What is cost to acquire a customer versus their lifetime value?

Avinash Kaushik, one of the leading experts on web analytics, just made an excellent point about not overlooking the lifetime value of a customer on his blog, Occam’s Razor. In it, he alleges, it is important to not merely view a customer by Cost-Per-Acquisition (CPA) or the cost to get a customer. Instead, it’s best to calculate the Lifetime Value (LTV or the total value that customer brings through spending) of each group of customers based on how you find them. Then do a simple, cost-benefit analysis. Where are you finding the most profitable customers, and how much does it cost to do so?

Example: a store owner compares customers he finds through online marketing, versus those he finds from coupons in his local advertising shopper. The advertising shopper might only have a CPA of $2 per customer, and the online marketing might be around $10.

If he compares and finds that the LTV of the advertising shopper customers is $100, but the online marketing customers’ LTV is $500. At a margin of 15%, he is making a net profit of $13 from the advertising shopper, and $65 from the online marketing customers.

What about customers who connect through social media?

What many businesses are finding is that customers who connect with a business on the web and through social media spend more and are have increased brand loyalty. Harvard Business Review mentioned one study this past March about the effect of Facebook Fan Pages on customers. Leaders of the study found that Facebook Fans of the Bakery in the study visited 36% more than non-fans, spent 33% more, and had 41% greater psychological loyalty to the brand. And that’s just one of the ways to connect with customers online!

It’s completely possible that the CPA can be five-times higher and still be more profitable in the end. The important thing is to think long-term and keep careful records to make informed decisions with. Perhaps equally important is choosing your metrics carefully, or in other words, what you measure is more important than how you measure it. With the example above, if the store owner had focused on measuring how much it cost to get a customer and based their decision on that alone, they would have missed out on the tremendous opportunity that online marketing offered.