The hidden trap in digital marketing: How cutting upper-funnel budget may kill your ROI
I want to talk about a common - and costly - mistake I see marketers and founders make; without them ever realizing it.
If you're a digital marketer or founder, listen closely, because this information can make or break your entire marketing success.
Most people fall into this trap because they don't look at marketing channels holistically. They zoom in too much on individual channels. Unfortunately this is not how things work anymore.
The key to sustainable success lies in understanding that investing in top-of-funnel initiatives lowers your overall Customer Acquisition Cost (CAC), even if those activities don't directly generate sales.
Keep reading to:
- Learn why cutting your upper funnel budget may increase your customer acquisition cost (CAC) over time.
- Learn how to read your marketing funnel metrics accurately without losing sight of the bigger picture.
- Identify the critical metrics you need to understand to drive long-term profitable customer acquisition efforts.
What is CAC?
"You can’t manage what you can’t measure." – Peter Drucker
First things first: Customer Acquisition Cost (or CAC) is the amount of money it costs you to acquire a new paying customer.
Example: Say you spend 100 EUR on ads and get 20 new purchasers from it. This means you pay 5 EUR per new paying customer (100 EUR divided by 20). 5 EUR is your CAC.
Knowing your CAC is important in order to run profitable campaigns. If you know the average lifetime value (LTV) of your customers and your general profit margin (and you should!), you can easily define a maximum CAC in order to never spend too much on marketing.
What is your maximum CAC?
Say your average LTV is 15 EUR and you operate at a 60% profit margin. This means that you make on average 9 EUR profit from any of your customers (15 EUR * 60% = 9 EUR).
Relating this to CAC means, that you should never exceed 9 EUR CAC, or your business will start losing money.
We can clearly see that it's important to have an eye on your CAC and LTV, correct? Yes it is, however, there is a twist to it.
In marketing we don't just have one channel. We typically have multiple channels or campaigns: E.g. Facebook ads, google display network, adwords, re-targeting, even offline initiatives, etc.
On top of that, we run ads & other campaigns to target specific customer journey phases.
Campaigns & the customer journey
Simplified, your customers go through three phases.
See the following image:
Typically each campaign you run is targeting only one customer journey phase.
To drive my point, let's simplify this even more and say that you're running a TikTok campaign in the top funnel for awareness. And you're running a google ads campaign for the conversion phase.
Your last months campaign numbers may look like this:
If you're looking only at TikTok it seems like your campaign is losing money, but your Google Ads CAC looks great. The total CAC for February also looks fine (way under 9 EUR).
If you're a marketer you may look at these numbers together with the founder / leadership (usually someone who doesn't know much or anything about marketing). They may say something like this:
"Why not cut the TikTok budget in half and move it over to Google Ads, since that is generating way cheaper customers?"
Cool, let's see what happens in March:
Cutting TikTok in half and doubling Google Ads has not done much. It has actually not brought a significant increase in purchasers from Google, while the CAC grew almost double due to the increased costs.
This time, someone may say: "To recover, why not give a bit more budget to TikTok again and add extra budget to Google Ads?"
Let's see our hypothetical results:
Adding more budget to TikTok did nothing and neither did the increase in Google Ad spend. And now the overall CAC is above our maximum of 9 EUR!
Obviously this is just a hypothetical example, but it plays out like this all the time.
What happens in reality is that TikTok (the upper funnel) is driving the cheap CAC in the lower funnel.
In other words: If you stop putting prospects into the funnel, the campaigns in the lower funnel don't work effectively. In fact, your entire paid marketing crumbles.
This is because people typically need time (build trust) and have multiple touchpoints with a brand in order to purchase your product or service.
The main takeaway
You need to look at the CAC for all channels combined and figure out how you can make it the lowest possible there.
In other words: Do not try to optimize the CAC per channel.
Rule of thumb: About 65% of marketing spend should be allocated at the top of the funnel. This usually gives the best balance and therefore performance.
This is what I mean when I say you need to look at marketing and marketing channels holistically!
What's next?
There's no specific thing you can do. Every marketing campaign, product, service, brand, budget, etc. is different. There is no "one size fits all" solution.
However, this idea should help you look at your campaigns more holistically and not get lost in the numbers.
Over time and with experience you will get better at reading your campaigns and optimizing them for actual profitability.
I hope you enjoyed and learned something from this article. Please follow me on LinkedIn and X for more content like this.
I talk about digital marketing, marketing automation, programming & ai.