By: Steve Jukes, CEO & President of Jumbleberry
When you buy media online, you are competing against every business or organization that is interested in attracting the attention of your target audience. To be successful, you must seek to capitalize on any advantage (e. g., a popular, trendy product that receives high ad click-through rates) and maximize its profit as quickly as possible before the window closes on the opportunity. The amount that you are willing to pay for a customer upfront, also known as the cost-per-acquisition (CPA) and sometimes referred to as customer-acquisition-cost (CAC), must be determined before you begin. The basis of a successful CPA campaign requires recognizing your average customer lifetime value (LTV) to identify your maximum acquisition cost. The problem with this is that many businesses do not view their customers holistically and are unable to determine the LTV, mostly because they operate on a transactional basis and use metrics like average order value (AOV) to make decisions.
When you use AOV as the basis for buying media, the goal is to minimize the CPA and maximize the profit margin percentage. This strategy opposes total profit maximization by placing too much emphasis on low-cost acquisitions. To be successful in acquiring customers cheaply, you must have a high conversion rate. However, a high conversion rate is strongly correlated with targeting and relevance: more relevant, better-targeted ads are more expensive due to their smaller supply. At some point, this catch-22 makes it impossible to keep the conversion rate up as the price of ads increases, resulting in lower and lower traffic volumes. The outcome is fewer sales and less total profit - the exact opposite of what you're trying to achieve (There are plenty of great posts that drill into the math of why this is so, like here and here).
Buying media at a CPA that is higher than your AOV might seem counterintuitive - your intuition suggests that you're losing money on every purchase - but the cold, hard reality is that transactional businesses cannot compete with lifetime-value based businesses when buying media, whether in B2C or B2B. If you pay out a percentage of each transaction as a commission and use AOV as the basis for buying media, then you have already lost. Customer-centric companies can pay more up-front because they know that they will realize profits throughout the life of each customer. If you are unwilling to pay a competitive price up front, then someone else will bid you out of the market and your ability to acquire customers will be severely limited.
Therefore, the solution is to buy media based on a CPA derived from your customer LTV. When you use this strategy, you unlock access to more eyeballs in more places, because your bids better represent the total value of each customer. Best of all, your profit margin is baked in.
You don’t have to take my word for it. The case studies are already out there, and big companies are losing to small, nimble businesses who understand how things really work. Unilever bought Dollar Shave Club for a billion dollars because a couple guys pulled back the curtain on the absurdity of the price of men’s razors. The business model was simple: enroll
people in a subscription razor blade program at a fraction of the cost, through a slick transaction path with upsell products and regular-joe marketing. The simplicity of this strategy allowed them to expand quickly into every facet of the market, and after just a few short years they became too big to ignore.
Every big brand should be shaking in their boots. Any single person with an internet connection has access to the same marketplace and moments of decision that they do. Large corporations can no longer crowd out the little guys through broadcast media and physical distribution. Anyone today could manufacture a laundry detergent that's as effective as Tide, visually brand it, give it voice, and reach billions of consumers through a Facebook Ads account. Oh, and they’ll price it out the door with a fixed CPA. The more customers they buy, the more units they move, the more capital they raise, the more detergent they make, and the cycle repeats. All of this can happen over the period of a few short months, and at barely a year old what was once a tiny company is now a multi-million-dollar business.
Consumers no longer discover products by through the aisles of big-box retailers, they find them as they scroll through their Facebook, Instagram and Twitter feeds. When they see something they like, they don't wait for their next visit to the mall, they buy it right then and there. If you want to be there in that moment and win the battle for a customer’s mind and wallet-share, then you need to know exactly what you're willing to pay.
Welcome to the new reality: where CPA rules the day.
Jumbleberry is made up of CPA experts with decades of cumulative experience in performance marketing. Reach out to us to learn more about the power of acquiring customers through CPA marketing campaigns.