CLV... That Unknown

Almost always, especially during our first meetings, people tell me about how much each project, each booking or each sale generates.

Yes, each, each, each.

When I ask about the cost per acquisition (CPA: how much money the company has to spend to generate a new customer) or the cost per lead (CPL: same thing, but to get a lead) people often look at me wondering what those numbers could possibly be. The truth is that very few companies know their cost per acquisition or cost per lead.

Later on, I ask about Customer Lifetime Value (CLV), which is a metric used to determine the value (or profit) earned from a given customer over the course of their relationship with the company.

This is an essential piece of information to understand and improve the performance of any advertising campaign, especially in Google Ads.

Let's look at some simple examples:

One person, let's call him Paul, finds out about a restaurant through Google Ads, and after his first visit, he decides to come back once a month. The average bill for a table is €80, which means that Paul generates a total of €960 for the restaurant in a year. Technically, we call this annual CLV.

But it doesn't end there, because even fewer companies calculate one of the most important parts of this metric: word of mouth (you can read our article Word of Mouth here).

Paul is very happy with the restaurant and tells his friends about it. Let's say one person in his group of friends also becomes a regular at the restaurant and goes 12 times a year, with an annual CLV of €960.

But of course, with Google Ads, we had to invest €70 to get Paul as a customer and nothing in the case of his friend, because he's "not from the internet" (a phrase I have heard more than my own name in the last 10 years).

Yes, it's true, his friend is "not from the internet", but if Paul hadn't known about the restaurant, his friend wouldn't have known about it either.

Why is this important? To accurately calculate the cost per acquisition for the marketing strategy. Paul's acquisition cost was €35 and his friend's was €35, because technically it is not correct that the whole investment of €70 served just to get Paul.

Years ago, we dinosaurs of the business world used to talk about the waterfall effect (now to feel younger we call it referral marketing).

Now that we know that we needed €70 in Google Ads campaigns to generate 2 new customers with an annual CLV of €1920, we can calculate the (sometimes more complicated) real CLV.

Restaurants, like any other businesses, work with cyclical phases of customers, trends, etc.

Let's assume that, on average, each customer is loyal to the restaurant for 3 years (depending on which software the restaurant uses, it will be more or less easy to gather this data – in the service world this detail has to be clear from the beginning). Of course, 3 years is an average – one person may visit only once, and another person may visit every month for 6 years).

Paul has generated a real CLV (the entire duration of his relationship with the restaurant) of €2880 (€960 for 3 years). His friend has also generated a real CLV of €2880.

Why is this important? Because the business has to understand 3 key points:

1. A customer who walks in the door does not "spend" €80 on dinner. If this customer is included in the restaurant's average, this person can generate a total of €2880 for the restaurant. If they leave happy, this can be another organic referral channel for other customers, each of whom can generate €2880 for the restaurant.

2. Because we understand that, with Google Ads, in order to generate the sale, lead or booking, we may need more money than that sale, lead or booking itself.

Because businesses make the huge mistake of calculating only the first sale.

3. Based on the first two points, you can understand how important it is for any business to maintain customer loyalty. Too many businesses make the mistake of focusing all their efforts on attracting new customers instead of keeping existing ones.

In the article Google Ads for Startups and New Entrepreneurs, you can read about Biriwuanga's real data and percentages in terms of new customers and customers referred by others.

On to the next conversion with Google Ads!

Dean.

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