Maximizing Your Marketing Efforts:
Lifetime Value (LTV) & Return on Ad Spend (ROAS)
Introduction
Lifetime Value (LTV) and Return on Ad Spend (ROAS) are two key metrics that businesses use to measure the success of their marketing strategies. Often there is an argument to track one over the other. Each metric will communicate different numbers, and you need to understand which metrics gives you the best information.
LTV provides a long-term view of customer relationships and allows businesses to accurately calculate the cost of customer acquisition.
ROAS measures the effectiveness of money spent on marketing efforts. However, it is limited in its
ability to measure the impact of customer retention strategies.
Tracking both metrics can help businesses make:
• Informed decisions
• Optimize marketing efforts
Lifetime Value (LTV)
LTV is a measure of the total value that a customer brings to a business over the span of their relationship.
Measures:
• Effectiveness of customer acquisition
• Retention efforts
• Profitability of a customer relationship
LTV Cont.
LTV is calculated by summing the total revenue generated by a customer over their entire
relationship with the business minus any costs associated with servicing that customer.
This metric is important for businesses to understand how to make informed decisions about
how to allocate resources to acquire and retain customers.
Return on Ad Spend (ROAS)
ROAS is a metric used to measure the direct profitability of an advertising campaign. It is calculated by dividing the total revenue generated from an ad campaign by the total amount spent on the ad campaign.
ROAS helps businesses:
• Measure success of an individual ad campaign
• Make necessary adjustments to improve future campaigns
Benefits of Tracking LTV
Tracking customers' LTV is essential for businesses as it provides a long-term view of the customer relationship. This allows businesses to better plan their marketing strategies and provide customers with a more personalized experience.
Use LTV To Determine:
• Number of resources to allocate to customer acquisition
• Which customers are the most profitable
• The value of current customers
• Ways to retain and nurture current customers
Specifically, tracking LTV can help businesses to see the following benefits:
Benefits:
• Accurately assess which channels are working best
• Allocate budgets more effectively
• Measure ROI of acquisition process
• Measure effectiveness of customer loyalty programs
• Measure effectiveness of retention strategies
• Determine the customers that bring in the most revenue
• Measure effectiveness of marketing campaigns for long-term profitability
Companies can use customer LTV to determine the effectiveness of customer loyalty programs, marketing campaigns, and other retention strategies. With this data, companies can make informed decisions on how to best allocate resources to maximize retention and improve overall profitability.
Problems With Tracking ROAS
One of the primary problems with tracking ROAS is the short-term view of customer relationships that it encourages. ROAS measures the immediate return on a given marketing expenditure and does not take into account any long-term benefits from customer relationships.
For example, if a customer buys a product with a high AOV, but then does not continue to buy from that company in the future, the ROAS does not measure the benefit of the customer relationship that could have been built over time.
Another problem with tracking ROAS is the difficulty in tracking the cost of customer acquisition due to the varying strategies used.
Thus, ROAS can be misleading when considering customer relationship health.
What ROAS Misses:
• True cost of customer acquisition
Impact of discounts, promotions and advertising costs on acquisition.
• Digital campaigns
Customers have multiple touch points which make the exact cost of interactions difficult to calculate.
This means that it is easy to overestimate ROAS and therefore can lead to incorrect decisions when it comes to future marketing investments.
Tracking ROAS can be a great way to measure the success of an individual ad campaign.
But, it also misses:
• Impact of retention strategies
• Effect of word-of-mouth marketing
• Indirect forms of advertising
Many marketers focus exclusively on customer acquisition but fail to consider the importance of keeping the customers engaged and returning to the brand.
Ultimately, ROAS is a useful metric, but it cannot provide the full picture when it comes to evaluating the success of a business’s overall marketing strategy.
Conclusion
Both LTV and ROAS are important metrics for businesses to track.
LTV provides a long-term view of customer relationships and allows businesses to accurately calculate the cost of customer acquisition.
ROAS is useful for measuring the effectiveness of money spent on marketing efforts, but it is limited in its ability to measure the impact of customer retention strategies. It delivers immediate feedback, which is important, but only gives a limited view of actual marketing results.
Both metrics should be tracked in order to make informed decisions and optimize marketing efforts for better results, but businesses need to rely more heavily on LTV as it gives the most complete picture.
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