054. Customer Lifetime Value and Paid Media Investments

Foreign. So hi, welcome everyone. This is Emilio Garcia from the Mangen Studio. With me, as always, is Gabby. How are you, Gavi?

Pretty good, Emilio, how are you?

We have been talking for so long now. I'm like, oh, I'm gonna keep talking for a little while, but. But yeah, very excited to be here, very excited as always about our topic and hoping that everyone finds value and everyone is having a great, great day. So without further ado, let's start discussing the topic for today. We are going to talk about customer lifetime value and Pay Media investments. A very relevant topic because as we have discussed in previous episodes, while the return on investment for marketing in general is something that is very important for practitioners and especially for the people that invest the money at companies, Pay Media has a special place on that concern because at least for other type of investments, owners, CEOs, CMOs feel that the investment is staying in the company, right? Like purchasing a house. When you create content or when you build up a database, you have something tangible that you can say that stays with the company. And I feel that while mistakenly, because it's not true, at least the perception is that when you spend money on advertising, that is gone, right? So if you don't, if you don't see something tangible, you feel, you get the perception that that money was wasted. So Pay Media has a special place for evaluating return on investment and customer lifetime value is one of the best way to, to change the perception about it and to determine the impact that it will have in the future. So really excited about the topic for today. I think that we are going to start right away and the first one is understanding what customer value, customer lifecycle value or CLB means. Honestly, the reason why it exists is because it changes the return equation. Meaning most companies nowadays, especially in B2B, especially in SaaS, do not transact once. They don't, they don't sell one time or one project and never ever interact with that client again. Typically what happens is that either you set up a stream of projects or you sell other services or you establish long term relationship where you are charging or yeah, charging a customer on a regular basis, right, like regular subscriptions. So CLB captures that. The idea is that you measure all the revenue streams that a client have over the term of the relationship. And that's what CLB is all about. And it matters again because when you are evaluating acquiring new customers versus retaining them, this is the component that they mean about is more important to retain than to acquire in some cases because you have already invested all this money into acquiring this customer. And it's way easier to increase the revenue stream for someone to have interacted with the business than start a new one with someone that is a stranger to your brand. So I think that's why it's important to talk about this now with CLB Cover. Very quickly here, we want to focus on, well, what about pay media, right? So as we have said many, many times, pay media is no different from any other organic efforts in the sense that it's not a marketing motion, it's not a sales motion, Sorry, it is a marketing motion. This is really important because some people mistakenly think that if you are paying for traffic or paying for attention, that should have a higher rate of either conversion or that issue transforming to sales and revenue right away or without the intervention of the sales team. And that's far from reality. The only thing that you're truly doing with pay media versus organic or free attention is that to some degree you are guaranteeing delivery. And that's the key thing here. You can see it everywhere, right? If you depend on someone finding your content, then you are depending on whatever the algorithm deem as relevant for the searcher or for the social media user or even in the real world to someone mentioning your brand across an a PR effort or word of mouth, right? You, you are not in control of who is going to hear about your company and what is going to be said. In some channels you have more or less control on some aspects of that, but most of the time you don't. And when you use paid advertising of any kind, not just digital, you are guaranteeing the message, right? Typically you have us a say on the audience, the message and the offer that you put in front of them. But after that the same mechanism apply, right? If you are not talking to the right person, if you are not offering the right offer for the journey of that person, or if you are not conveying the best message that earns and retain the attention, you will fail. But at the end of the day, that is the difference, right, between the two of them. And one way that you can evaluate if you are having success with pay media investments is to evaluate the return of that. And so the more intangible, not easy to measure aspect of it is the brand building aspect, the one that we said. That is the thing that stay when you invest that money, even if you don't get one phone call or one form fill or one new prospect, your brand had an impact on those on that audience because you guarantee delivery, right? It is like when Someone mentions a brand, possibly because they had a great experience, that won't mean that the person that listened to that immediately will pick up the phone or visit the website and start buying your product. But you are putting the seed of something that will grow over time and that part of the return is not visible, right. Until it happen to crystallize. And it's observed in the form of a request on your website or a request or for any other channel that you have. But we understand at the end of the day the expectation is that eventually that revenue stream is going to show up and that's where that return investment benefits itself first in that first purchase and eventually in repeated purchases and growth coming from that account. Right.

You say something really important about the acquisition like brand visibility from paid media. Because I think that pay media isn't just about just getting your name out there, right? Like on social media or online, any media or channels that you can afford to. It's a, it's a powerful tool for customer acquisition. Which is the thing that we're going to discuss today about the CLB and obviously the brand visibility and for the B2B world as we call it, the buyer's journey is really complex and the way that it's, it's really long too. So pay media helps you to stay top of mind throughout those that, that, that journey or that process. And it's like being the spotlight, right? Using it and being that business in the spotlight. And when you're doing it doing it right or when you've done it right, it will assure you that that potential customer, like you said, or that client will encounter your brand constantly and constantly. And whether searching on Google or LinkedIn or Twitter, whatever the channel that you choose, even the traditional ones, this will help you to, to step ahead, right? And plus to this, it's like you said, more cost effective because than the traditional advertising because it would allows you to maximize your reach and eventually hopefully. Roy, as. As it is.

Yeah. And the, the way we, I think we should think about it, right, the relationship between them is that the key here is that advertising or pay media, just like any other distribution channel will influence revenue, as you are saying, Gabby. So when we, when we talked about return on investment, we should think about in terms of the return of the investment on influence revenue. That's truly how we should see it because advertising will be another touch point in the journey, right? You still need order channels, you still need the help of sales and the references and reviews from positive reviews from other customers to land sale more and more of those touch points you can make direct attribution, right, using software. But there's still and will ever be touch points that you cannot measure, that you can only correlate with the investment. So one of the biggest challenges that that we have is that usually when marketers start making that measurement, they have the cost component very easily, right? You know how much you are spending on media and to some degree, if you have laid out your campaigns by territory or product or product line, you will know how much you are investing in each of them. But the return side is very hard to measure because you need the sales cycle to happen to know what revenue are you bringing in and how many customers are you getting, right? And how long it will stay. Especially if you're thinking about life cycles, life cycle stages or life cycle value value. So what will you do in the meantime is that you will start getting that return against the leading metrics that are available to you. And that's perfectly fine. The only challenge is that we need to remind ourselves that each of these returns are just means to an end. And even the return on investment is guidance for capital allocation, for marketing effort allocation, you are not trying to get a specific number, you are trying to guide your future actions and behavior based on that number. So to put it in practical terms, so if you say, well Emilio, I'm starting a brand new pay media effort, what will be the best return that I can measure right now? Well, probably the cost per action will be a good metric to begin with, right? For example, in search, typically your initial return will be what is the cost per action, meaning the cost per click is this one easy thing that you can start mentioning today to compare return, right? Which in this case is someone engaging with the ad and visiting your website, that's what pretty much you are going to say you're paying. On the social media side, it's better to start with the cost of impression because usually on social media you are more interest on delivering the message rather than people actually acting on it right away. So your CPM will be your first Roy to measure. And I know that is weird because you'll say well, impressions is not, is not the return. I don't want impressions. Yes, but that's what you have at the beginning. So you want to optimize for having the most impact or reach with the least investment cpm or in the case of search, you want to have the most volume of traffic or action to your website based on intent for your money, which is your cpc. However, as you start accurate out information. You want to continue to increase the measurement so you can get a better picture of your return. In this case, the next one is will be that acquisition or conversion which typically is for B2B. Am I getting forms with commercial intent? Am I getting phone calls with commercial intent? Am I getting chat conversations with commercial intent? And there's going to be a cost of acquisition for that. And that will be your next stage, right? The return on commercial action or intention. And you will accumulate that. You put that on a CRM and after a little while you will discover that for every person that raised their hand, there's going to be half of them at least that are not qualified, either because they are not truly ready or because you as a company don't want to interact with or sell to them your product. For whatever reason, they are not a good fit. But you want to measure that as well. So typically that will be your return on or cost per qualified prospects or qualified leads. And it continues right? Then you have opportunities. Finally you cast cost per customer, which is that cac. It's until then that you can start measuring the immediate return, the ROI that the shortest ROI that you can measure is well, how much revenue I got in that transaction against the cost of acquisition. That will be the first iteration. But on the long term you will start to. You will start to measure what is the revenue stream that I'm getting year over year over these customers. And on the cost side, your cost of acquisition for pay media will be just the smallest component of the total cost of acquisition. Meaning you also invest on the, on the creatives, on the people or the agency that you hire to create those ads or those campaigns, on the time and effort from the person that qualified and prospect those intent leads and finally on the salesperson that set up the contract and close the deal, right? So your total cost acquisition is way larger than pay media investment. You also want to measure that overturn and eventually get a number. And this is the part that is fantastic. I always find fantastic. When most agencies and people that are in the medium say like you are getting a return on investment of 5x or 10x, they usually take the highest revenue and the smallest cost. And so the highest revenue is the CEO. B if you, if you take the revenue of a customer and multiply by the years they're going to be customers to you, then you will have the highest return, right? This revenue stream that will come for five years or whatever average term a client is stay with you is going to be a very large number. And on the acquisition side of the formula, they just use the pay media, the dollars that you actually spend on advertising, but they don't include the creative, the people, the sales process. That's how you get those 5x or those 10x. There's nothing wrong with that. I just want to mention something there, right? There's nothing wrong with that. It is one way to measure in performance. But be mindful that you maybe also want to evaluate for maybe cash flow, cash flow purposes, the total cost of the acquisition and the revenue that is coming in the first year. And I mentioned this because for example, in that particular case it is important to know that at least you are getting dollar over dollar of investment. Right? Because the money that you spend on pay media plus what you do, that's going to happen across the year and the only revenue that you have right now is the monthly payments or the contract that you have from that client. That's it. If that number is not at least 1 or 100%, meaning that for every dollar in total real acquisition that you spend, you are not getting a dollar of revenue in that year, then you will have to put money to keep acquiring those customers. Even when in the long term it will be profitable. Which happens a lot to startups, Right. That's why they need investment. Because yes, their marketing and sales engine is a profitable one in the long term, but in the short term they need investment to get it going. Right. And I know that I, I'm deviated a little bit, but I, I, I feel that this whole relationship between CLB and ad spend is just a component of it. Right?

Yeah.

So those are some of the recommendations that I have in general. Right. And I think we have covered this in previous episodes. Start measuring your immediate cost and comparing against a tangible short term metric like impression click or even conversion. But keep measuring and keep increasing the timeframe so you can finally have your CLB and compare that against your ad spend. I don't know if you, Gabby, have any other insights there.

No, I'm okay with that. I'm okay, I'm pretty okay with that. With what you said, just about obviously the, what we cover on this topic, which is the combination of them. Right. And how it will help you. I guess it's really valuable to discuss how like the tips for optimizing paid media campaigns for the long term customer value, which is what we are talking about, like you said, and I guess I have a tip for that. And it's about the customer relationship nurturing on those, on those paid media ads that you're going to cover after acquiring those leads through obviously the paid media and investing those relationships, building those relationships and making that effort like I don't know, maybe you can use email marketing, webinars, personalized follow ups and obviously having an excellent customer service. You can, it can all contribute to nurturing those leads and into loyal leads. And obviously this will increase your clb, right? And customers, moving them to the CLB customers which is what we are looking for, what we're approaching for with the paid media investment. And that's something I have to say about the symbiotic relationship and for practical insights too. Actually I have another one which is actually you mentioned it for the power of pay media investments which is we have to keep in mind that some of the not only challenges but the strategies that you can implement to this combination too, which is sometimes we have this challenge we are focusing solely on customer acquisition while we're neglecting customer retention. And this obviously can lead to high churn rates. And this is something really important because we are overlooking customer retention and a strategy that we implement here. It's we can develop customer retention strategies that include ongoing engagement, engagement with those customers, loyalty programs and again the customer. I over say this because it's really, really important. But the customer service is really important because we have to maintain that communication and retaining. We have to remember that retaining existing customers can be more cost effective than acquiring new ones which is something that you mentioned earlier and I think it's really valuable for the topic that you have for today and a practical, practical dash challenge that we have to cover for today.

I agree. It really matters the quality of you know, whatever stage you are. We cover these many times, right? Is impressions have quality. It matters who is seeing the ad, not just how many numbers you have of them. Traffic quality, right? It matters who is the person that is visiting the website and the actions that are taking there. And so the same happened with revenue. Not every dollar is of the same quality, right? Which is what you're saying about retention. Sometimes you control that by the experience that you offer. Most of the time you control that by the experience that you offer as a company. But also you control the retention rate by the clients that you bring in to begin with. The expectations that you build the product, the promises that you make matter to the long term retention, right? So if you, you can hack your way in into getting a ton of clients with some revenue faster or at higher rates, but the price will be that the expectations that you set make you your clients to churn later on. Right. Because the promises were not the right type or the relationship that those clients wanted to build for with your company were not long term. Right. They were more immediate, more transactional. And so you will have that immediate jump, but you will have a higher churn. And that was decided the moment that you set up your go to market strategy. Right. Right from the beginning, the type of person that you were trying to educate about your product. So who do you target? Impact that metric as well. Very good. So well, I think we have covered most of the ideas for today. I hope you have found value. Don't miss the next one and be on the lookout for our next episode. And yeah, I'm really happy to have the opportunity to talk to you today. Until the next one.

Glad to be here too, Emilio. See you guys another time.

Bye bye.