Table of Contents
- Digital Marketing Channels and Engagement
- How is marketing ROI calculated?
- Why is Customer Acquisition Cost (CAC) so important?
- How to calculate Customer Acquisition Cost (CAC)?
- SMS - the most cost-effective marketing channel
You sell a product or service online, and you know that it takes money to earn money. But you want to make sure that each dollar you spend is being used efficiently to grow your business. Measuring your digital marketing return on investment (ROI) is critical to improving it over time and can be used as a strong metric to help marketers make different choices, especially over which channels they use to communicate with their customers.
When faced with the plethora of channels – SMS Marketing, Email Marketing, PPC, Social Media, and so on – digital marketers want to understand which gives them the best ROI.
There are a lot of misleading numbers out there, with ROIs estimated from 1650% to 4400%, without any real clarity on where the data is coming from. There doesn’t seem to be a comprehensive, well-researched study into the costs of using different digital channels and measuring their impact.
TL; DR summary –
When comparing customer acquisition costs:
- Google Ads: $45.27
- Facebook Ads: $18.68
- Email Marketing: $.71-$1.65
- SMS Marketing: $.06-$.09
Don’t believe us? Let’s take you through how we got here.
Digital Marketing Channels and Engagement
(Source: “Email Marketing Benchmarks”, MailChimp, updated 03/2018; “Ecommerce Email Marketing: Industry Performance Benchmarks”, Alicia Thomas, Klaviyo, 02/15/2018 | “What is the open rate of SMS Text Messaging?”, Christopher S. Penn, Shift Communications, 09/29/2015 | “How to Calculate Customer Acquisition Cost and Determine Benchmark by Industry”, Shalyn Dever, ChatterBuzz Media | “Email marketing vs. Social Media – is there a clear winner?”, Jacinda Santora, OptInMonster.com, 08/04/2019)
But if you’re trying to work out marketing ROI, that’s more complex.
How is marketing ROI calculated?
Calculating the return on investment for a digital marketing campaign is simple. The investment is the cost of running the campaign. The return is the overall positive impact it had upon your sales, adjusted to reflect how expensive the campaign was. Thus, digital marketing ROI works out to (Increase in Sales – Cost of Campaign)/Cost of Campaign.
However, this doesn’t translate well when looking across companies and channels. The value generated from getting a customer to buy a book or buy a house is very different, and would skew ROI measurements substantially. Using this method to arrive at ROI for digital marketing channels doesn’t work.
The solution is to remove price out of the equation and focus on the number of users persuaded to make a purchase. That way, we can arrive at the cost of acquiring customers (CAC), which is a very powerful marketing metric.
Why is Customer Acquisition Cost (CAC) so important?
CAC is one of the most important ecommerce and digital marketing metrics used by ecommerce companies and startups. Having a high CAC means that your marketing is ineffective and is costing too much. It also helps companies choose between digital marketing channels, and is a great way to measure your marketing ROI.
How to calculate Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the cost of acquiring a single customer. This means that you calculate it by adding up all your marketing spending and dividing it by the number of customers acquired by your marketing.
For example, if you want to measure the effectiveness of your Google Ads spending, your CAC would be – Total Spend/Number of Customers Acquired. A Q1 2018 study shows that the CAC (also known as the Cost Per Acquisition/CPA) for Google Ads is $45.27 for Ecommerce and for Facebook ads is $18.68.
We know how much SMS marketing costs at Voyage (check out our attractive pricing plans). Using the Small Business plan and the conversion rate benchmark above, for $18.68 you can acquire 359 customers. For $45.27, you can acquire 622 customers.
For Email marketing, we have to develop the CAC benchmark ourselves. Using the pricing data from one of the most prominent email marketing automation platforms, we have built the table below –
SMS – the most cost-effective marketing channel
Mail marketing platforms are usually priced on the number of subscribers and allow for unlimited emails. This means that when they are compared, email marketing can potentially allow marketers to bombard their audience with messages, effectively leveraging pure quantity to overcome its lower conversion rate compared to SMS marketing. However, even with that caveat, SMS marketing is clearly substantially more cost-effective and persuasive.