How much do you need to increase spend in order to gain one extra customer?
If you think it’s your average CAC (Customer Acquisition Cost), you’d be quite mistaken unfortunately. It’s a lot more than that.
Every company has many times been in a situation where your campaigns are already maxed out and your Google representative is suggesting you to increase your CPA levels to increase spend. Sounds familiar right?
The problem with this is the following. Imagine here’s how your historical spend levels look like, and the corresponding average CAC. Perhaps your LTV is around 1,000 € and you would like to keep your ROAS (Return on Ad Spend) at 300% or abive. So, when you invest 30,000 € at an average CAC of 250 €, you expect to get 90,000 € in the lifetime of your customers and your ROAS is 400%.
Now the management decides it’s time to accelerate growth and you’re given 20,000 € to invest in marketing. Adding another 20,000 € means you need to increase your CPA levels and eventually your CAC grows from 250 € to 350 €. That’s not such a big deal, since with a 1,000 € LTV, it’s still a 286% ROAS. Not exactly 300% but rules are meant to be bent, amirite?
Actually, what happens is you end up barely in the green, since the marginal cost of adding new customers almost completely eats their future revenue. Here’s what the marginal cost looks like in this situation:
Since your LTV was 1,000 €, then any spend you add after the 40,000 € mark you actually lose money: the next customer costs more to acquire than their lifetime value.
This is quite simple to verify: just calculate how many paying customers you get with 30,000 € at 250 € CAC vs 50,000 € at 350 € CAC. That’s 121 and 141 respectively. So adding 20,000 € spend added 20 new paying customers at 1,000 LTV.
Convinced yet?
Stop gifting money to ad platforms, put it in better use
Marginal cost analysis isn’t rocket science, but it does require all data (ad spend and revenue) to be conveniently available in one place. Not all companies have time to invest in this, and why re-invent the wheel when you can have professionals do it for a fraction of the cost of in-house implementation?