The problem marketers are increasingly complaining about is rising customer acquisition costs (CAC). This is no surprise because the past two years have seen an acceleration of digital growth in part forced upon all of us by the pandemic and ensuing lockdowns. This has been happening not just on media platforms but also on marketplaces. The biggest beneficiaries of this have been Google, Facebook and Amazon.
In 2021, Google’s advertising revenue grew to $210 billion, up 42% from the previous year. Facebook (Meta) grew its revenues 37% year-on-year to $115 billion. Amazon’s ad revenues in 2021 stood at $31 billion, growing at 32%. Tally up all three and their 2021 take comes to $356 billion. According to Digiday: “Together they accounted for more than $7 in $10 (74%) of global digital ad spending last year, which is 47% of all money spent on advertising over that period … The rest of the online ad market is growing at a combined growth rate of 3% year-on-year in comparison.”
Where is this growth coming from? From marketers competing against each other to grab customers. It is little wonder then that the cost of acquiring new customers is rising so rapidly. Massive inflows of venture capital into startups have also fuelled this spending mentality. The result is spending on new customer acquisition like there is no tomorrow – creating what I have called as the “doom loop” of ad spending.
My assessment of the waste is that it happens in two ways: reacquisition and wrong acquisition. Reacquisition is about those customers who have churned. As I wrote earlier: “This is because the pool of available customers is limited. Outside of the loyal cohort, the lifetime of other customers with brands is perhaps no more than a couple years – which means half of them churn each year. And since they were valuable at one point of time, they are more likely to get retargeted for acquisition.” Wrong acquisition is about new customers who churn quickly. It is estimated that half of those who install an app uninstall it within the first 30 days. While no formal estimates are available, I believe that each of these two categories sucks away a quarter of the ad spending.
Apple’s new privacy framework and the rising backlash against cookie tracking are also going to create hurdles and increase cost of acquisition. Marketers therefore face a leaky bucket with their ad spending.