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Managing to lifetime value, not cost per click
Two customers cost the same to acquire and are worth ten times different amounts. Steering by acquisition cost alone systematically buys the wrong ones.
Key points
- A cheap customer who never returns is more expensive than a costly one who stays five years.
- You can outbid every competitor if you know your lifetime value and they do not.
- Calculate it per segment; the average hides the whole insight.
Advertising steered by cost per click optimises for the cheapest contact. Advertising steered by lifetime value optimises for the most valuable customer. Those lead to different decisions almost every time.
The calculation, kept simple
For most businesses a workable figure needs four inputs.
- Average order value.
- Average number of orders per customer per year.
- Average retention in years.
- Gross margin percentage.
Multiply the first three, then apply the margin. A customer spending £600 twice a year for four years at 35 per cent margin is worth £1,680 in gross profit.
Against that, an acquisition cost of £180 looks entirely different than it does against a single £600 order.
Why the average is the wrong number
Aggregate lifetime value is nearly useless, because customer segments differ enormously.
| Segment | Orders per year | Retention | Value |
|---|---|---|---|
| Landlords | 3.5 | 6 years | very high |
| Owner-occupiers | 0.4 | 3 years | medium |
| One-off emergency callouts | 1.0 | under 1 year | low |
| Commercial contracts | 8 | 5 years | highest |
A single acquisition cost target applied across all four underbids for the valuable segments and overbids for the worthless ones.
If you know a landlord is worth £4,000 and your competitor is bidding on an average of £900, you can outbid them on every relevant keyword and still be more profitable.
Turning it into bidding
The practical mechanism is to define acquisition cost targets per segment and structure campaigns so segments are separable.
Separation usually comes from search terms, geography, form questions, or product entry point. A search for "commercial roof inspection contract" is a different segment from "roof leak emergency" and should carry a different target.
The retention side
Lifetime value has two levers and marketing usually pulls only one. Raising retention by 10 per cent typically improves value more than lowering acquisition cost by 10 per cent, and it is cheaper.
Retention spend that pays: a service reminder at the right interval, a newsletter with actual utility, a follow-up call after completion, and a maintenance offer at the point where the product typically needs it.
The number to publish internally
Give the sales and marketing team one figure per segment: what a customer of this type is worth in gross profit, and therefore what you are willing to pay to acquire one.
That number ends most internal arguments about whether an enquiry was too expensive, because the question becomes arithmetic rather than opinion.
Frequently asked questions
How do you calculate it without years of data?
Take two years of order history, group customers by acquisition year, and extrapolate cautiously. Imperfect beats absent.
What if customers buy only once?
Then the value includes referrals and reviews, which are measurable and frequently substantial.
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