By Bruce Buchanan, CEO, Rokt
As our world becomes more digital, measuring marketing effectively online is increasingly imperative to success.
However, any discussion of marketing “measurement” can quickly become contentious, bringing to mind the oft-referenced words of John Wanamaker: “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” This sentiment has haunted marketers for more than a century and became a source of friction between finance and marketing teams.
The internet and the data it provides was meant to solve this, right?
Many believed that performance tracking tools like Google Analytics would offer a solution to this puzzle, providing a link between the source of new customers and marketing activity. Certainly, such performance tracking tools have made it easier to justify increasing marketing budgets as the rationale was based on data. The challenge has been that the additional marketing budget has mostly gone to “last click” channels, whereby the “last click” is given credit for a sale or conversion. Last click attribution is understandably alluring to marketers, as it is easier to draw a connection between the last action a prospect took–say, clicking a digital ad right before making a purchase –rather than measure the impact of marketing activities earlier in a customer’s journey–say, hearing a podcast advertisement or reading positive press. Measuring marketing activities further up the funnel is very challenging even though any rational person knows that all touchpoints, not just the final one, can influence a purchase decision. Yet, we tend to ignore this truth and focus only on the last click. This “last click trap” has meant most marketers focus their time and investment on last-click channels. As is said, what gets measured gets done, which, in this case, is not a good thing!
To get an idea of how the “last click trap” impacted the US advertising market, consider this: In 1990, more than 60% of total advertising spend (USD $80 billion) was on mass awareness channels, digital didn’t exist as a category and bottom-of-the-funnel spend was estimated to be less than 20% of total spend. In comparison, in 2020, advertisers are expected to spend more than 50% of all ad spend on middle and bottom of the funnel channels. This has been mostly driven by the emergence of digital, estimated to be a channel with more USD $160 billion of spend (mostly bottom-of-the funnel). Many of these bottom-of-funnel channels did not exist in 1990.
While companies believed this shift would allow them to attain more customers and lower their customer acquisition cost (CAC), the reality is that many did not see reductions in CAC. We believe the focus on last-click performance metrics is one of the key reasons why.
The obvious next question is: What drives improvements in CAC? From our research of almost four billion e-commerce transactions, we have isolated four important drivers that result in meaningful improvements to CAC:
1. Brand. Choosing one product over another is ultimately powered by the consumer’s emotional relationship with the brand. We see companies with strong brands outperform weaker brands in the same industry by 3:1 in terms of customer acquisition costs (CAC). Many businesses miss the link between brand and performance entirely. They underinvest in brand because outcomes are not as easily measured. This is the challenge when the approach is laser-focused on short-term performance metrics versus long-term shifts in brand strength.
2. Customer Onboarding. Friction during the purchase or onboarding experience has a significant impact on CAC. For anyone who has completed a lengthy application for a credit card from a traditional bank versus an easy sign-up such as for Apple’s new credit card, this is easy to understand. We’ve seen a 10:1 variation in CAC based on friction in onboarding. Watch out for common mistakes such as trying to shift natural customer behavior, asking unnecessary questions with nice-to-have answers, poor user experience; poor user progression (e.g., asking for information you already have collected), and poor technical integration. There are some great quick wins in onboarding that can immediately improve the bottom line.
3. Incremental Approach to Paid Marketing. One of the best ways to improve CAC is to ensure that marketing spend in a given channel–irrespective of what the metrics from that channel are telling you–is improving your outcomes for the overall business. As you adjust your channel mix or increase spend in a channel, validate it at the overall business level; is CAC increasing or decreasing? This ensures that you consider some channels and activities that have a much longer payback window. Said another way, you want to ensure each incremental dollar of spend in a channel is having a positive incremental impact. We have seen clients reduce CAC by 50% through a disciplined and scientific approach to paid marketing using more advanced incremental measurement techniques. The key is to stay focused on your overall business CAC metric and use incremental metrics only when looking at individual channels.
4. Organic-to-Paid Marketing Ratio. Customers talk to other potential customers. New customers are expensive to acquire, so leveraging this investment through word of mouth and referral programs is often a clever way to reduce CAC. Leveraging your current (and most loyal) customers can be incredibly effective. This can reduce CAC by as much as 80-90%.
It sounds simple: grow your customer base to grow your business. But knowing exactly how effective the marketing efforts are, how much it costs to acquire customers and how this relates to lifetime value is key to competitive advantage, faster growth, and domination of your market. In these uncertain times when every dollar counts, knowing how to efficiently acquire customers is more important than ever. Fortunately, the data and tools are now available to make this a reality—marketers just need to know how to take advantage of them.
To find out how Rokt can help you acquire new customers at scale, visit rokt.com/actnow.