PPC keyword bidding is both an art and a science. So, there’s no single “right” way to do it. For most advertisers, you’re just trying to generate more revenue per keyword than what you’re spending on clicks. And that’s just fine. But, you may also want to think about adjusting your keyword bids based on the lifetime value of a customer.
Simply put, the lifetime value (LTV) is the amount of money you expect a customer to give you during the span that they remain your customer. So if you run a business that has a monthly subscription fee of $10 and you know that your average customer remains a subscriber for 12 months, your customer lifetime value would be $120. There are more robust ways to calculate this using purchase frequency, profit margins, and the like. I would explain them to you here, but KISSmetrics already did an excellent job of covering it in this infographic:
++ Click Image to Enlarge ++
Source: How To Calculate Lifetime Value
So going back to that previous example, if you were adjusting your bids with the understanding that you were making $10 in revenue (based on the initial sign-up), you could be missing out. Sure, your PPC account could be wildly profitable if you’re acquiring customers that are worth $120 for a mere $10 or less, but you could definitely afford to be more aggressive with your cost per acquisition. Increasing your acceptable cost per acquisition is going to allow you to bid higher, which will often result in more traffic, better CTR due to higher position on the page, and better total conversions. So if you can figure out that your customers are worth $120 to you, why not try getting more aggressive and accept a $100 CPA instead of a $10 one?
This is pretty easy stuff to figure out for people selling subscriptions, but might get a little trickier for e-commerce retailers or people who drive offline conversions. But, if you run a business then either you or someone in your organization should know what the LTV of a customer is. If you don’t, work it out pronto. Look at how often your customers repeat purchase. Track cart totals and see which products are frequently purchased together. You can even factor in the revenue you get from email marketing as you build your email list from new customers acquired from PPC and other channels. Once you identify what your LTV is, you can start doing some interesting experiments with your PPC bidding.
Search marketing is frequently a channel of first awareness. Once you acquire a customer on a product or service-based keyword, you can prime that customer for repeat purchases via channels like email, social media, remarketing, or brand keyword searching on Google and Bing. Too often, we overlook the value of that new customer acquisition. Figure it out, and you can determine just how valuable it is to get that new customer in the door.