Auto insurance carriers have historically placed a heavy focus on policy sales as a crucial, guiding metric when it comes to measuring their marketing success—and with good reason. After all, new customers are the lifeblood of any growing business.
But while the sale remains the all-important end result of a successful customer acquisition effort, it’s important to make sure that policy sales isn’t the only metric you’re using to gauge your performance.
The reason? Not all customers are created equal. Indeed, someone who purchases an inexpensive policy is going to be less valuable to your business than someone who purchases an expensive one, and your longtime customers will bring in more money than those who buy a one-year policy and do not renew.
This concept is called customer lifetime value (CLV). And if you’re not paying attention to it, you’re going to wind up overpaying for low-value customers and losing out on high-value customers you might have had—if only you’d known to bid a little extra to reach them.
As it turns out, modern carriers can analyze their historical conversion data to determine the lifetime value of their customers, broken down by household type, geographic location, and other variables. With this information, you can predict which bidding strategies will yield the highest lifetime revenues for the least amount of money.
In fact, the industry’s leading advertisers are already growing their profit margins by optimizing for one metric in particular: a powerful measurement tool known as lifetime value-to-customer acquisition costs (LTV-to-CAC).
What is LTV-to-CAC?
LTV-to-CAC is a ratio that compares the amount of money an insurer earns from its policyholders to the amount of money they spent on advertising to acquire them.
If you have a high LTV-to-CAC, it means you’re producing a strong return on ad spend by acquiring high-value customers at an efficient cost. In other words, it means you’re doing your job.
In order to really optimize LTV-to-CAC, and thus maximize their profit margins, insurance advertisers need to make sure they’re “de-averaging” this metric. This means separating out certain segments of your customer base and measuring LTV-to-CAC for each specific portion.
While an average LTV-to-CAC is a good gauge of your overall digital performance, it doesn’t give you any hints about how you can improve, since you don’t know which parts of your customer base are valuable and which are not. Instead, you’ll need to look closely at each of your different audience segments.
For instance, you might de-average your LTV-to-CAC and find that leads who are homeowners deliver twice as much value as leads who are not. This would mean you’d probably want to start bidding higher to attract more of the homeowners who are purchasing high-value policies, and you’d perhaps want to bid less for the renters who are proving to be less fruitful.
Getting started with lifetime value-based bidding
De-averaging LTV-to-CAC is a baseline step for any advertiser hoping to use the metric, but there are several other steps you need to take before you can optimize your performance for lifetime value.
Here are five steps to bidding effectively based on LTV-to-CAC:
1. Track Policy Sales, Not Quotes
When measuring customer acquisition costs, some marketers measure the cost of serving users a quote. However, this method of tracking conversions is inadequate, as it lumps in actual customers with a large number of people who request a quote and never purchase a policy.
Indeed, the lifetime value of an almost customer is $0.00.
Instead, auto insurance advertisers should focus on tracking the lifetime value and acquisition costs of the people who actually purchase their policies.
2. Attribute Your Sales as Granularly as Possible
The more specific you’re able to be in your measurement, the more effectively you’ll be able to optimize. In digital marketing, as in life, knowledge is power.
Smart marketers are able to filter their LTV-to-CAC by homeowner status, zip code, age, marital status, and the number of cars the customer owns. It’s one thing to know how much money you typically make when a homeowner binds, but you’ll make even smarter decisions when you know how much revenue you earn from a 30-year-old married homeowner who owns two cars and lives in Westwood, Los Angeles.
3. Build Your Lifetime Value-Based Bidding Model
Once you’ve broken down your sales by a variety of customer variables, you can build a predictive model that allows you to bid appropriately for each lead, based on how much your model suggests that prospective customer will be worth to your business. After this is implemented, you’ll be able to run every lead-buying opportunity through your model and bid the optimal price—all in real time.
If you need help putting together this model, feel free to reach out to our client success team.
4. Let Us Know if You Need a Hand
Optimizing for LTV-to-CAC can be challenging, particularly as it relates to tracking and analyzing the conversion data you receive from the various channels you operate in.
At MediaAlpha, we offer transparent, granular reporting that allows our customers to gain deep insight into the circumstances of each transaction. By matching your sales records to our reporting data, you’ll be able to uncover which traffic sources, driver profiles, and geographic locations account for your most valuable customers.
If you run into any issues, our client success team is happy to provide support. If you send us your conversion data, we can deliver actionable data insights and help you manage your campaign.
5. Always Be Optimizing
Optimizing for LTV-to-CAC isn’t a one-time, set-it-and-forget-it situation. If you really want to maximize your performance, you need to be willing to test and learn, and you should always be on the lookout for new data points that you can help you bid more effectively. It’s crucial to have a process in place that allows you to continuously analyze your performance and adjust your model accordingly.
Auto insurers have more data than ever before—it’s time to take advantage of it
For auto insurance advertisers, the beauty of digital advertising is that it offers far more insight into their customers than was ever available previously. And with a recent William Blair report finding that more than 75% of consumers are doing price discovery for auto insurance online, there’s never been a better time for marketers to take advantage of this information.
By diving deep into your conversion data, you’ll be able to pinpoint your most effective advertising opportunities and reallocate your budget accordingly, optimizing LTV-to-CAC and return on ad spend in the process.
Already, many of the industry’s most sophisticated advertisers are using lifetime value to get the most out of every bid. Isn’t it time you did the same?