. Conversely it’s also very short term focused and judges success on a short term uplift in sales.
These models both have their merits and are driven by the needs of businesses to be able to show a direct return on activity. Both models however place a limit on the ability to find customers.
“If the CPA goes above our target we need to pull spend back otherwise we lose money on that customer.”
“We should set up audiences to exclude customers so we don’t waste the budget on customers who already know us.”
Two understandable points but also a sure fire way to limit your ability to grow revenue.
For businesses willing to take a more long-term view, there is another metric that can exponentially add more value to marketing activity and should be used alongside your CPA & ROAS - Lifetime Value.
Customer Lifetime Value - The total revenue generated from a customer throughout their relationship with a business.
Many businesses focus on finding new customers at the detriment of their existing customer base.
But what if you knew how long on average your customers stayed and how much they spent? You’d actually know the true value of a customer relationship and it can completely change your approach to measuring the value of customer acquisition and retention.
Customer Lifetime Value is one of those metrics that is often talked about but frequently finds its way into the too hard basket very quickly. With a little bit of work it doesn’t need to be that way.
For one of our clients we worked with a 9:1 ROAS target. One of their brand ranges which they launched in October was receiving fantastic product reviews from customers, which led us to dig a bit deeper into performance. We took an export of their sales for all new customers from October and filtered the product range, so we could see new customers who purchased this one brand.
From this we saw £7,000 in sales in October with an AOV of just under £40, which looks pretty good. Way more interestingly we can see this same group of customers have since then gone on to spend over £26,000 in repeat purchases, with an average value of over £180 and on average just under 4 purchases per customer with a higher AOV.
This quadruples the original ROAS that was being measured.
This is an incredibly simple way to get a better view on how customers engage with your brand, but this data allows for a completely different conversation about customer acquisition and retention.
Now we’re able to look at a much higher CPA target allowing for increased media budgets and more brand building activity to find more new customers with an increased confidence of repeat purchase. It also allows us to look at what we can do to drive higher levels of repeat purchase to drive the desired incremental revenue rather than chase increasing numbers of new customers.
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