If you want to grow a business, whether you are an owner, an agency, or a media buyer, it’s essential to understand and measure the metrics that drive the growth.
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Today, we are focusing on understanding them. We’ll dedicate a separate newsletter to measurement.
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Two of the most important metrics for any business are Return on Advertising Spend(RoAS) and LifeTime Value(LTV).
While RoAS measures the revenue generated from a customer’s first purchase compared to the ad spend, LTV looks at the entire revenue generated from a customer over their lifetime.
In this newsletter, we’re going to examine how to use RoAS and LTV to create a scaling plan based on real numbers.
We’ll explore a recent case study from a brand in the UK selling protein water, to illustrate how focusing on LTV can help create better scaling opportunities without leaving revenue on the table.
Because that’s the thing: if you don’t consider LTV in your scaling plan, you are going to leave money on the table.
The brand is a startup that has doubled in size every year since it started selling on Shopify in 2019.
Here you can see a breakdown of their figures in 2022. Total sales for the year were slightly above £200,000.
Our paid traffic campaigns were focused on acquisition (we started testing retention earlier this year).
Therefore, the RoAS we see on Meta and Google is the New Customers RoAS tile above.
Our paid traffic campaigns were focused on acquisition (we started testing retention earlier this year). Therefore, the RoAS we see on Meta and Google is the New Customers RoAS tile above.
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An average of 4.4x during the year (we started working together during Q4 2022 and we were able to improve the situation right away, but this is an overall picture of 2022) is not bad at all.
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But if we stop here, the picture is very limited.
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Overall RoAS is almost twice as much, 8x. This includes all sales, from both new and returning customers.
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Before getting to the takeaways, let’s have a look at another screenshot:
On average, after 3 months LTV is £37 (these are all time data), and it goes up to £49 after 12 months.
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In 2022, the Blended CAC was £5. This is the price we paid to acquire a new customer.
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Every new customer, on average, spent £29.
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If you plan your scaling about this number, you are leaving money on the table. However, if you take into consideration your 12-month LTV, the situation is very different.
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When you scale, you should expect your CAC to go up. If you focus on 1st time RoAS, your room for scaling is much more limited.
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If you keep in mind your LTV, you have more room to scale and increase your volumes.
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The chart below explains everything:
To apply this approach, you need these numbers but sometimes is not easy to get them. For our clients with Shopify, we use an app called Lifetimely, and the screenshots above are taken from it.
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How do we turn this into practice? By focusing on the overall MER for the month, rather than RoAS.
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MER stands for Marketing Efficiency Ratio and it’s the total revenue divided by the total ad spend. This includes also sales from returning customers, and therefore LTV.
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There are many other things we could take into consideration, like the product journey for example. But for today we already put a lot on our plate.
Takeaways:
- RoAS and LTV are two of the most important metrics to take into consideration when you want to grow/scale your (or your clients) business.
Most of our paid traffic campaigns are focused on acquisition >> RoAS.
Considering LTV in your growth plan allows you to create a data-driven approach to scaling based on real numbers rather than assumptions.
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These are the variables we are taking into consideration to help this business scale. And our team is doing an amazing job as usual.
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I’m very grateful to lead them, it’s amazing how we grow together every day.
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See you next time.
Luca
