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The story of performance marketing is a story of evolution; the development of an online advertising market from a simple to a more complex form, while adjusting to changes in the ecosystem. With the possibilities of predictive lifetime value, performance marketing has moved into primetime and its potential is too great for advertisers to ignore. Here’s a quick look at the stages that led to the creation of a thriving performance advertising market.
In the beginning, the industry first started measuring success simply by eyeballs or the amount of views. It was based on advertising strategies offered by other traditional media such as television or print, which sell advertising based on viewership. The cost-per-impression (CPM) metric was the gold standard.
The case for performance marketing starts with the evolution of tracking and measurement; allowing advertisers to only pay when ad placements generated a click (CPC). Overture pioneered this approach and Google perfected it with Adwords and later on, Adsense. On a business level this model, based on relevance, provided direct response advertisers with a more quantifiable method of establishing value and helped get them one step closer to answering the question that keeps every marketer up at night “ what are you willing to pay to acquire a new customer.”
Just as CPC redefined the model of its predecessor CPM, Cost-Per-Action (CPA) redefined the model of CPC. With CPA, advertisers only paid when a certain conversion action takes place, such as a registration, add to cart or product purchase. This approach answered that nagging question of “what it costs to acquire a new customer.” More recently this evolved into paying only when a mobile ad drove a specific action – like an app install. This was light years better than buying eyeballs and clicks, but not perfect.
While many digital advertisers try to minimize how much they spend to acquire a customer, (CPA), by understanding the lifetime value of various customers, they can improve their ROI in the long run. LTV predicts the amount of revenue or profit a customer generates over time. As marketers we can agree, that it’s worth spending a little more to find and acquire a customer that is 20x more valuable than another. For marketers interested in scalability and accountability, CPA or single purchases are not predictive of future behavior.
Customers that have the highest lifetime value (LTV) often cost more upfront. Once acquired, however, their value over time is much higher than customers who are acquired via CPA based bidding at a lower upfront cost. If your CPA costs increase, then your boss is going to start to take notice. So how do you justify the increase in CPA? By incorporating predictive lifetime value based models into your marketing analytics.
By strategizing, bidding and optimizing to predictive lifetime value, you can rest assure that you will be protecting yourself against low future values, and maximizing your investment today. The best part of predictive lifetime value based optimization is that it allows marketers to spend their dollars efficiently and scale with confidence. With expected revenue reporting based on daily data tracking, marketers can breathe easy by knowing that any budget increases are truly based on positive ROI.