Factoring CLV into CPA Advertising

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An article in MediaPost this week offered an insightful view on why the lifetime value of a customer should be a prominent consideration in the equation evaluating the metrics of CPA advertising.  By factoring in the long-term return on investment of capturing a particular audience instead of solely looking at the cost per acquisition, you are getting a more accurate view of the overall value of the campaign to the business.

“Rather than look for volume, advertisers should consider focusing on the quality of the conversion itself,” the author writes.  Here are Mediabids, we couldn’t agree more.  We see this strategy considered by our most expert advertisers all the time.  They are willing to pay more for a lead from print than what they pay an online affiliate network because a) they know the conversion rate in print is higher and b) there is greater long term value in that customer.

Take as an example an online flower retailer.  They may capture a new customer with an aggressive discounted offer for Mother’s Day flowers one year.  Assuming they deliver on the quality and expectations of that customer, they now have the opportunity to retain them for future lifetime purchases.  Cultivating additional value and increasing the spend of that consumer over time – further improving the overall CPA of that initial campaign.

To illustrate: If they’re offering 20% off a $40 product and paying their affiliate $10 per sale, the initial sale costs them $18 ($8 discount + $10 per sale).  But assuming they can utilize less costly customer retention email programs to generate repeat purchases from that individual consumer in the future (potentially at full price), that initial $18 could generate a $40 annual spend every Mother’s Day for 10 years.  Not to mention other holidays (Valentine’s Day, birthdays, graduations, etc).

On the flip side, consumer behavior indicates that shoppers utilizing Groupon or a similar coupon code site are always on the hunt for the best bargain.  They’ll buy something once because it’s available at a discount, but won’t return.  According to a Rice University study, only 20% of Groupon consumers become repeat customers.  The low lifetime value of these customers drives down the relative success of that CPA campaign.

Obviously there are many factors for companies to take into consideration when choosing where to allocate their advertising budget.  But with such high conversion rates, potential for increased lifetime value, and an affluent and unique audience with little overlap from other mediums, performance advertising in print is certainly worth adding to the mix.

Post by Darcy Mauke.

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