One of the biggest mistakes ecommerce companies make with Google Ads is asking the wrong question.
They ask:
“How much can I afford to spend to acquire this customer?”
That sounds like a reasonable question. But there’s a better one:
“How much is this customer actually worth to my business over time?”
That distinction can completely change how you approach Google Ads.
If you evaluate every customer based only on the profitability of their first purchase, you may stop advertising to customers who could ultimately become some of your most valuable—and profitable—customers.
The key is understanding Customer Lifetime Value (CLV or LTV) and incorporating it into your Google Ads strategy.
Start by Understanding Your Customer Economics
The first step is to understand the difference between customer acquisition cost (CAC) and customer lifetime value.
Imagine you sell a product for $100. After accounting for the cost of goods, fulfillment, payment processing, and other variable expenses, you have $40 remaining.
If you’re only looking at the first purchase, you might conclude that you can’t afford to spend more than $40 to acquire that customer.
But what happens if 30% of your customers purchase from you again?
What if some of them make three, four, or five purchases?
Suddenly, that $100 customer isn’t really a $100 customer.
They might ultimately be worth $300, $500, or even $1,000 to your business.
That’s where lifetime value changes the Google Ads equation.
Before making changes to your advertising strategy, understand your basic customer economics, including:
- Average order value
- Gross margin
- Repeat purchase rate
- Average number of purchases per customer
- Customer retention
- Customer acquisition cost
- Customer lifetime value
You don’t necessarily need a perfect lifetime-value calculation down to the penny. What you need is a useful number that helps you make better advertising decisions.
For example, if your average first order generates $50 in contribution profit but the average customer generates $150 in contribution profit over their lifetime, you have considerably more room to invest in acquiring that customer.
That’s particularly important because Google Ads is an auction.
You’re competing against other advertisers for clicks and customers. If you insist on making all of your profit from the first transaction, you may be unwilling to bid what it takes to win the customer.
Meanwhile, a competitor who understands lifetime value may be willing to pay considerably more.
And that competitor may end up getting more of the valuable traffic.
Not Every Customer Has the Same Lifetime Value
Another important consideration is that not every customer has the same value.
Consider two ecommerce businesses.
One sells products that customers typically purchase once every few years. The other sells consumable products that customers reorder every 30 or 60 days.
A customer might place the exact same $100 initial order with both companies.
But the lifetime value of those customers could be dramatically different.
This means ecommerce companies need to look beyond the initial transaction when evaluating Google Ads campaigns.
Don’t just ask:
“Which campaign generated the most revenue?”
Instead, ask:
“Which campaign generated the most valuable customers?”
That’s a much better question.
The same principle applies to products, keywords, search terms, audiences, and campaigns.
A campaign that appears less profitable based on first-purchase revenue could actually be generating customers with significantly higher repeat-purchase rates.
Use Customer Lifetime Value to Establish Your Target CPA
This is where understanding lifetime value becomes particularly useful.
Suppose your average customer is worth $500 over their lifetime.
That doesn’t mean you should spend $500 to acquire them. You still need to maintain a profitable business.
Instead, determine how much of that lifetime value you’re willing to invest in acquiring a new customer.
For example, your business might determine that it is willing to invest $150 to acquire a customer because that customer is expected to generate $500 in lifetime revenue and enough margin to make the acquisition profitable.
Now you’ve established a target acquisition cost based on the economics of the customer—not simply the economics of the first order.
That can dramatically change how you manage Google Ads.
Measure What Happens After the First Purchase
Another common mistake is evaluating Google Ads based exclusively on the initial conversion.
Google Ads is very good at reporting conversions.
But a conversion isn’t necessarily the same thing as a valuable customer.
Consider two customers.
Customer A purchases $100 from you once and never returns.
Customer B purchases $100 today and then another $100 every few months for the next two years.
Both customers generated the same initial revenue.
But they’re obviously not equally valuable.
Your advertising strategy should eventually reflect that difference.
That means connecting your advertising data with your ecommerce and customer data whenever possible.
Look at customers acquired through different campaigns, products, keywords, and channels.
Then ask:
- Do these customers come back?
- How frequently do they purchase?
- What products do they purchase?
- What’s their average lifetime revenue?
- What’s their lifetime profitability?
Those answers can tell you much more about the true value of your Google Ads campaigns than first-purchase revenue alone.
Don’t Be Afraid of a Lower ROAS Today
Here’s one of the most important concepts to understand.
Imagine Campaign A produces a 500% ROAS on the first purchase.
Campaign B produces a 300% ROAS.
If you’re looking only at first-purchase ROAS, Campaign A appears to be the obvious winner.
But what if customers acquired through Campaign A almost never purchase again?
And what if customers acquired through Campaign B have an exceptionally high repeat-purchase rate?
Campaign B could actually be the more profitable campaign for the business.
This is why first-purchase ROAS can sometimes be misleading.
That doesn’t mean you should ignore ROAS. It’s still an important metric.
It means you need to put ROAS into context.
You want to understand the relationship between the acquisition cost you’re paying today and the value that customer can generate over time.
Build Google Ads Around Profitable Customers
Ultimately, the goal of Google Ads isn’t simply to generate clicks.
It’s not even simply to generate conversions.
The goal is to acquire profitable customers.
And profitable customers can become considerably more valuable after their first transaction.
If I were building a Google Ads strategy for an ecommerce company, I’d start with the economics.
First, determine:
What is a new customer worth to us?
Then determine:
How much are we willing to spend to acquire that customer?
Finally, determine:
How can we structure our campaigns, bidding, products, and measurement to acquire more customers who look like our most valuable customers?
That’s the shift from simply managing Google Ads to managing customer acquisition economics.
And once you start looking at Google Ads through that lens, you may discover something interesting.
The campaigns you thought were your best campaigns may not actually be your best campaigns.
And the campaigns you thought were too expensive may actually represent some of your most profitable opportunities.
Make Each Customer Count
The next time you’re evaluating your Google Ads performance, don’t just ask:
“How much revenue did this customer generate today?”
Ask:
“What could this customer be worth to us over the next several years?”
When you understand Customer Lifetime Value, you can make smarter decisions about how much you’re willing to pay for the right customer.
And that’s how you build a Google Ads strategy designed for long-term ecommerce growth, rather than simply winning today’s sale.
Make each click count—but make each customer count even more.
Frequently Asked Questions
- What is Customer Lifetime Value (CLV) in ecommerce?
Customer Lifetime Value is the total value a customer is expected to generate for an ecommerce business over the entire relationship, rather than just from their first purchase. It considers factors such as average order value, purchase frequency, repeat purchases, retention, and profitability.
- Why is Customer Lifetime Value important for Google Ads?
CLV helps ecommerce businesses determine how much they can reasonably invest to acquire a new customer. If customers typically make multiple purchases, a company may be able to spend more to acquire them than it could if it evaluated profitability based solely on the first order.
- How does CLV affect a Google Ads target CPA?
A higher customer lifetime value can justify a higher target CPA, provided the customer’s future purchases generate enough profit to support the acquisition cost. Rather than basing your target CPA exclusively on first-order profit, consider how much profitable revenue the average customer generates over their lifetime.
- Should ecommerce companies ignore ROAS when focusing on Customer Lifetime Value?
No. ROAS remains an important Google Ads metric, but it shouldn’t necessarily be the only metric used to evaluate performance. A campaign with a lower first-purchase ROAS may generate customers with higher repeat-purchase rates and greater lifetime profitability.
- How can ecommerce businesses calculate Customer Lifetime Value?
A basic CLV calculation can consider average order value × purchase frequency × average customer lifespan. For a more useful advertising metric, ecommerce businesses should also incorporate gross margin and other variable costs so they can estimate the customer’s actual contribution to profitability.
- Should every Google Ads customer be assigned the same lifetime value?
Not necessarily. Customer value can vary significantly depending on the product purchased, acquisition source, purchase frequency, and likelihood of returning. An ecommerce business should analyze which campaigns, products, keywords, and audiences tend to produce its most valuable long-term customers.
- How can an ecommerce company use CLV to improve its Google Ads strategy?
Start by determining the lifetime value of your customers and how much you’re willing to spend to acquire them. Then evaluate Google Ads campaigns not only on first-purchase revenue and ROAS, but also on the quality and long-term value of the customers they generate. This allows you to invest more aggressively in campaigns that attract profitable customers over time.
Need Help with Google Ads? If you’re ready to take your online store’s performance to the next level with Google Shopping Ads but need a helping hand, consider reaching out. I’m Andy Splichal, author of Make Each Click Count and host of the Make Each Click Count podcast. Whether it’s about creating high-performing Shopping Ads or mastering your overall Google Ads strategy, I’m here to help. Let’s make those clicks count!
ABOUT THE AUTHOR
Andy Splichal is the founder and managing partner of True Online Presence, author of the Make Each Click Count book series, host of the Make Each Click Count podcast, founder of Make Each Click Count University and certified online marketing strategist with twenty plus years of experience helping companies increase their online presence and profitable revenues.
He was named to Best of Los Angeles Awards’ Most Fascinating 100 List in both 2020 and 2021. To find more information on Andy Splichal, visit trueonlinepresence.com or read The Full Story on his website or his blog, blog.trueonlinepresence.com.