Measuring CPA and CLV

DVP4973649Written by Andrew Shu
Chief Technology Officer, MGX Copy
As marketers and managers of printing organizations, many of us clearly understand our sales costs and production costs. However, when it comes to online marketing metrics, things start to get a bit fuzzy.
One of the biggest lessons I share with marketers is that Google Analytics—as powerful of a tool as it is—does not have all the metrics that you need to truly understand your marketing performance. Some of it has to be computed and estimated manually, using Microsoft Excel.
In this article, I will show how to calculate Cost per Acquisition (CPA) and Customer Lifetime Value (CLV) and how they can help you determine the profitability of your marketing campaigns.

Tracking the Cost of Each New Online Customer (Cost per Acquisition)

Cost per Acquisition (CPA) tells you the average cost of each newly acquired online customer. In other words, you’ll be able to say: “I can expect it to cost X dollars to acquire each new customer through this marketing channel.”
My preferred way of computing CPA is to do it manually through Microsoft Excel spreadsheets. To do so, I pull together and process the raw data from various sources. The basic figures you need to compute CPA are:

  1. The total marketing spend on the campaign
  2. Total # of unique customers you acquired during the time frame.

You can put them together to compute the average CPA:

  • Avg. Cost per Acquisition = (Total Campaign Cost) / (# of New Customer Acquiring in Campaign)

This figure is a big deal. I like to know the average cost per acquisition of every marketing campaign I review. The basic goals when you review any newly launched campaign is ROI, helping to determine if the production profits exceed for your marketing costs.

*Editor’s Note: If you want to read more about the importance of CPA, check out Why Cost per Acquisition is the Only Metric That Really Matters.

Tracking the Total Profit per Customer (Customer Lifetime Value) 

Another figure that isn’t reflected in Google Analytics is Customer Lifetime Value (CLV), which is the average amount of profit you expect of a customer over their lifetime of ordering. The calculations for CLV can get very deep and very intense (when you start taking into account how long customers have been with you), so today I’m going to focus on a basic overview.
In order to estimate CLV, we’ll first need to calculate the average customer lifetime revenue:

  • Avg. Customer Lifetime Revenue = (Total Revenue for a Specific Marketing Channel) / (Total # of Customer Acquiring in the Channel)

But, revenue isn’t enough! We need to know how much profit is actually coming in. Frequently, printers have a good sense of what our “average profit margins” are—taking into account paper, toner, labor, etc. If your campaigns are structured to be mostly single-product, your profit margins should be pretty consistent for all your orders. You can estimate your CLV with some arithmetic like the following:

  • Avg. Customer Lifetime Profits = (Avg. Customer Lifetime Revenue) x (Avg. Profit Margins)
*Editor’s Note: True CLV formulas are very complex and difficult to compute, largely due to decay. While this calculation may not be perfect, it does provide a good starting point

Many of the online tools for tracking marketing profitability don’t really have a way of tracking the value of repeat business, and it’s such an important number! As printers and graphic communications firms, a substantial portion of our revenues come from repeat business.
We cannot—and should not—evaluate the profitability of our marketing based on our customer’s first order.

*Editor’s Note: For a more comprehensive description of CLV, you should take a look at How To Calculate & Increase Customer Lifetime Value. They cover CPA, CLV, churn rate, retention rate, and suggest several marketing tactics to increase CLV.

Putting the Two Metrics Together: Is your Campaign Profitable?

When you’re armed with the combination of these 2 metrics, you’re much better able to understand the true profitability of your marketing campaigns. The following is a very common use case:
I often come across advertising which loses money on the first order. However, I’d like to know whether the campaign will end up being profitable after I’ve taken into account all the repeat orders.
If you know the CLV (the production profits), and the CPA (the marketing costs), you want to know if the following is true:

  • CLV > CPA?

xer_RdcngCost_4cpThe larger the difference between your CLV and CPA, the higher your ROI. The more profit you can acquire from repeat orders, the more profitable your campaign is.
Given this very specific understanding helps you in three ways. First, it increases the number of campaigns you’re confident in leaving turned on. Even if Google Analytics reports a loss on the first order, you know that the repeat business will pay for itself. You may even decide to expand on those areas of advertising.
Secondly, you’re going to be faster to respond and more accurate with your decisions of cutting off advertising. Your marketing will become leaner and meaner.

Finals Thoughts: Slice and Dice your Data!

Today I’ve covered two key questions that will help you focus your attention on the performance of your online marketing. Before I finish, I want to recommend that you try segmenting your data for even more specific, more valuable insight.
For each of the metrics I mentioned above, you can segment the data for:

  • Different time ranges
  • Different marketing channels
  • Different advertising campaigns on the channels
  • Different product types

The benefit of segmenting your data is that you can—with great granularity—delve into the profitability of each of your different revenue streams. You can analyze profitability on a channel-by-channel and product-by-product basis. With that knowledge, you can choose to augment or diminish your investment in each category of your business.
There are so many fascinating opportunities when you start diving into your metrics beyond Google Analytics!
 

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