How much does a digital marketing campaign cost?
A very common question among companies launching into the digital world is, “How much does a digital marketing campaign cost?” The answer to this question, we are sorry to advance you, depends on many factors. In order for you to have an overview of these factors, it is important to introduce the basic concepts to determine whether we are on the right or wrong track, whether we should invest more or stop investing and analyze the return on campaigns.
Let’s start with a small guide that we hope will help you to determine the performance and cost that your campaigns are having in the digital ecosystem.
What are you buying in a digital marketing campaign?
Let’s start with the basics. What you are buying are mostly clicks or you can also buy impressions (times your ad has been seen). More specifically, your ads are uploaded on the different platforms, Facebook, Google, Amazon, Criteo, etc… and are displayed throughout the digital ecosystem. Every time a user clicks on one of your ads you are paying a specific amount (the pay per click PPC), this is part of how much your digital marketing campaign costs, but it doesn’t end here.
The cost of such a click will depend on the supply and demand for such advertising space. For example, how many people search on Google for “interior design studio” per day? You don’t need to think of a specific number, just think about it. Now, try to quantify how many people go to general press websites?
We will all agree that the number of people searching for a specific word in Google is much lower than the total number of people who see the general press. So, now ask yourself the following question: How much should it cost to place an ad in the first search results when someone searches for “interior design studio” versus how much will it cost to place a banner in any digital portal of general press? In the first case, the price per click is over one euro; and in the second case, the price is less than five cents, to be a little more specific and to give you an idea.
In short, the advertising market, like all markets, is ruled by supply and demand, and digital marketing is no exception.
So, you buy clicks, to attract users to your website, or app. The key question that everyone should ask themselves is…
How many people do I have to impact to generate a sale in digital marketing?
Cost of Customer Acquisition (CCA)
Or how much does it cost me to get the first customer? Once we know how much it costs us to obtain the first customer through the digital channel, we can compare it with the return that this customer generates to our business. For example, let’s say we have launched an SEM campaign to appear in the first positions of Google, where each click has a cost of 1.50€. We have needed to impact 20 people so that one of them ends up buying on our website or app. The cost of obtaining that customer has been 20 * 1.50 € = 30 €, this is what in digital marketing terms is known as the Cost of Customer Acquisition (CCA). If you look at it this way, it may seem that the cost of digital marketing is very high, but we should not only look at the CCA, but we should look at the long term. At that point we look at the…
Life Time Value
Now that we know what it costs to acquire a customer in the digital sphere, we must compare it with the revenue that this customer brings us. In order to analyze in detail where we are, it is important that we familiarize ourselves with the concept of Life Time Value (LTV) or customer lifetime value, in other words, how much this customer will return to us over the course of his or her life as a customer of our company.
This term basically quantifies the margin that a customer will bring us throughout the commercial relationship with our company. For example: If we sell a product for €121 and we know that the average customer buys from us twice a year and then stops buying from us, what would be the LTV?
Let’s make some calculations, first of all we must know what components are included in the price, and focusing on the example, we have:
- Selling Price = €121
- VAT (taxes) = €21
- Cost of production = €50
- Gross Margin = €50
To simplify the example, let’s imagine that we do not have fixed costs applicable to the product, such as office rent, nor the salaries of the personnel necessary to carry out the sale. Each person can calculate more precisely how much their digital marketing campaign really costs and get a more accurate idea.
Well, taking into account the simplified example we have mentioned, the customer will buy from us twice during the year. Therefore, the customer’s LTV will be the margin we have calculated above times two, as we just calculated, i.e. €50 margin * 2 sales = €100.
This is a simplified way to teach how to calculate the LTV, nevertheless, there are many ways to calculate it. We especially consider the following formula very easy to do and understand:
LTV = Margin * Recurrence / Churn Rate
The churn rate refers to the proportion of customers who stop buying from us during a given period of time. It is a possible indicator of customer dissatisfaction because they are no longer loyal to our brand. For example, if we know that out of every 100 customers, 25 stop buying from us every year, this would be a churn rate of 25%, or an average customer lifetime of four years.
Let’s apply this new concept in the previous example: let’s imagine that we have greatly improved the product and now the customer buys from us twice a year, as before, but for three consecutive years. In this case, what would be the Life Time Value? In order to calculate it, we first need to know what the churn rate is:
- Churn rate: 33%, a costumer buys for 3 years 1/3 = 33%
- LTV, applied to the formula= €50 margin*2 recurrence/33% churn rate = €300
Return On Investment (ROI)
Simply put, your ROI is your Life Time Value (LTV) divided by your Customer Cost of Acquisition (CCA). Once you know how much it costs to acquire a customer and how much this customer brings you throughout the business relationship, you can calculate how much money or every euro in advertising investment generates profit.
For example, in the last section of the example we have seen that the CCA was €30, while the LTV was €300, this is an ROI of €300/30 = €10, meaning that for every euro invested you get €10 back.
Now it does not seem that digital marketing costs so much, does it?
Once we understood the ROI calculations, we may find these different outcomes:
- LTV < Incorrect CCA = You are spending more money acquiring a customer than you are earning from them over their lifetime. You are losing money and your marketing strategy is not effective. You need to analyze why.
- Neutral LTV = CCA = You make as much money on a customer as you spent on acquiring them. You are not making any real profit on customers, but you are not losing money either.
- LTV > CAC = You are getting a positive return on your digital marketing investment because what each customer brings you is more than what it costs you.
Decreasing returns on advertising investment!
If you find yourself in a situation where your ROI is positive, you must keep in mind that ROI and CCA do not have a direct proportional relationship. In other words, if you invest five times more in attracting new customers, they will not bring you five times more profitability.
The reason is that your potential audience is limited, advertising spaces are also limited and the spaces to impact your potential customers are also limited , so you will have to spend more money for each click. As we have mentioned before, the advertising market, like all markets, is governed by supply and demand.
Reasons why your digital marketing campaigns aren’t effective
If the return of a customer is lower than the cost of acquiring it, you need to look at the reasons for this, the source of the problem. There can be a vast number of problems that affect the achievement of sales. Some examples could be:
- Usability problems of the digital asset, in other words, that it is very difficult to navigate with the mobile and make a purchase.
- The product is too expensive.
- There is not enough demand in the market for the products we are selling.
- The channel we have used to advertise them is not the right one and we are not impacting our potential customer.
- Among many others…
The key is to identify what the main problem is when it comes to obtaining profitability from your digital campaigns and try to remedy them. Now you can get an idea of how much a digital marketing campaign is worth.
The key to a good digital marketing strategy is based on getting the most profit out of that customer. Buying customers or sales is something that is relatively easy to do. The tricky part is getting the most out of those sales.