What is LTV-Based ROAS (and Why Does it Matter?)
If you’re part of an ecommerce business, you understand the importance of effective advertising. You likely review metrics and analyze data that help you understand how your advertising channels and campaigns are performing, including things like conversion rate and ad spend.
But are you evaluating your marketing performance both for the short term and the long term? If not, you may not be getting all the information you need to make smart business decisions. Looking at two distinct metrics – return on ad spend and LTV-based return on ad spend – can help.
What’s the difference between ROAS and LTV-based ROAS?
Return on ad spend, or ROAS, and lifetime value-based return on ad spend, or LTV-based ROAS, are related but unique. ROAS looks at your return on ad spend in the short term – typically for a period of a few months, at most. It tells you your immediate returns from specific marketing efforts – whether that’s an individual campaign or project, a marketing channel over a short period of time, or a holiday season.
LTV-based ROAS, on the other hand, is useful for the long term – it looks at the lifetime value of your marketing efforts. It can help you evaluate larger strategic initiatives and overall marketing channel or even team performance. LTV-based ROAS is a harder metric to access, but it’s hugely valuable for ecommerce stores when it comes to allocating ad spend more effectively.
Calculating return on ad spend
Both ROAS and LTV-based ROAS start with calculating return on ad spend – a term that describes the profits driven by specific marketing efforts. This metric tells you how effective a particular campaign or channel is, over a short period of time.
The formula used to calculate ROAS is simple:
Revenue / Ad Spend = ROAS
That’s revenue driven by your marketing efforts, over a specific period of time, divided by the cost of those marketing efforts.
PRO TIP: We make it easier for you by automatically calculating ROAS in Glew. Check out Customers > Lifetime Value > LTV Profitability by Channel, or start a free trial to see more.
While this formula is useful for short-term reporting and analysis, it doesn’t tell you anything about the long-term effectiveness of your marketing efforts. And when you base your marketing strategy solely on short-term ROAS, you aren’t seeing the whole picture.
That’s where LTV-based ROAS comes in.
Why LTV-based ROAS matters
To grasp the performance of your marketing efforts, you need to look beyond just the initial revenue generated by new customers. You have to consider the expected lifetime value (LTV) of your customers, too.
Here’s why: When a potential customer clicks on one of your ads and makes a purchase, the sale is attributed to the specific campaign. But that doesn’t take into account all the future purchases they might make. What about when that customer returns and buys again – by going directly to your site or searching for your site via Google? Depending on what attribution model you use, those sales may not be attributed to the original campaign that brought the customer in, but to the other channels they went on to use.
This can skew your return on ad spend, because profits from additional purchases are not included in the revenue used to calculate ROAS. For example, if you spend $20 to acquire a new customer, but they only spend $25 on their first purchase, you’re not adding much to your bottom line in the short term. But if you know that same customer will go on to spend $250 over their lifetime as a customer, that marketing channel becomes a lot more valuable – in the long term.
ROAS is great for short-term performance analysis. But to really understand the long-term value of your marketing efforts, you need to calculate LTV-based ROAS, too.
Use LTV-based ROAS for longterm insights and decision-making
Calculating LTV-based ROAS – which takes into account both your ad spend and your customer LTV – allows you to get a full picture of your marketing efforts.
The calculation for LTV-based ROAS combines your return on ad spend (ROAS) with the expected lifetime value of new customers (LTV) for a given time period:
(New Customers Acquired X LTV) / Ad Spend = LTV-Based ROAS
The tricky part of this calculation is determining your LTV, which can be challenging because there are multiple variants that can be included. However, just like ROAS, it’s calculated for you in Glew (start a free trial to see).
Once you have your LTV, you can plug it into your LTV-based ROAS formula to determine the longterm effectiveness of your marketing efforts. This allows you to make better business decisions about what efforts you should invest in. And making better use of your advertising dollars will help you drive more sales, more efficiently.
PRO TIP: Don’t want to do all that math? LTV-based ROAS is calculated for you and easily accessible in Glew, along with dozens of other important LTV metrics. Check out your Customers > Lifetime Value > LTV Profitability by Channel tab for more. If you’re not a Glew user already, start a free trial to see!
When to use ROAS versus LTV-based ROAS
You already know that ROAS is useful for short-term reporting and insights, while LTV-based ROAS is useful for long-term. But what does that actually mean for you?
The short term versus long term for your business will depend on your store’s lapse point – the number of days that can pass before a customer is likely to never make a purchase from you again. Each business has a different lapse point depending on the products they sell and expected customer behavior. For example, a cosmetics brand would have a significantly shorter lapse point than a company that sells speakers, since you typically need to re-purchase eyeliner or mascara long before you need to re-purchase speakers.
If your lapse point is 45 days, short term for you might be as little as a week or two, while your long term might be no more than a few months. If your lapse point is closer to a year or 18 months, your short term might be six months, while your long term might be upwards of a year. It all depends on your lapse point – Glew calculates this automatically for you based on your ecommerce data.
Want to learn more about the ecommerce metrics you should be tracking?
Download our 2019 reporting checklist – it includes the 27 ecommerce metrics you should be measuring, plus when you should report on them – daily, weekly, monthly or quarterly.