Mitigating rising digital marketing / CAC expenses

September 10, 2024

by a searcher from The University of Chicago - Booth School of Business in Santa Cruz, CA, USA

Hi SF community

In most businesses I look at - not just ecomm - ad expense is the most material cost, the most volatile, and the most at the whim of external forces.

Invariably every business I look at with digital marketing has significant increases in costs over the last two years, relative to revenue, which I understand to be industry wide dynamic. In some cases, they have made recent changes (e.g., to new vendor) and projecting material pro forma improvements based on short run rate.

Obviously I have healthy skepticism, and am aware you can game numbers short-term While I am far from an expert, neither is current mgmt in most cases, and there are some obvious opportunities. I am generally pursuing in cases where I have ideas and applicable experience to reduce dependency, e.g. through expanding other channels..

I would love any stories - good or bad - on how ROMI / CAC has moved after recent acquisitions, and how you have mitigated (through DD or post-close operational changes), in order to have a more realistic view.

thanks in advance!

Reply by a searcher
from Emory University in Tucson, AZ, USA

Without knowing the specific industry sectors or markets for your potential acquisitions, it is hard to suggest where you may want to look to validate any projected efficiencies in CAC or short term ROIs. Unless the business has invested in sharpening its value proposition, clarifying the market, or making material changes to their channel strategy, there is no reason to expect they can generate greater efficiency in acquisition spend. If they are simply trying to do more of the same through Google, costs will be going up and returns will continue to erode.

We've consulted with a business that was exploring a sale, but were seeing massive declines in their digital marketing results due to reduced traffic and conversion. We did an old-fashioned set of customer journey work to help identify the fundamentals of who they were really speaking with and where the experience was failing. By simply fixing the holes in their experience, providing more focus and clarity to their content strategy, enhancing their ambassador programs, and improving the purchase flow, they saw marked improvements on a lower level of paid acquisition investment. I believe this helped to improve the company's enterprise value as they took it to market.

My point is that it is unlikely you will be able to shift the trajectory on CAC through programmatic shifts alone - looking at the underlying offer and seeing if there are clear places to fix the conversion journey through sharper brand positioning & targeting, improved use of owned channels, and data-driven improvements to the purchase experience may provide more insights on the potential to efficiently drive growth for a potential acquisition.

Reply by a searcher
from University of British Columbia in Canada

Steve's responses was spot on. Google used to let you get pretty granular on how you targeted keywords and how you allocate budget. Over the past few years they have moved farther and farther from this. They now push you extremely hard to go with automated bidding (Google picks what you pay) and they've broadened keyword match types. They've also started to hide keyword data in reports - for example if you now use "phrase" match in your campaigns you will typically only see 30% to 40% of the search terms you paid for. They do this so you can't add negative keywords to campaigns for keywords that aren't relevant to your company. Many of these changes occur without account owners realizing the change. Overtime spend continues to go up and up....

In terms off the cost of advertising going up - previous to starting my search I was in the tech B2B space where I managed a decent PPC budget. Towards the end of Covid I started to notice large increases in the cost-per-click (CPC) resulting in increased overall spend. Interestingly large increases in CPC seemed to occur in December - not sure if it was the holiday season driving this up or Googles year end :)

Hope this helps and if you have any further questions or need clarification please reach out.

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