When it comes to marketing, you might think that spending less — whether overall or per customer — is the best way to go for your company. After all, you’ve got a business to run and a budget to maintain. Right?
It might not be as cut and dried as you’d think…keep reading to find out how you can use data to strategically choose where and how to reinvest in marketing and get better results.
In short: spending more can get disproportionate results…when you do it right
In another post, I talked about a scenario where a hypothetical business reduced churn by 1.5% using strategies to decrease involuntary churn. In that example, reducing churn by 1.5% resulted in a 43% jump in the customer lifetime value (LTV) — from $780 to $1114.
Now, let’s add a few more hypotheticals to build on that scenario:
- The business in question had initially earmarked $200 of the $780 LTV for marketing to and acquiring new customers.
- They’re able to acquire 1,000 customers per day, at $200 each.
Not bad, right? They’ve earmarked roughly 25% of their customer LTV toward marketing. But what would happen if they increased their marketing spend to match the boost in LTV? $200 earmarked for marketing, when increased by 43%, becomes $280.
In marketing, an increase in spend — as long as it’s well-planned and implemented — can yield exceptional results. For example, at Rebilly, we work with some companies that spend more than $1 million per day targeting their audience. That kind of buying power can unlock some serious opportunities.
The good news is: you don’t have to spend anywhere near that much to see the benefits
A more realistic scenario is having a choice between acquiring 500 customers a day at $28 each, or only 100 customers a day at $20 each. The choice (and lesson) is clear.
The point of the above examples is twofold:
- First, like stocks and bonds, reinvesting profits in marketing can unlock the multiplier effect.
- And second, business owners and even marketers often put too much focus on optimizing for the lowest overall customer acquisition costs (CAC), but ignore the bigger picture.
CAC vs. CPL: What’s the difference and which is more important?
If you’re new to the world of marketing and advertising acronyms, you might be a little confused about where the differences lie between CAC (customer acquisition costs) and CPL (cost per lead). They’re similar metrics in how they’re calculated:
- CAC can be calculated by dividing total ad spend by how many new customers you got as a result of that spend ($100 spend / 8 customers = $12.50 CAC)
- CPL is calculated by dividing total ad spend by how many leads you obtained as a result of that spend ($100 spend / 10 leads = $10 CPL)
The only difference is that CPL tracks leads, and not actual customers. If someone clicks through an ad and signs up for your newsletter or enters in their data for a consult call, then that’s measured with CPL; if they become a customer, that contributes to your CAC metric. Your CAC is probably going to be higher than your CPL, since most businesses don’t convert 100% of their leads.
To see this in action, let’s look at two advertising campaigns:
Which is the better campaign? Most people will guess Campaign A. And on the surface, it does look better.
In reality, though, you’re only seeing part of the picture. Now, imagine you collected further data, so you could estimate the lifetime value (eLTV) of each customer acquired in each of these campaigns.
Yikes. In this scenario, campaign A would barely cover its cost, while campaign B will double its return on ad spend.
Without this data, though, most marketing managers would cut the spend on campaign B, based solely on its higher CAC. As a result, the company will be spending more than necessary and could run out of budget quickly, because the LTV of the customer barely covers the acquisition cost.
Spending more on campaign B, however, would result in a very gradual increase of cash back to the company. If your marketing budget rises as sales and profits rise, which is generally recommended, this means you would have more money available, faster, to acquire even more customers — which is where compounding benefits kicks in.
To be clear, the lesson isn’t to always reinvest in the highest CAC campaigns…
That would be ludicrous. Instead, the takeaway is to use a pragmatic, data-driven decision process: Don’t eliminate entire campaigns simply because they cost more or convert at slower rates. Look at the big picture to see what drives the most long-term value back to your business, and put your money there.
Another way to optimize: Analyze by cohort
Now that you know that a low CAC isn’t always the best thing in the long run, let’s talk about other ways you can optimize your marketing spend. One of the best ways to continue optimizing your performance is to create “cohorts,” or groups of leads, and then look at the differences in metrics across them.
A cohort is simply a group of prospects or customers that you’re treating as a collective for marketing and reporting purposes. Example cohorts might be:
- Gold-plan members
- Leads that have taken the trial but not purchased
- Customers acquired through Facebook ads
- Customers acquired from Affiliate A
- Customers who joined during January 2018
In our campaign A and campaign B examples above, the campaigns are our cohorts. When it comes to your own marketing, you can create cohorts for just about anything that you want to optimize.
When you’re in the process of making major changes — like redesigning your subscription site or dramatically overhauling membership benefits — you typically use time periods as your cohorts. That way, you can measure the performance differences before and after the change. You can also treat marketing campaigns as cohorts to compare the overall initial purchase value, LTV, and rate of churn for customers that convert across each of your campaigns.
If you want to get started optimizing your marketing, here’s our top two ways to get started:
One: Create cohorts for all your lead sources
Most marketing organizations track cost per lead and cost per customer. But, all too often, they stop tracking the customer once they’re acquired. Instead, create cohorts that track every lead by the source they originated from (down to the specific marketing campaign, affiliate, etc), and keep tracking them even after they convert. Lead sources and segments are built into Rebilly to make this easy — find out more about those features here.
Why do this? Tracking cohorts like this gives you long-term insight into which marketing channels are the most efficient, effective, affordable, and profitable for you. They can also help reduce fraud. Watch out for sources that give you tons of leads at a low cost, but result in a customer lifetime value that is dramatically lower than normal (by half or more). This sometimes means the marketing messages and tactics used by the affiliate may not be above board. (In short, their practices may be deceptive.)
Two: Reinvest in the best marketing channels
As you work on the other cornerstones of running a subscription business — reducing churn, optimizing pricing, and reducing fraud and chargebacks — don’t forget reinvest a healthy portion of your gains into the lead sources that yielded the best long-term results (CAC, LTV, etc.).
It works like compounding interest:
- The more you optimize, the more you earn.
- The more you earn, the more you market.
- The more you market, the more customers you acquire.
- The more customers you acquire, the more you can profit.
It’s easy to get tunnel vision running a subscription-based business.
But when you focus too much on acquiring new customers and too little on reducing churn, optimizing pricing, and reducing fraud, you can end up harming your business instead of helping it.
Instead, take a holistic approach to growing a healthier, more profitable subscriber base. Start by making sure that you aren’t losing customers to involuntary churn. After that, optimize your pricing and your website, along with working to reduce chargebacks and increase your fraud prevention. Then, you can put the gains from all of those activities into reinvesting in high-performing marketing campaigns…and watch your business go to the next level.
This post was originally published at the Rebilly blog.