Maximise Your Performance Media with LTV-based ROAS & Learn How to Calculate It
Liam Hall • 21st Feb 2023
Performance media is a cost-effective way of acquiring customers and growing revenue, but to truly maximise its potential, marketers must understand the importance of a few key metrics. We’re talking ROAS (Return on Ad Spend), LTV (Customer Lifetime Value), and the heavyweight champion, LTV-based ROAS (hopefully you don’t need us to type that out in full)! If you’re keen to understand these better, we’ve got everything you need to know right here…
LTV is the estimated revenue a customer will spend on your business throughout their lifetime. By keeping LTV front and centre, marketers can guarantee that their performance media moves aren’t just scoring short-term wins, but also building strong, long-lasting customer connections. LTV is like a crystal ball for marketers giving you the ability to see the potential future revenue a customer will spend – what’s not to love?
Too often, marketers and business owners are laser focused on one metric and that’s ROAS. ROAS refers to the amount of revenue generated for every pound spent on advertising. It’s often seen as the holy grail in performance media which measures effectiveness of advertising campaigns by determining ROI. The ratio is simple, divide your revenue generated from advertising by the total amount spent on advertising.
The problem with ROAS is that it’s addictive. Everybody wants it and everybody is chasing it, but ROAS is a short-term metric, and focusing on it too closely means marketers lose sight of the bigger picture – the LTV of the customers they acquire!
While ROAS & LTV are distinct metrics, we think they’re better used together. We’re all about combining the two and focusing on LTV-based ROAS.
LTV-based ROAS considers the long-term value of marketing efforts and helps assess overall marketing channel performance and the impact of larger strategies. It is a more challenging metric to obtain, but when it comes to allocating ad spend, it’s a game-changer.
With the above in mind, we’ve put together a handy step-by-step guide on how to calculate LTV-based ROAS.
Calculating LTV-based ROAS
Firstly, you must figure out your customer LTV. You’re going to need about a year’s worth of sales data for this and calculate the average value each customer provides each year. Do this by:
- Multiplying your AOV (Average Order Value) by average purchase frequency (how many times a year your customers purchase).
Avg. Annual Customer Value = AOV x Purchase Frequency
- Multiply this by your average customer lifespan (how long they remain a customer) and you have your LTV.
- Helpful tip: e-commerce average customer lifespan is approx. 3 years.
LTV = Avg. Annual Customer Value x Customer Lifespan
Next, you need to figure out the number of new customers acquired from your performance media activity and multiply this by your LTV to get your Lifetime Value Revenue attributed to paid media.
This, divided by your ad spend gives you your LTV-based ROAS.
(New customer Acquired x LTV)/Ad Spend = LTV-based ROAS
Keeping this metric in consideration when evaluating your marketing activity is crucial in understanding the long-term effect of your marketing activity. A low ROAS may scare marketers into thinking their CPA is not profitable, but if their customer LTV is high, their acquisition costs may well be more reasonable than they seem.
If you need help with your performance media, e-commerce, or wider marketing efforts, get in touch today and tap into our team of specialists.