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Why the cost of acquisition bad for your health

Updated: Jan 13, 2022

By Ryan Haynes, Haynes MarComs and Andy Headington, Adido.

Digital marketing is now the status quo when it comes to marketing, and while digital channels may not be the most valuable for all businesses, digital can provide the transparency needed to assess and calculate business performance.

The days of digital marketing being the cheap alternative have near-enough vanished; channels have been tried, tested and optimised - with well rehearsed formulas that can boost the prospects of companies.

Today, digital marketing needs to be considered and thought through to ensure each channel contributes to the core commercial goals. More than ever, companies need to be monitoring their Customer Acquisition Cost (CAC), breaking this down throughout the sales funnel and tracking the customer journey to understand the value each interaction contributes to your sales process.

How to understand cost

The cost relates to both the financial and human resources needed to capture a lead and convert to a customer. Cost has traditionally been calculated based on the financial investment made in third party channels either through commission costs, affiliate fees, bidding, pay per click or through flat-rate advertising models.

In a wider digital mix you will need to consider your owned and paid-for channels. Digital marketing provides performance visibility of each channel and marketing partner, tracking each engagement and visitor journey and giving you the insight needed to understand the relevance and value of each marketing investment. When you understand the performance of each channel, you can begin to optimise and improve the return of investment, however there will always be a digital ceiling - particularly where you rely on third-party data and transactional marketing.

To reduce costs and drive performance of higher value channels you’ll need to break through the digital ceiling, and diversify your marketing mix. You’ll need to look at earned channels to spread your reach and brand messages.

When running a wider marketing programme inclusive of non-digital channels, calculating the cost of acquisition becomes more tricky - calculations need to take into account longer-term brand marketing campaigns as well as the internal/external sales and marketing resources required to secure the customer.

The importance of digital alignment for an effective sales funnel

Building a full digital infrastructure is required to align all communication channels and deploy integrated multichannel campaigns to maximise the trackability of all communications. You need to consider how you track and monitor engagement through activities like events, conferences, PR and media relations, Direct Marketing, advertising and influencer engagement. Think of it as implementing a new healthy living routine: you need the right diet, the physical exercise, mental well-being and nutritional understanding to fully benefit - all of which contribute to performance.

The pandemic has forced many businesses to adopt digital marketing programmes to access their target market - needing to identify the virtual channels where their sales prospects hang out to have the opportunity to engage. However not all businesses and sectors rely on digital marketing channels - but with everything changing, companies need to address their digital twin to not lose opportunities.

Furthermore, a new generation of buyers now rely heavily on self-service, researching and understanding the products before engaging in a direct sales process with a company. This is where a defined sales funnel will enable you to understand and track the stage of each prospect to engage with their current phase of buying.

By understanding your sales funnel and when, where and who engages with the prospect, you can make your calculations most effective by aligning departmental aims to core commercial goals across sales, marketing, ecommerce and customer experience. This allows you to determine clear responsibilities with each department while also calculating the long-term value of each customer for managing retention and upselling.

Why review past investment and your purpose of marketing

Tapping into digital channels may be alien to your company, however without the right level of investment you will lack the insight to understand the value it can offer the business. Therefore, it’s important to assess historical marketing investments and the performance they provided to the business to understand the realistic level of investment needed.

Let’s first take print advertising, historically the most impactful next to billboards, radio and TV - reaching the desired audience through demographically focused publications. Flat rate advertising but with near to no trackability. When you invest £65,000 a year, what do you expect to achieve? How do you monitor results? How do you measure effectiveness and performance?

This is when you need to ask yourself what is the purpose of advertising, and how do you set quantifiable KPIs? A marketing manager is lacking the performance visibility of this channel: with digital marketing you can justify investment by the return. The purpose of advertising should be readdressed as a tool for raising awareness through brand association and reaching a wider audience amongst non-digital buyers and those beyond your owned network.

Looking at events, businesses often fail to fully calculate the cost of attending and exhibiting as part of their marketing and acquisition budgets. That is why it’s important to recognise the differing KPIs for marketing activities and how they can be attributed to commercial performance. In one example of a company investing in a 54sqm stand - exhibition fees, stand build, travel and accommodation costs plus supportive marketing - the investment came to £120,000. On tracking the meetings and contacts made at the event return of investment was only realised in the second year - demonstrating the need to address the sales funnel to shorten the sales cycle through wider marketing initiatives.

As you restructure your budgets and marketing strategy you need to consider the investments made previously in travel, meetings, events and exhibitions and consider how best to divide this investment to new channels. Taking a 70 - 20 - 10 approach split between existing channels, new channels and experimentation will enable you to truly begin building a full hybrid marketing strategy.

Digital marketing is not immune to mismanagement

Tracking data is great. But what if the wrong data is being tracked? Worse still, what if it is being tracked correctly but then not acted on?

A recent contact came to us wanting to understand why the PPC investment was not delivering growth to the business. While the top level numbers of visits and spend were going up, underneath the top line, things were not rosy.

Our analysis of their systems, data and reporting highlighted huge inefficiencies. Only 14% of their spend was achieving their target cost per acquisition, and a good chunk of this was on their brand which they probably didn’t need to bid on in the first place! Most worryingly a third of their budget was spent on phrases that didn’t convert once in a year!

Tracking data from top line measures to something more meaningful is where smart companies focus their attention. Understanding a proper cost per acquisition isn’t easy, but it is crucial to help make smarter decisions when spending precious budget and resources.

KPIs - getting the commercial goals right

Your goals and targets are essential for building your marketing strategy and selecting the right marketing mix. When you know what engagement you’re attracting and how well it is performing, you can begin to look at alternate channels to either tap into a more relevant or niche audience, or spread your net to reach a wider audience that you cannot tap into directly through your existing digital channels.

Third party digital marketing and sponsorship can enable you to reach dedicated communities and targeted buyer audiences, furthermore media PR can reach beyond your network. Here you will need to ensure you have all your tracking set up, with dedicated URLs and observing performance of organic traffic and search.

In a dedicated PR campaign to raise awareness of a travel app, media coverage reached a potential audience of 112 million, this was tracked by app downloads - recording a 20% uptake in users. The marketing team was able to see the return of investment and begin better calculating the cost of acquisition through brand PR.

Similarly a b2b software provider ran a six-month media PR campaign to drive industry awareness and thought-leadership through a number of business and product announcements, garnering a database of over 2,000 revenue managers worldwide. This company fed the top of the sales funnel through brand PR to begin qualifying leads.

Understanding your audience

Marketing requires an inherent understanding of the target buyer audience, without which your marketing efforts will experience a lot of leakage. One large holiday accommodation provider ran a digital campaign to increase website traffic and conversions, however the opportunity was lost due to a misplaced audience. The campaign targeted an audience of 20 - 30 year olds, however the highest value consumer was 60+ audience, which caused friction in the customer journey negatively impacting conversion rates.

Unraveling digital - unpicking confusion

Getting on top of your marketing agenda and sales opportunities requires analysis of all activities so you can effectively review channel performance. This is best achieved by identifying the customer journey to create a clear sales funnel. You can then establish the relevant sales touchpoints involved in the decision making process, and address the purchase barriers while building buyer confidence.

The process of analysing and dissecting your sales funnel can be laborious, often getting messier before it gets clearer. Take the time to understand the sales cycle, where you are experiencing leakage, churn and drop-off, and what adds the highest value to the decision making process. This will come from both data analysis and getting feedback from recent buyers. The more you do it, the more you can categorise contacts and track their engagement the better, clearer understanding you will have.

From here you need to break down the costs and attribution of each activity, reviewing both channel and people performance to understand what it takes to make the sale, inclusive of time and financial investment. The more you take into account all business costs, the more you can understand your P&L and what it takes to grow and scale the company, enabling you to build the formula for successful marketing.

Where companies develop the digital marketing and sales process, utilising the CRM to manage engagement and drive buyers through the sales funnels, free sales teams to focus on higher value opportunities and providing a consultative approach to form stronger, deeper relationships. For businesses starting their marketing journey, it's important to invest significantly more in the early stages of development, create the digital sales and marketing infrastructure to maximise the long-term investment.

How to track success of your digital marketing channels

Once you have defined your sales funnel and identified your marketing mix, you need to activate your digital channels. Apply the relevant KPIs to attribute to your wider commercial goals, and develop trackability mechanisms.

When it comes to measuring sales generated online, we typically see three scenarios. The ideal being that we can measure from first click through to sale and sales value. Sometimes we can only see leads or quotes generated online but not how they convert offline and sometimes we can only see partial lead or quote information, for example through 'Register interest forms' or similar. To truly understand the value of any online form, we need to track each form uniquely so we can assign various attributes like channel source, creative or keyword to it.

By storing a unique reference ID valid for online quotes and offline sales, you can link revenue back to the source and understand the impact of channel performance, even to a keyword level! This led to a 42% increase in online revenue generated for one client.

The number of businesses that do not have their tracking correct is vast! It’s a scary fact that in 2021, many businesses can’t attribute online sales back to activity. For one client, we could see nearly $250k of revenue not tracked properly, leaving room for large inefficiencies to creep in. It can take many months to not only correct data collection, but also get value from it to make better decisions. Think of how much wasted budget that is!

Sometimes it takes many visits or interactions to convert. Looking at the last activity and giving it all the credit can often be wrong. It’s worth looking at your typical conversion journey and seeing where the gaps are. Google Analytics doesn’t make it easy to understand value across multiple touch points, whereas advanced tools like Ruler Analytics or Hubspot give valuable insights which can be used to increase conversions and reduce wastage.

It’s important to make it easy to see and understand marketing performance. Dashboards should be set up to understand everything from the basic top level stats through to month on month performance by channel, by product to get really into the detail and see how and where efficiencies can be found.

Frequent CAC and performance analysis

It’s essential to review performance quarterly and annually, looking at changing patterns of purchasing behaviour and how each channel is contributes to your KPIs. Content, SEO and PR are longer-term strategies compared to PPC and paid-advertising. By reviewing your commercial goals you can assess how each channel has contributed and which offers the best value.

By recording activity and investment made across all your owned, earned and paid channels will provide the visibility needed to identify marketing budgets, build ROI calculations and optimise your CAC. Incorporating both people and financial resources will help you make informed decisions on channel investment and skill recruitment to ensure you are investing in the right areas.

Join the webinar on 6th October to learn more: Register on Eventbrite - Assessing Customer Acquisition Costs.

Final thoughts

  1. Dissect your marketing channels and define your sales funnel by understanding your customer journey and your high-value touchpoints.

  2. Analyse your expenditure and attribute sales and marketing performance to develop KPIs.

  3. Review historical marketing activities - particularly those that performed well - and identify the complementary digital twin/alternative.

  4. Set initial CAC targets and begin to optimise.

To discuss

  • What factors are most influential to securing that customer?

  • What’s your challenge calculating acquisition cost?

  • What’s your challenge identifying a marketing budget?

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