Customer Lifetime Value: The Metric B2B Businesses Need to Know About

As a Google Ads Specialist, I often speak to and work with B2B business owners who are managing their own Google Ads campaigns. One metric that I often find needs to be known or considered is Customer Lifetime Value (LTV).

LTV is a crucial metric for businesses of all sizes, but it is especially important for B2B businesses.

It measures the total revenue a business can expect from a customer throughout its relationship with the business.

Many businesses, especially B2B ones, tend to focus mainly on the Cost per Conversion metric.

This is important, but it has its limitations. Cost per Conversion only measures the cost of acquiring a new customer, not the long-term value of that customer.

In this blog, I will explain why focusing solely on Cost per Conversion can be short-sighted and why it is vital to consider Customer Lifetime Value (LTV) in your marketing strategy.

The Common Focus: Cost per Conversion

Let's start with Cost per Conversion.

This metric is pretty straightforward – the cost incurred by your business for each conversion, be it a sale, a sign-up, or any other action you desire your customers to take.

It’s easy to see why so many businesses focus on this metric.

It helps to understand how effective your marketing efforts are and is crucial for managing your advertising budget.

However, focusing solely on the Cost per Conversion can be quite limiting:

• It provides only a snapshot of your marketing performance and does not account for the overall health of your business.

• It does not consider the long-term value of a customer. Acquiring a new customer might be expensive, but if they continue to purchase from you in the future, the initial high cost might be well worth it.

• It may lead to underinvestment in customer retention strategies. Remember, retaining an existing customer is usually cheaper than acquiring a new one.

Customer Lifetime Value (LTV)

Now, let’s focus on the Customer Lifetime Value (LTV). LTV represents the total revenue you can expect from a customer throughout their entire relationship with your business.

Understanding the LTV of your customers is crucial because:

• It helps you understand the true value of a customer, guiding you on how much you should be willing to spend to acquire or retain them.
• It enables you to make more informed marketing decisions, such as identifying and targeting your most valuable customer segments.
• It helps in optimising your marketing spend and customer acquisition strategies.

How to Calculate Customer Lifetime Value

The simplest formula for calculating customer lifetime value (CLV) is:

CLV = Average purchase value * Purchase frequency * Customer lifespan

Example:

Let's say you have a customer who spends an average of £50 per month and visits your store twice a month. If you expect this customer to continue shopping at your store for an average of 2 years, then their CLV would be:

CLV = £50/month * 2 visits/month * 24 months/year = £2,400

This means that you can expect this customer to generate £2,400 in revenue for your business over the course of their relationship with you.

Here are some tips for calculating CLV more accurately:

• Use customer segmentation to group customers with similar behaviour together. This will help you get more accurate CLV estimates for different customer groups.
• Use historical data to track customer purchase history and churn rates. This will help you to make better predictions about future customer behaviour.
• Consider all the costs associated with acquiring and retaining customers in such as marketing, customer support, and product costs.

Once you have calculated CLV, you can use it to make better marketing and sales strategy decisions. For example, you can use CLV to:

• Identify your most valuable customers and target them with special offers and discounts.
• Calculate the maximum amount you will spend to acquire a new customer.
• Prioritise customer retention initiatives to keep your most valuable customers coming back.

How to Use Customer Lifetime Value to Optimise Google Ads

Now that you have calculated the LTV, you can use this information to optimise your Google Ads campaigns:

1. Allocate more budget to campaigns targeting high LTV customers. These customers are more valuable to your business in the long run, so investing more in acquiring and retaining them makes sense.

2. Use LTV data to create more personalised ad campaigns. By understanding the value of different customer segments, you can tailor your messaging and offers to appeal to them.

3. Optimise ad creatives and landing pages to target high LTV customers. High LTV customers are likely to have specific preferences and needs. Make sure your ads and landing pages address these to increase conversion rates.

While Cost per Conversion is undeniably an important metric, it should not be the only one you focus on.

Understanding and optimising for Customer Lifetime Value (LTV) is crucial for the long-term success of your business. It will help you make more informed marketing decisions, optimise your marketing spend, and ultimately, drive better results for your business. Read my blog post "5 Ways to Boost Customer Retention" to discover valuable insights for elevating your customer retention rate.

I hope you found this blog post helpful. If you did, please share it with other B2B business owners who might also find it helpful. And, as always, if you have any questions or thoughts on this topic, feel free to get in touch. I’d love to hear from you!

Remember, the success of your business depends not only on acquiring new customers but also on retaining your existing ones. Start focusing on Customer Lifetime Value today and see the difference it can make in your Google Ads strategy and your business.