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With everything going on in the world, this might seem like a crazy time to talk about performance marketing. It’s not — this actually may be the single most important time to look at how your performance marketing is… well, performing. Times of crisis tend to bring budgets front and center, especially as key performance indicators fluctuate and priorities shift. 

When the global environment turns challenging, many companies want to react by cutting marketing spend. If brands take away only one thing from this article it should be this: Fight that urge! There is a strong business case to be made for maintaining, and even expanding, your marketing efforts even in an uncertain economy. 

Understanding that case requires understanding the totality of your customer acquisition journey, what you’re spending and what you’re spending it on, what makes a good KPI in a challenging environment, and what your market looks like.

In this article:
What’s the Difference Between CAC and CPA, Anyway?
Understanding the Customer Acquisition Cost
The Business Case to Keep Spending
Understand That Last-Click Conversion Rates Aren’t All There Is
Monitor the Competition
Scale With Performance
Remember That Downturns Eventually Turn Up
The Takeaway: Take A Deep Breath

What’s the Difference Between CAC and CPA, Anyway?

Most marketers are familiar with cost per acquisition or action (CPA). Many are also familiar with customer acquisition cost (CAC). Unfortunately, too many use them interchangeably or don’t fully understand the difference between the two. That’s a costly mistake to make, and can lead to bad decisions and an inability to secure stakeholder approval.

The simplest way to differentiate the two is to remember that CAC is about getting a paid customer that contributes to revenue, while CPA is about getting potential customers to perform some kind of action or to get an acquisition of some kind before a user becomes a customer.

So for example, the cost to sign a visitor up for a newsletter would be a CPA. Same with getting a user to sign up for a free trial. In both cases, even though the actions were positive and could lead to a user turning into a customer, they aren’t there yet. 

On the other hand, the cost for that user then buying an item they see in a brand’s newsletter or upgrading the free trial to a paid subscription would be the CAC. The metric switches as soon as money changes hands, and the CAC is often (but not always) made up of many preliminary CPAs (among other things!)

Why is this important? Two cases can help illustrate:

  1. Company A runs a performance marketing campaign and uses free trial signups as the key success metric. The campaign goes gangbusters — every single person who clicks turns into a free user, at a cost of only $5 per click! Conversion rates are as high as it’s possible to go, and the CPA is very reasonable for this industry. The campaign is a smashing success, and they should move as much money as possible into performance ads, right?
  2. Their competitor, Company B, runs a similar campaign. Unfortunately for their marketing manager, signups are slow. They’re spending a ton on clicks, but only every fifth click signs up for a free trial. The CPA is $25 — much higher than industry standards — and the VP of marketing is starting to walk past the performance office a lot while looking worried. 

Which company is running the more successful campaign? It’s easy to guess Company A, but in reality there isn’t enough information presented to make an informed inference. Company A may seem to have a successful campaign on the surface, but if they are only converting free trial users at a rate of 20%, they’re actually spending the same amount for each customer as Company B if the latter converts at 100%. And if Company B spends less per free trial user on the back-end, if for example they have a smaller marketing team, they may well be significantly ahead of Company A.

That’s not to say CPA is not important. CPA can be a leading indicator and a component metric of CAC, and can point to areas where optimization is needed within a holistic customer journey. But it’s also not the be all and end all metric to build goals around, and is just one component out of many that tells brands how successful their marketing spend is.

Understanding the Customer Acquisition Cost

Measuring CTA is often a fairly easy and straightforward undertaking. Since the actions/acquisitions being tracked tend to be small and non-monetary, attribution often defaults to simple models with relatively short look-back windows, like last-click. That’s not to say it can’t be more complex, but if the actions being measured are properly discreet and small, simple often works. 

Measuring CAC can be a much more difficult process. The standard equation for CAC is:

(Marketing Spend + Sales Spend)/Customers Acquired in Time Period

This is a good foundation, but misses a couple of key points:

  1. Brands don’t always get customers in the same time period that they spend marketing or sales dollars. Some brands might have a customer journey lasting only a few minutes (see an ad, click the ad, buy the product.) Others might last years (see ad, meet reps at conference, get marketing materials, pass through budgeting, see more ads, watch webinar, talk to sales team, buy product.) Failing to take this into account can register false CACs that can be too high, if a brand launches a new initiative but doesn’t allow enough time to see customers from that initiative, or too low, if a wave of customers comes in months after an initiative is paid for.
  2. How does a brand define marketing and sales cost? Are salaries calculated in those costs? What about facilities costs and other overhead? Engineering? Creative? If CAC is boiled down only to direct and simple-to-attribute costs, it can appear artificially low in some cases — for example by not taking into account a branding campaign that happened months ago and contributed to a purchase, or by ignoring the cost of sales support salaries.

These factors make calculating a true CAC difficult. This is especially true over shorter time periods — weeks, months, and even quarters. Brands not focused on understanding their full customer journey can often miss large portions of their CAC, leading to less-than optimal campaign and tactical decisions.

The Business Case to Keep Spending

So what does customer acquisition cost have to do with spending patterns during difficult economic times? And how does it add to the business case for maintaining spending?

Slow-downs tend to bring out the bottom-line obsession hidden inside every executive. When accounts are high, stake-holders feel less pressure to account for every dollar going out. When those accounts start falling, the mood can quickly change to tightening belts and planning for the worst. Every dollar out needs to result in X dollars in. For marketing, this often means hyper-focusing on the day-to-day KPIs and CPAs. 

What this laser-like focus misses, though, is that very few companies have a one-stop customer journey. Looking only at last-clicks and direct conversions ignores the sometimes hundreds of touchpoints consumers have with brands before making a purchase. Limited lookback attribution windows ignore the sometimes months consumers take to decide to buy. Especially in the context of an economic slowdown, customers don’t stop buying products, but they do slow down their decision making timelines. 

Focusing on specific costs per action obscures the research process that goes into buying, and hides the value of being top-of-mind when consumers are ready to purchase. A hyper-focus on direct performance misses the forest for the trees. Instead, smart brands need to:

Understand That Last-Click Conversion Rates Aren’t All There Is

Even in the best economic times, the single-touch or last-click attribution models fail to fully capture all of the touch-points. Really understanding how spend is contributing to sales often requires looking back two weeks or more. The higher the cost or complexity of a product, and the less essential it is to consumers, the longer their customer journey is likely to be. 

Marketers need to review their data and identify how long a typical customer journey is and base channel and spend decisions on this timeframe, attributing spend across the entire journey to the final conversion. By focusing on the total journey, they may find that even high click/low conversion campaigns are an essential part of getting consumers to click that “Buy” button. 

Monitor the Competition

Brands need to remember that during a downturn, competitors are going through the same crisis of confidence in performance marketing as they are. During a bad enough downturn, it can seem like the various exchanges and marketplaces look like a ghost town! But as everyone’s parents told them at least once,” just because everyone is jumping off a bridge doesn’t mean you should.” 

Instead, consider what happens to a vertical when a large number of brands pull out of performance advertising: ad volumes drop, rates get slashed, and exposure for the brands still left skyrockets. Brands in a position to maintain or even increase spending when everyone else is pulling out are in a strong position to capture significant new market share at significantly reduced rates. Or to put it even more simply, when a customer searches for a product and there’s only one brand still advertising, that brand wins 100% of the time.

Scale With Performance

While shutting down campaigns that are still bringing in business might be a rash decision, performance marketing managers can find a happy medium in scaling their spend to current market conditions — both the market for their products and the marketplace for ad placements. As overall traffic decreases and competitors begin to pull out, ad rates drop to compensate. This allows marketers to slowly scale down their spending to match while retaining a roughly similar market share and stay in front of their target audience at the same frequency as before, only for a lower cost.

This approach allows for a compromise between tightening belts and maintaining the status quo of performance. It won’t help brands power past competitors, but it will also keep them from losing ground. 

Remember That Downturns Eventually Turn Up

Ninety-five percent of purchases are subconscious. Customers often turn to barely-remembered bits, jingles, and feelings of “I think I’ve seen that before” when they make purchasing decisions. So when they begin making purchases again after a period of restraint, the brands they pick will be the ones that have done the most to stick in their head. If that sounds like “brand awareness”, it is. It’s real, it’s valuable, and it is the secret sauce that allows some brands to turn economic downturns into opportunities for explosive growth.

Because markets recover, panics subside, downturns turn up, and decreased spending increases. Eventually, recessions end and consumers start spending money again, and it’s often faster than many brands are ready for. The great recession of 2007, for example, only lasted 19 months — just about a year and a half. During those 19 months, consumers didn’t stop having wants and needs. Rather, many of them simply postponed larger purchasing decisions, taking the time to research and understand the market they would eventually rejoin. 

Car sales illustrate this important point perfectly — after a drop in 2008 and 2009, 2010 saw a huge jump that exceeded the strongest pre-recession year by over 10%. All that pent up demand needed to go somewhere, and it often went to the brands that had spent the most building brand equity while advertising rates were cheap and consumers weren’t buying. The message is clear: companies that invest in building brand equity when others are pulling back win big when consumers start spending again.

The Takeaway: Take A Deep Breath

It’s incredibly easy to get wrapped up in news of doom and gloom and to start being reactive rather than proactive. Researchers have spent a lot of time examining how consumer actions in a crisis determine their outcomes, and the takeaway is clear — consumers that make rash decisions always do worse, whether it’s selling stocks during a market run or buying three years worth of toilet paper out of fear.

The same holds true for brands. Marketers who react to news and follow the herd rarely end up in as good a position as those who follow the data and make smart, careful, prudent decisions based on actual results and market conditions. During this time, brands need to be extremely careful not to get caught up in the immediacy of same-day signals and partial information. Instead, focus on the signals that show true value, like customer acquisition cost. Follow those signals, invest in building a brand with long-term value, and avoid making rash decisions. And take a deep breath. 

For additional reading around how your business can prepare for a new normal, download your copy of Tips for Acquiring and Retaining Customers Through Economic Change.
Patrick Holmes
Author

Patrick runs digital advertising at AdRoll. His focus and dedication to this craft leave little room to develop secondary interests that might fit in an author bio.