In Which Channels Should You Allocate Your Marketing Spend?

Marketing spend makes up a substantial portion of total expenses for most eCommerce companies. Allocating that spend in the correct channels is key to efficiently growing your business

Key Topics

• Introduction to Allocating Marketing Spend
• CPO, CPA, ROAS By Attribution Methodologies
• LTV by Channel of First Order
• New Customer % By Channel
• Putting It All Together

Introduction to Allocating Marketing Spend

Allocating your marketing spend to the correct channels should be a primary concern for any eCommerce company.  Spending the correct amounts in the correct channels will help you grow your business more efficiently and acquire the right types of customers.  But how do you decide how much to spend and in which channels? 

Assigning marketing spend to the correct channels is always going to be a nuanced decision that is unique to every company.  The types of products you sell, the price points, and how long you have been in business can all determine where you should be spending your marketing dollars.  However, there are three concepts that any merchant can use to help analyze their results and determine how to allocate their marketing spend:

• CPO, CPA, ROAS By Attribution Methodologies
• LTV by Channel of First Order
• New Customer % By Channel

CPO, CPA, ROAS By Attribution Methodologies

CPO (Cost per Order), CPA (Cost per Acquisition or CAC), and ROAS (Return on Ad Spend) are the three primary metrics used by merchants to measure marketing efficiency.  Each has a unique purpose and calculation:

• CPO (cost per order); Calculated as total marketing spend divided by total orders.  Used to determine overall marketing efficiency across all marketing vendors and customer types.
• CPA (cost per acquisition, sometimes referred to as CAC); Calculated as total marketing spend divided by new customers acquired.  Used to determine overall marketing efficiency among acquisition channels / campaigns.
• ROAS (return on ad spend); Calculated as total sales divided by marketing spend.  Rather than just relying on orders to calculate marketing efficiency, this metric includes the sales price of items to account for orders that have a higher or lower AOV.

Understanding and tracking these metrics is the first step to determining how efficient your marketing spend is with different vendors.  However these metrics can show drastically different results depending on what type of attribution methodology you use.  

"Attribution" simply refers to the logic you are using to assign a specific order or a group of orders to a specific channel / vendor / subchannel / media type, etc...  As an example, let's consider an individual who finds your site through a Facebook ad that they clicked on.  When that potential customer hits your site for their first visit they don't buy anything, but two days later they visit again after searching for your brand on Google and clicking on a paid advertising link.  Again, the customer doesn't make a purchase.  Two days later they type in your site URL directly to visit your site, and this time they make a purchase.  

Depending on the type of attribution you are using, this order may get assigned to different channels / vendors:

- First click methodology would assign this order to Paid Social / Facebook

- Last click methodology would assign this order to Direct

- More complex methodologies would assign pieces of this order to different channels.  For example, a 40 / 20 / 40 methodology would break up this order so that 40% was assigned to Paid Social / Facebook, 20% to Paid Search / Google, and another 40% to Direct

- Most marketing vendors have their own methodology to report orders, usually something based on an "attribution window".  These are typically something like 1 day click / 1 day view, or 7 day click / 1 day view.  With a 7 day click / 1 day view window, both Facebook and Google would report this as an order assigned to them in their own reporting (in other words, the vendor reported data would show 2 orders for this 1 order, one assigned to Facebook and one assigned to Google).  For more on Attribution Windows, see here.

These different methodologies create a complex problem.  You want orders assigned to the correct channel / vendor so that you can match up your spend with those orders and get accurate CPO / CPA / ROAS reporting for each vendor / channel.  But in a case like this, what is the correct channel / vendor?  

At Daasity we report on First Click, Last Click, AND Vendor Reported data so that you can view your metrics using all three methodologies.  While this does not give you a "correct" answer, it allows you to compare the three methodologies and understand how your customers find your site, what their most common purchasing behavior looks like, and use this to arrive at a more reasonable range within which your CPO / CPA / ROAS is actually contained.  

As an example, consider the following showing first click, last click, and vendor reported ROAS for Facebook and Google:

In this case, the first click and last click data for google are virtually identical, which likely means that most customers finding the site through a Google search buy on their first visit.  For Facebook, the First Click ROAS is higher than the last click ROAS, which means that more customers are finding your site through Facebook but not buying on that initial visit, returning later and buying through a different channel.  And in both cases the vendor reported ROAS is significantly higher than last click or first click ROAS.  

So which attribution method is actually correct?  Unfortunately none of them are actually "correct".  Every attribution method is going to be inaccurate in some way as it is impossible to understand exactly which advertising method introduces your customers to your site, or causes them to buy on visit #4 instead of visit #2.  But by looking at three different methodologies, we can get a feel for the range in which the "true" ROAS, CPO, or CPA exists.  In the example above, we can comfortably say that the facebook ROAS is somewhere between 0.26 and 1.35, and the google ROAS is somewhere between 1.96 and 5.11. 

The bullets above that outline which channels are typically under reported / over reported can help you narrow these ranges.  For example Facebook is typically under reported in the last click methodology.  If the attribution window used in the Facebook UI is 1 day view / 1 day click, then the 1.35 vendor-reported ROAS is likely much closer to a "true" ROAS for Facebook.  For Google, the default attribution window is 30 days which often makes the Google-reported numbers far higher than they should be.  In this case, the last click and first click ROAS values are likely pretty close to a true ROAS for Google.

Hopefully this example gives you some clarity on how to use the three different attribution methods that Daasity provides.  But before you use these measures to allocate your spend, let's take a look at which channels are bringing you the most valuable customers.  

LTV By Channel of First Order

One of the most valuable uses for Lifetime Value is to compare different segments of customers, find the most valuable segments, and attempt to acquire more of those customers.  In the LTV by Channel of First Order visualization, we get a look at Lifetime Value for customers that were acquired through different channels.  This visualization can help you understand which channels are acquiring the "right" types of customers; in other words, your most valuable customers that are more likely to come back and repurchase, and potentially less price sensitive.  

In this example, customers that were acquired through the email and SMS channels show a much higher lifetime value, while customers acquired through the Shopping channel have a lower Lifetime Value.  Based on the data above and some CAC data, this example might be summarized like this:

This sheds a bit more light on the cost of acquiring customers vs the Lifetime Value numbers in the visualization.  Our inexpensive channels like Email, SMS, and Organic Search are costing very little to acquire very valuable customers (Do more of this!).  Of course, it can be much more difficult to acquire new customers through these channels.  Meanwhile, Paid Search (for now let's assume this is just Google) acquisition seems to be worthwhile, even if the ROAS we saw above in Google was a little on the low side.  Those customers are also valuable and are profitable after less than 12 months.

Customers acquired through Paid Social are also very valuable, although it takes around 2 years for them to be profitable.  Assuming Paid Social is only Facebook, it appears we are right on the edge of spending to our limit of profitability.  For some merchants we may be spending beyond our limits; it's up to each company to decide if they are willing to wait two years for an acquired customer to be profitable or if they want customers to be profitable in 12 months, 6 months, or even immediately on their first order.

Finally, let's take a look at new customer % by vendor to see how those numbers can influence our marketing spend.

New Customer % By Channel

The % Orders from New vs Returning Customers visualization in the Marketing dashboard contains one final piece of information that can inform our marketing allocation decision.

When allocating your marketing dollars it's important to consider how many new customers each vendor is adding.  You will likely find that specific channels are HIGH new customer acquisition channels, while other channels are not as appealing when it comes to customer acquisition.  As a result, you may find that while certain vendors don't have fantastic ROAS or CAC:LTV metrics, they are crucial for your company to continue to acquire new customers.  In addition, you may find that there are vendors that are only attracting existing customers, and you may wish to spend less with those vendors and attempt to move existing customers to repurchase through less expensive channels like Email and SMS.

In the example above, we see that our Organic and Paid Search channels are hovering right around the 50% mark.  Instagram seems to be a strong acquisition vendor, while Facebook is an extremely poor acquisition vendor.  YouTube is the strongest acquisition vendor, with almost all of the orders coming from YouTube coming from new customers.

Putting It All Together

Looking at all of our metrics together we can make the following conclusions:

• Customer acquisition in Email and SMS (Klaviyo and Attentive) is strong, cheap, and results in really high LTV.  Do as much of this as you can.  Note that your audiences here will be fairly limited as "acquisition" in these channels likely comes from potential customers signing up for your email newsletter on your site before they have purchased.  These are highly motivated / interested customers.
• Customer acquisition in Organic Search is strong, cheap, and results in really high LTV.  Having strong SEO results requires consistent content creation but is an excellent way to acquire customers in an inexpensive fashion.
• Paid Search is a strong acquisition channel and produces solid LTV from customers acquired in that channel.  YouTube is likely rolled up under Paid Search, so consider moving some spend from Google search and from Google Shopping into YouTube.
• Paid Social (Facebook, Instagram) have an interesting set of results, and this is typically where merchants are trying to optimize their spend.  With the metrics shown above it is probably worthwhile to move some spend out of Facebook and into Instagram.  But at the end of the day this will come down to a bit of personal choice.  Some merchants will feel comfortable acquiring customers that will not be profitable for 24 months, confident that they can work on repurchase rates and potentially drive those LTV numbers even higher.  Some merchants are bootstrapping and don't have the cash to spend beyond first-order profitability, and with the new customer numbers from Facebook so low, they may reduce spend in Facebook and move it to Instagram or YouTube.
• Google Shopping is acquiring customers that have a low LTV, and it is very expensive.  We should reduce spend here and move it to other vendors, specifically YouTube.

Note that these are guidelines.  When making any decisions like this it is important to move slowly, test different options, and continue to monitor your metrics as you move spend around.