What Can You Afford to Acquire a Customer?

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What Can You Afford to
Acquire a Customer?
YOU MAY BE CALCULATING THIS WRONG -
AND LOSING TO YOUR COMPETITION!
When you are running performance advertising like paid search, it's important to fully
understand certain numbers that apply to your business. How much can you afford
to spend to acquire a customer?
If you're not considering the lifetime value (LTV) of an acquired customer - the
amount of revenue, over time, that the customer will generate for your business -
you are likely miscalculating the amount you can afford to pay, and underestimating
your cost-per-acquisition (CPA) target.
Why does this matter? In performance advertising, particularly in verticals that are
competitive, companies who consider LTV and average order size (AOS) in their CPA
calculation can afford to pay more for a click, and therefore tend to win auctions. This
is why a large retailer, like Office Max, can afford to pay several dollars for a click on
an ad selling staplers, which are only worth a few dollars. Office Max knows that their
average order size is more than the price of the stapler, and they've also worked to retain
customers over time: they will be able to remarket to an acquired customer, driving up
If you're not calculating
the lifetime value.
LTV and AOS correctly,
An offi ce supplies retailer who hasn't calculated these metrics may set their CPA targets
based on what they can afford to drive a single sale. The result of setting this drastically
you may be turning away
lower target will decrease the retailer's marketing options and volume of sales.
profi table leads.
As a mid-market company, you can still compete with the companies who are able to pay
more for a click - because you might be able to afford those clicks, too. You just need to
calculate and understand your average order size (AOS) and lifetime value (LTV). These
two metrics will allow you to set a target cost-per-acquisition (CPA).
Understanding Average
Order Size (AOS)
Your average order size is the amount an average customer spends in a single
purchase. You can easily calculate this metric: it's the total value of transactions
divided by total number of transactions.
Google Analytics also keeps track of your average order size. You can fi nd this
number in the standard Ecommerce Overall report in Analytics.
Value of Transactions

= Average Order Size
Number of Transactions
A D V E RT I S E O N
Want to know more? Learn how Trada can improve your ROI. Contact us today for a tour! e: [email protected] p: 877-871-1835 w: trada.com

What Can You Afford to Acquire a Customer? | DON'T LOSE TO THE COMPETITION
Understanding Lifetime Value (LTV)
Lifetime value is the amount of revenue an average customer will generate during the span of their relationship with your business, and
it's another easy-to-calculate metric. When you understand your LTV, you can compare the revenue generated by a customer to the costs
associated with acquiring it - and set an effective CPA.
# of Transactions
NUMBER OF TRANSACTIONS PER MONTH
In this simple equation,
x
determine how many
# of Months
Profit Margin
x
=
AVERAGE NUMBER OF MONTHS AVERAGE CUSTOMER IS RETAINED
PROFIT MARGIN PER CUSTOMER
LTV
transactions an average
x
customer makes in a
$ of Average Order
AVERAGE ORDER SIZE
month, and multiply it by
the number of months a
This will give you a very basic number.
customer tends to last.
You may choose to consider additional
values, such as discounts given or the
Then, take this number
amount of referral revenue a customer
and multiply it by your
brings over her "lifetime".
AOS. Finally, multiply
by the percent profi t
C O N S I D E R T H I S V E RY
margin you make from
B A S I C E X A M P L E
each customer over her
A health club sells membership
packages. The club has three
"lifetime".
packages at different prices, and
their calculated AOS is $110.
An average customer pays once per month, and is retained as a customer for 18
months. The health club makes a 50% profi t margin on each customer after the
costs of staffi ng, facilities and insurance.
The health club's most basic customer LTV is $990.
The health club also knows that one in three health club customers refers another
customer. This means that each customer refers, on average, $330 of business.
Now, the average LTV for a health club customer is $1320.
1 Transaction
NUMBER OF TRANSACTIONS PER MONTH
x
$0.50
The health club's
18 Months
x Profit Margin =
most basic customer
AVERAGE NUMBER OF MONTHS AVERAGE CUSTOMER IS RETAINED
PROFIT MARGIN PER CUSTOMER
$990
x
LTV is $990.
$110.00 Average Order
AVERAGE ORDER SIZE
A D V E RT I S E O N
Want to know more? Learn how Trada can improve your ROI. Contact us today for a tour! e: [email protected] p: 877-871-1835 w: trada.com

What Can You Afford to Acquire a Customer? | DON'T LOSE TO THE COMPETITION
"Valuable customers"
Some customers will have a smaller LTV than others. While these
customers may be cheaper to acquire, they're also worth less. Identify
the activities, sources and messaging that deliver your "good" customers:
those that fulfi ll the promise of your LTV calculation.
Want to learn more about lifetime value? Kissmetrics has a great infographic
for you at http://blog.kissmetrics.com/how-to-calculate-lifetime-value/.
Understanding Target
Cost-Per-Acquisition
A CPA target allows you to set goals for what you can reasonably afford
to pay to acquire a customer or make a sale (a conversion). A CPA target
is used in paid search for both sales and lead generation.
It seems reasonable that if you are selling a t-shirt for $10 and your
profi t margin is 50%, you must achieve a CPA of $5 or less for a PPC ad
marketing that t-shirt in order to break even.
But if your average order size is $70, and once you've sold to a customer
once they tend to buy from you 6x/year for 5 years because you market
to them effectively, and they refer friends through your referral program,
you can afford to set your CPA target higher.
Calculate your LTV, and you'll have a better
chance of winning auctions, building a larger
customer base, scaling your business, and
beating your competition.
A D V E RT I S E O N
Want to know more? Learn how Trada can improve your ROI. Contact us today for a tour! e: [email protected] p: 877-871-1835 w: trada.com