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Conversion Optimization by Ayat Shukairy, Khalid Saleh

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Lifetime Value (LTV) of a Customer

Most companies see their first sale with a new customer as the initial step in a long-term relationship. If things go well, these companies will receive multiple orders from that customer, building loyalty to their brand. Our calculations in the previous sections used the profit from a single order to determine the campaign budget and its profitability. We did not take into account the fact that returning customers will likely not click on paid advertising.

Taking lifetime value (LTV) into account can drastically change the budget for the campaign. How to calculate LTV is beyond the scope of this book and is the subject of many debates. But for the purposes of our discussion, let’s assume you are able to calculate LTV for your customers. How does LTV impact the calculation for a campaign? In our example, the company determines that the LTV of a customer is $187.50. Table 2-4 shows how using the LTV calculation versus a single sale calculation will have an impact on the campaign’s bottom line.

Table 2-4. Adding LTV to budget calculations

Campaign parameters

24 cents per click and LTV calculation

24 cents per click and single order calculation

48 cents per click and LTV calculation

48 cents per click and single order calculation

Number of orders

1,000

1,000

1,000

1,000

LTV

$187.50

$187.50

$187.50

$187.50

Profit per order

$75

$75

$75

$75

Income

$187,500

$75,000

$187,500

$75,000

Total number of visitors

100,000

100,000

100,000 ...

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