In media buying, two metrics often stand out as the guiding stars for decision-making: Return on Advertising Spend (ROAS) and Customer Acquisition Cost (CAC). While both are crucial, they serve different purposes and offer unique insights into the performance of your advertising campaigns. If you’re new to these terms or find them confusing, you’re not alone. Let’s break down these metrics, compare them, and discuss how they can be effectively used to make informed media buying decisions.
What is ROAS?
ROAS, or Return on Advertising Spend, is a metric that measures the effectiveness of a digital advertising campaign. It’s calculated by dividing the revenue generated from the campaign by the amount spent on the campaign.
When and How It’s Used
ROAS is often used to evaluate the immediate impact of an advertising campaign. It helps you understand how much revenue each dollar of your advertising spend is generating. A high ROAS indicates a more effective campaign, while a low ROAS suggests that your advertising dollars could be better spent elsewhere.
Example Use Case: Flash Sale for a Retail Brand
Imagine you’re a retail brand that just ran a flash sale. You spent $10,000 on a Facebook ad campaign and generated $50,000 in revenue. Your ROAS would be 5, meaning for every dollar spent, you made $5.
Media Buying Decision Based on ROAS
If the ROAS is high (like in our example), you might decide to allocate more budget to Facebook ads, perhaps even extending the flash sale. On the flip side, a low ROAS would signal the need to pivot—maybe by tweaking the ad creative or targeting parameters.
What is CAC?
Customer Acquisition Cost (CAC) is the cost associated with convincing a potential customer to buy a product or service. This includes the cost of all promotional efforts, advertising, and any other resources spent to acquire new customers.
When and How It’s Used
CAC is a longer-term metric that gives you an idea of how sustainable your business model is. It’s particularly useful for subscription-based services or any business model where customer lifetime value (CLV) is a significant factor. The goal is to have a CAC that is significantly lower than the lifetime value of a customer.
Example Use Case: Subscription Service for a Fitness App
Let’s say you run a fitness app with a subscription model. You spend $20,000 on various marketing channels and acquire 200 new subscribers. Your CAC would be $100 per subscriber.
Media Buying Decision Based on CAC
If the lifetime value (LTV) of a subscriber is significantly higher than the CAC (let’s say $300), you’re in a good spot. However, if the CAC starts creeping up and approaches the LTV, it’s time to reassess. You might need to diversify your marketing channels or optimize existing ones to bring down the CAC.
ROAS vs. CAC: Making Media Buying Decisions
Immediate ROI vs. Long-Term Sustainability
- ROAS: Great for assessing the immediate impact of a campaign.
- CAC: Vital for understanding long-term business sustainability.
Example: E-commerce Business During Holiday Season
Imagine you’re an e-commerce business ramping up for the holiday season. You could:
1. Use ROAS to Test Campaigns: Start with smaller budgets on multiple platforms—Facebook, Google Ads, Instagram. The campaigns with the highest ROAS get more budget allocation.
2. Monitor CAC for Scaling: As you scale your campaigns based on ROAS, keep an eye on CAC. If CAC starts to rise, it might be time to optimize or look for more cost-effective channels.
3. Balance Both for Optimal Results: Aim for a high ROAS and a low CAC. If you find a channel that offers both, it’s a golden opportunity to scale your efforts.
How Companies Determine ROAS and CAC Goals
Determining goals for Return on Advertising Spend (ROAS) and Customer Acquisition Cost (CAC) is a critical step for any business investing in media buying. These goals serve as benchmarks that guide strategy, budget allocation, and performance evaluation. But how do companies actually set these targets? Let’s delve into the factors that influence the determination of ROAS and CAC goals.
Factors Influencing ROAS Goals
Companies often start by looking at industry benchmarks to get a sense of what a “good” ROAS might be. For example, a ROAS of 4:1 might be considered excellent in the retail industry but mediocre in SaaS.
The higher your profit margins, the lower the ROAS you can afford. If you have a 50% profit margin, a 2:1 ROAS might be acceptable. However, if your margins are slim, you’ll need a higher ROAS to ensure profitability.
Are you looking to aggressively acquire new customers, or are you in a phase where you’re focusing on profitability? Your business objectives will significantly influence your ROAS goals.
Example: E-commerce Startup
An e-commerce startup in a growth phase might be willing to accept a lower ROAS initially to gain market share. As the business matures and the focus shifts to profitability, the ROAS goal would likely be adjusted upwards.
Factors Influencing CAC Goals
Customer Lifetime Value (LTV)
The LTV to CAC ratio is a crucial metric. A common target is an LTV to CAC ratio of 3:1, meaning the value of a customer should be three times the cost to acquire them.
Sales Cycle Length
In industries with longer sales cycles, like B2B services, a higher CAC might be acceptable because the LTV is also typically higher.
Funding and Cash Flow
Companies that have recently secured funding might be willing to have a higher CAC to accelerate growth. However, businesses operating on tight cash flows will aim for a lower CAC to sustain operations.
Example: SaaS Company
A SaaS company with high LTV and ample funding might set a higher CAC goal, focusing on rapid growth and market penetration. As the company becomes more established, it might lower its CAC goals to focus on profitability.
Balancing ROAS and CAC Goals
Striking the right balance between ROAS and CAC goals is essential. For instance, pushing for a very high ROAS might lead to a very low CAC, but it could also mean missed opportunities for growth. Conversely, setting a high CAC goal could accelerate growth but might make the business unsustainable in the long run.
Example: Hybrid Approach for a Retail Brand
A retail brand might use a hybrid approach, setting different ROAS and CAC goals for different campaigns. High-ROAS goals could be set for campaigns targeting existing customers, while higher CAC goals might be acceptable for campaigns aimed at new customer acquisition.
Both ROAS and CAC are indispensable metrics for anyone involved in media buying. While ROAS gives you a snapshot of your immediate returns, CAC helps you understand the bigger picture of customer acquisition costs over time. By understanding and leveraging both, you can make more informed, strategic decisions that can lead to the long-term success of your advertising efforts. So, the next time you’re puzzling over your media buying choices, remember: it’s not just about the immediate returns, but also about building a sustainable business model.