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Great ROAS, Terrible Results:The Case for CLV-Centric Advertising
WHITE PAPER
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TABLE OF CONTENTS
CLV: Three Key Things To Remember
Choosing An Investment Timeframe
The Story So Far: An Evolution Of KPIs
The Importance Of Incrementality
Great ROAS, Terrible Results
Assessing Customer Value
Brand vs. Non-Brand Forecasting
Making CLV Actionable
Why Change Management Matters
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15
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GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 2
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Few retailers doubt the effectiveness of performance
advertising. From humble origins to something more
complex, it remains a preferred tactic for advertisers
the world over. The reasons why remain simple.
Retailers can target shoppers better. And they can
measure their campaigns more accurately.
But as campaign expectations have evolved, so have
the metrics which determine success.
This paper explores the latest step on that
measurement journey: Customer Lifetime Value (CLV).
It doesn’t matter how big (or small) your organization
is. In a hyper-competitive environment, optimizing for
CLV helps you hold your ground against giants like
Amazon.
At Crealytics, we’ve incorporated CLV into our
optimization strategies for over 10 years. We
discovered that advertisers who focus on long-term
revenue goals make about five percent more revenue in
the first 12 months, and can triple that number when
they look over a longer time horizon.
INTRODUCTION
3GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
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Return on Ad Spend [ROAS] remains the go-to
metric for retailers seeking to evaluate their
performance marketing campaigns. Most bidding
systems encourage it: top-line revenue is easy to
measure, and easy to justify.
Smarter retailers know that optimizing for revenue
proves efficient but ineffective.
They can unlock a three-dimensional view of
performance, but only by incorporating margins, returns
and new customers into their approach. Achieving this
requires co-operation across all departments.
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New customers generate more revenue than
existing ones - which is why smarter retailers
optimize for customer lifetime value (CLV). This
entails adding the profit they make over a
customer's “lifetime” (typically 12 months) to the
profit of their first purchase. Choosing CLV over
ROAS means switching from short- to long-term
revenues. It demands more than pure marketing
execution. You will need stakeholder alignment, as
well as a willingness to sacrifice profits in the here
and now in exchange for future gain.
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IF YOU READ ANYTHING, READ THIS
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 4
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Today’s retailers enjoy unparalleled measurement
finesse. Access to - and aggregation of - data across
one’s organization bears little resemblance to the early
days, when data quality remained low.
As one of the earliest metrics, Cost Per Order (CPO)
treated everything equally. It didn’t matter what the
order was - cheap socks and expensive sweaters both
received the same value, regardless of the large gap in
margins.
Revenue soon replaced orders as a better indicator
of value, as it empowers decision makers to optimize
campaigns based on previous earnings. They can
thus allocate more budget to a campaign that drives
higher revenues (sweaters) vs. lower ones (socks).
Thousands of retailers continue to optimize for
ROAS. However, its sole focus on top-line revenue
makes it a one-dimensional KPI. One, inescapable
truth continues to diminish ROAS' value: it excludes
other factors that paint a more robust and accurate
picture of performance.
THE STORY SO FAR: AN EVOLUTION OF KPIs
CPO: The lowest rung on the ladder
Return on Ad Spend [ROAS]: Still popular, but one-dimensional
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 5
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Incorporating margin data into measurement represents
a big step up from Return on Ad Spend. Retailers who
know the order, revenue and margins involved can power
their campaigns more effectively.
As an example, if a retailer sells a laptop for $1000 per
unit, and each has a 10% margin [i.e. $100], they can
then reinvest this margin back into their bidding system.
Once you factor in profit margin, selling laptops at a
lower efficiency rate will likely yield more value to the
organization than selling pencils at a high ROAS (unless
you're selling very expensive pencils) It’s a much healthier
way of looking at search, albeit only in the present. While
close to an ideal solution, ROI still misses a key ingredient
in future-proofing your customer acquisition
campaigns: It fails to reveal performance
advertising’s role in acquiring new customers [who
bring more value to a business than existing ones].
Today, optimizing for profitability is no longer
enough. Acquiring new customers doesn’t just yield
value in current transactions, it also incorporates the
value of future transactions. CLV-centric marketers
add the estimated value of future purchases to the
current margin: resulting in a more accurate view of
new customer value. Let’s say the dresses you sell
attract more new customers than shirts. Even if
shirts have a higher margin, the dresses will still
receive more budget.
THE STORY SO FAR: AN EVOLUTION OF KPIs
ROI: Measuring performance by profitability
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
Customer Lifetime Value (CLV)
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The reason? Over a longer period of time, those dresses will generate additional purchases and, subsequently, larger
lifetime profits.
When you optimize for CLV, you focus on specific subsets of new customers brought into the fold. You then target your
ad spend on the most valuable ones.
THE STORY SO FAR: AN EVOLUTION OF KPIs
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
+9%
PERIOD 0
HIGH MARGINMargin differences might make lower-priced products more attractive than high-priced products
Product categories differ in their return rates: the lowest return rates are favorable
Only by targeting first-time and loyal customers can you achieve maximum long-term value
LOW RETURN RATES
NEW CUSTOMERS
REVENUE
PERIOD 1
MOST BUSINESSES FOCUS ON REVENUE: …BUT WHAT THEY REALLY WANT IS
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Even though marketers have long known that ROAS-based KPIs only tell a partial story, they persist in using it. Why is
that? Data access plays a big role. The siloed nature of most retail organizations means that it’s sometimes difficult to
unlock new customer identification, costs associated with selling, and CRM data. Furthermore, most analytic and
bidding systems emphasize ROAS as an ideal metric, largely because it can be easily measured and adjusted.
Most automated bidding solutions optimize towards a fixed ROAS efficiency target, focusing on achieving efficiency
across products, geographies, or defined segments. To drive as much revenue as possible, they seek to display a similar
ROAS, regardless of differences in markets or audiences. In the event that, say, LA displayed a much higher ROAS than
Atlanta, a bidding system would reallocate the latter’s budget to achieve more revenue.
If you asked a bunch of performance advertisers to look at the below chart, they’d acknowledge the automation’s job
well done:
GREAT ROAS, TERRIBLE RESULTS
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
NYC
2.2 2.12.4 2.22.2 2.12.0 2.02.2 2.3
ROAS
LA SF ATL CHI
KPI TOP 5 CITIES TOP 5 BRANDS
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But factor in new customer recognition, margins, returns and cancellations, and you’ll notice that things start to lose
balance. Because your bidding system chases down the cheapest available revenue, it comes from the revenue sources
you don’t necessarily want: existing customers, low margin products, high return rates.
What happens if you factor in repeat purchases accrued over time? First, we measured each new customer's initial
purchase for six months. We then tracked their behavior for a further six months to determine all additional revenue
generated beyond their first purchase.
Accounting for margins and returns changes the game. What seemed balanced when viewed through a ROAS lens
breaks down completely once you measure for long-term profitability.
GREAT ROAS, TERRIBLE RESULTS
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
0.4
0.40.4 0.4
0.8
0.8
0.2
(margins, returns)
(margins, future margins, returns)
-0.1
-0.1
-0.2
-0.3
-0.3
-0.1 -0.1
0.2
0.2
0.2
0.20.10.2
0.3 0.5
-0.4 -0.4
0.50.3-0.4 -0.4
0.1
-0.1
ROI
CLV ROI
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GREAT ROAS, TERRIBLE RESULTS
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
REVENUE
1,000
300
330420
300
580
280
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RETURNS COST OF GOODS SOLD
MARGIN CLV FUTURE MARGIN
AD SPENDMEASURED WITH ROAS MEASURED WITH CLVMEASURED WITH ROI
ROAS: 33% ROAS: -15% CLV: 76%
Only Customer Lifetime Value can attune you to the full picture. It unlocks the true value of each campaign with
technicolor accuracy:
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Many retailers still view performance marketing as a whole,
rather than making a distinction between branded terms
(low incremental value) and non-branded search terms
(high incremental value). ROAS-driven campaigns mask
this reality. By targeting easy-to-achieve branded search
profits, they subsidize weaker, non-branded terms.
Try deducting non-incremental sales. You'll see how limited
the contribution of branded search terms really is. Only
when non-branded revenue has its own, separate targets
can marketers start managing both groups in a profitable
way.
Forecasts split brand from non-brand. CLV helps you reflect
long-term investment and growth strategies - for both
customer acquisition and marketing budgeting. You can
solve for channels with different revenue curves - rather
than assigning blanket targets.
BRAND VS. NON-BRAND FORECASTING
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
PPC BRAND NON-BRAND:
PLA & TEXT ADS
Revenue Revenue
Budget BudgetGro
wth
pot
entia
l
Grow
th p
oten
tial
The CLV calculation has the biggest value for Non-Brand: it gives us investment boundaries; we do not need to look at blended numbers anymore.
Brand is the most efficient channel but incrementality is questionable.
Growth potential is high but more costly in ROAS.
FORECAST FOR NON-BRAND
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A customer’s “lifetime” spans between first order, 12, 24 and even 36 months. Deciding which timeframe you want to
optimize for will deliver varying levels of profitability in the short term.
CHOOSING AN INVESTMENT TIMEFRAME
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
INVESTMENT PROFIT OVER TIME
Maximize profit on first order
Optimize 12 month profit
Optimize 24 month profit
2.0
-1.0
-3.0
1st ORDER 12 MONTHS 24 MONTHS
3.0
2.0
1.0
4.0
5.0
8.0
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So, if you want to be profitable after 12 months you
would:
CHOOSING AN INVESTMENT TIMEFRAME
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
Your choice of time frame hinges on how long-term you
want your organization's focus to be. In this hypothetical
scenario, your customers generate the following:
12 months 24 months 36 months
an average of 1.8 purchases
an average of 2.2 purchases
an average of 2.5 purchases
with a profit of $30
with a profit of $50
with a profit of $65
ADD 12 MONTHS’ PROFIT TO EACH PURCHASE MADE BY A NEW CUSTOMER:
AD SPEND
AD SPEND
$300
$300
$280
$280 $580
$300
MARGINNEGATIVE ROI, UNPROFITABLE
TOTAL PROFIT:
FUTURE PROFIT:
POSITIVE CLV AFTER 12 MONTHS
(10 NEW CUSTOMERS X CLV $30)
MARGIN
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In order to develop a clear view of the lifetime value of
your customers, you need to understand the varied
touchpoints that impact a purchase decision. Most
retailers look to their MTA (Multi-Touch Attribution)
systems to guide their thinking.
But assigning touchpoints is only half of the story. The
other half is understanding the marginal contribution of
each media tactic. What is the marginal lift that each
channel can create for your business?
A/B testing supplies the genetic makeup of a customer
conversion. It shines a spotlight on each media type’s
contribution, and should form the cornerstone of any
investment decision. Without clean data any future
investments can go pear shaped; and the longer the time-
frame you seek to optimize, the wonkier your potential
results.
To illustrate, Crealytics ran the below test with a high-
volume, fast-fashion retailer. A miscalculation in
incremental value saw expected profit fall like a house
of cards:
THE IMPORTANCE OF INCREMENTALITY
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
-50
-50
100
100
45
45
65
65
52
28
2
-24
EXPECTATION
REALITY
Investment Revenue NC Value ProfitIncrementalvalue
assumedincrementality:
80%
actualincrementality:
40%
Margin afterreturns
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Pursuing CLV leads to two important questions: How much
is the average customer worth to my business? And what
percentage of value do my top customers bring to it? The
clues, revealed through your CRM, will better inform your
investment strategy.
A customer cohort analysis - in other words, determining
shared characteristics of those who’ve bought your
products - will lead the way. And the longer the transaction
history, the better the calculations.
At Crealytics, our BI team uses the past five years’ of a
retailer’s transaction data, along with (new or existing)
customer IDs. We evaluate how much each shopper comes
back per channel, along with how much profit they
generate over set amounts of time. That way, profits will
always incorporate future cost and ad spend.
New customer values vary depending on their type, so
different retailers might project different values
depending on their vertical. You can also get more
granular, and base value on initial basket composition,
demographics and payment details.
How dependent is your company on specific cohorts?
After all, you’re optimizing for long-term profits. You
want to ensure you spend your money targeting the
most valuable, most loyal customers. With your CRM
data under the microscope, you can determine what
percentage of shoppers are responsible for the bulk of
your revenue. Segmenting them via Recency, Frequency
and Monetary Value (RFM) can help you find an answer:
ASSESSING CUSTOMER VALUE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 15
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Attributing Recency, Frequency and Monetary labels for each of your customers will help you to evaluate where each
of them falls in terms of overall value. Assigning each variable its own scale (for example, dividing Recency into 1, 2
and 3; from least to most value) will help you ascertain the value of your customers.
ASSESSING CUSTOMER VALUE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
FREQUENCY RECENCY
MONETARY VALUE
How many times did your customer buy a product within a specific time frame?
Someone who purchases all the time has a better chance of returning than a sporadic buyer.
When did your customer last make a purchase?
Someone who bought a product recently carries greater potential for doing it again.
How much does your customer spend within that time frame?
Someone who spends more is more likely to return to you vs. a customer who spends less.
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FREQUENCY MONETARY VALUE RFM SCORERECENCYCUSTOMER
Customer K 3 3 2 8
Customer L 3 3 1 7
Customer F 2 1 3 6
Customer O 2 2 1 5
Customer J 3 2 1 6
Customer D 1 2 1 4
Customer B 3 1 1 5
Customer H 1 1 3 4
Customer C 2 3 2 7
Customer E 2 1 3 6
Customer I 2 3 1 6
Customer A 1 2 1 4
Customer M 3 2 1 6
Customer G 1 1 2 4
Customer N 3 1 1 5
Customer P 1 2 1 3
To illustrate, a customer who has not made more than one purchase over a four month period might receive a “2” for
Frequency and so on:
ASSESSING CUSTOMER VALUE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 17
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More often than not a hefty slice of revenue comes from a
small portion of customers. Crealytics’ Business
Intelligence unit discovered that just 3% of U.S. zip codes
drive an astonishing 50% of repeat purchases. What does
that 3% have in common?
Maybe they come in through a certain channel, or
through a specific promotional activity. Once you
understand who they are, you can ramp up your
marketing efforts to target this group in particular.
ASSESSING CUSTOMER VALUE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
3% OF US ZIP CODES DRIVE OVER 50% OF REPEAT PURCHASES THREE STEPS TO CRM SUCCESS
Analyze which customers contribute the most
Find similarities in order to identify them early
Ramp up your marketing efforts to target those customers
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02
03
97%$90
$10
$1703%
48%
52%
ZIP Codes CLV AverageCLV
RestCLV
Top ZIP
TOP
REST
Sales
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Customer tracking also plays an important role when optimizing for CLV. Remember- most retailers still ingest revenue
figures into their bidding systems. Making CLV actionable requires you to ingest the margins of products you’ve sold
(excluding order-related costs like shipping and packaging).
MAKING CLV ACTIONABLE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
Luxury dress
Purchase history, returns, COGS, warehouse cost, etc.
New CustomerESTIMATED TRANSACTION VALUE
ESTIMATED TRANSACTION VALUE
POST PROCESSING(APPROX. 24 HOURS)
REAL-TIME TRACKING TAG
CONVERSION IMPORT
$200
+$48
Transaction value:Higher CLV, low returns
Attribution & incrementality: Cart abandoner
This is added to the real-time estimated value
+20% +80%
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You should also know how to find out who made the
purchase. Was it a new or existing customer? The former
requires you to assign them an additional value, in line
with the results from your cohort analysis.
By ingesting these data points into your biddable media,
you set yourself up to make smarter decisions. Instead of
chasing cheap revenue, you can expect your systems to
reallocate budget to high value, new customers.
Predictive CLV is time consuming. It can also be resource
heavy - not everyone has the technology providers in place,
nor the in-house capabilities to pursue it. If you’re
comfortable with cohort analysis, however, preparation for
the next stage shouldn’t be difficult:
1
2
3
Select customers who placed their first purchase
in e.g. 2019.
Add a 12 month window to each first customer
order.
Top up the total customer revenues within this
timeframe and divide it by the total number of
new customers from step one.
MAKING CLV ACTIONABLE
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING
From Customer Cohorts to Predictive CLV
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Many retailers struggle with the idea of switching to a
CLV-centric model. Efficiency-based metrics like ROAS
see budgets flow toward branded terms, or RLSA, as
these areas cost less and boast better conversion rates.
Adopting a long-term approach involves a leap of faith.
Retailers must sacrifice short-term revenue, and allocate
budget towards areas that just aren’t as efficient. This can
create friction in departments incentivized towards short-
term revenue targets. It requires a change management
approach that goes beyond pure marketing execution.
It’s impossible to make smart decisions if you don’t
understand each piece of the marketing trifecta
(advertising, pricing and inventory) and how they relate to
one another. But you can also expect to see more retailers
taking steps to align these channels - and focus their
whole business on a single set of mutually beneficial,
coordinated metrics.
A truly effective performance marketing strategy will be
one that makes decisions based on price
competitiveness, inventory sell-through rates and stock
levels. Marketing departments have started waking up
to new, company-wide metrics that promote true
profitability instead of individual siloed success.
WHY CHANGE MANAGEMENT MATTERS
GREAT ROAS, TERRIBLE RESULTS: THE CASE FOR CLV-CENTRIC ADVERTISING 21
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Crealytics is a retail advertising solutions company. With a
balanced focus on customer acquisition and site
monetization, it empowers brands and retailers at all
points of their product advertising lifecycle. A worldwide
team of retail experts supports its offices in New York,
London and Berlin.
For more on CLV-centric performance, get in touch via
www.crealytics.com
GET IN TOUCH
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Great ROAS, Terrible Results: The Case for CLV-Centric Advertising
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