Advertisers only have to understand two numbers to win on Google Ads. Cost per acquisition and lifetime value of a customer. How much does it cost to get a customer, and how much are they worth to you?
Those two numbers are everything. Get those right, you’ll make a mint from Google Ads. But if you get those wrong, you will end up failing at your online marketing attempts and other sharp advertisers will step into the void and take your market share.
Information is king. The more information you have about your Google Ads strategies, the easier it is to get good results and make money. Most information is spoon-fed to you. Clickthrough rate, quality score, cost per click, search terms, and all the other data that Google provides gives you a ton of insight into your campaign performance, and it all helps you make decisions and helps you try and get good results from Google Ads.
But that provided information is missing two key components, cost per acquisition and lifetime value. And these are the most important numbers.
Cost per acquisition is the cost it takes to actually acquire a customer from Google Ads. Not just how much did it cost to get a conversion, but rather, how much did it cost to actually get a customer. This number is very easy to produce. You need to know what your cost per conversion is (cost to get a lead), and then how many leads it takes on average to get a customer. If you cost per conversion is $100 and it takes 5 leads to get a customer, then your cost per acquisition is $500 ($100 x 5).
Lifetime value of a customer is the lifetime value you can expect from one new customer, on average. Some people track revenue as value, others track profit as value. For this article, let’s go with revenue. If you sell a service for an average fee of $10,000, and customers only buy it one time, then your average lifetime value of a customer is $10,000.
Let’s make it more complex and let’s say you’re a realtor, and on average clients will use your services 1.3 times over the next twenty years you’re in business. You’ll get some repeat customers, people who will use you for their next home as well, so that’s where the 1.3 times comes from. Now the lifetime value of a new customer is $13,000. But you also get word of mouth value when you get new customers. So let’s add a 10% multiplier on there to account for the value you get from word of mouth referrals. Now we’re at $14,300. So for this example, taking into account repeat business, as well as word of mouth referrals, this realtor knows their average lifetime value of a new client is $14,300.
Empowered with this knowledge, the realtor can then run an informed Google Ads campaign and know if their campaign is making a profit or not. The rule of thumb we like to go for when it comes to revenue is that a 3x is likely profitable and a 5x is likely very profitable and a good goal to start with. The value is $14,300, in terms of revenue, and we want a 5x return on our ad spend, so we’d be aiming for a cost per acquisition of $14,300 divided by 5, which is $2,860.
And then in Google Ads, if we’re tracking leads as our conversion metric, then we’d need to get a cost per conversion that gets us to a place where the actual cost per acquisition is $2,860 or less. Let’s say in this example the realtor knows that it takes 10 leads on average to get a new client. $2,860 divided by 10 leads is $286, and that would be our target cost per conversion.
If we get a $286 cost per conversion, cost per lead, and it takes 10 leads on average to get a new client, then our cost per acquisition is $2,860, our average lifetime value of a client is $14,300, and we’re making a 5 times return on our ad spend in terms of revenue to acquisition cost, and we’re likely making a great profit on our ad spend.
Do you see how knowing cost per acquisition and lifetime value of a customer solve everything? Do you see how these two numbers let you know exactly where you stand and if your campaign is working or not?
If you have these two numbers under control, then Google Ads is easy. All the questions will answer themselves, and the money will flow in.
Cost per acquisition and lifetime value of a customer. Keep those two numbers front and center and let them guide all your Google Ads decisions.
