Is an overreliance on performance marketing hampering business growth?
Performance marketing can be a real growth booster in the early stages of business development. However, when brands need to scale, over-investment in this area alone often leads to diminishing returns.
Many brands face a stark reality.
Customer acquisition cost (CAC) is growing. Return on ad spend (ROAS) is falling. And everything is becoming inefficient.
The direct link between advertising and growth that existed before has weakened.
The reason is likely to be an over-focus on media-specific KPIs, which are then used as the main driver of marketing strategy. But once the advertising costs peak, brands admit that they’ve made a mistake. Nevertheless, they are not always ready to move to a balanced “full-funnel” approach. Sometimes it requires a complete overhaul of the entire marketing strategy and the involvement of new teams.
To be able to spot this trend, marketing teams need to be in tune with the overall health of a business. Empowered with both top-level business insights and detailed media metrics, marketing teams can successfully adjust their strategy.
One example is online fashion giant ASOS. In FY22, ASOS acknowledged its customer acquisition rate slowed and its CAC increased. This was due to the allocation of more than 80% of marketing investments to paid marketing alone.
“The allocation of marketing spend had not been effectively prioritized or managed to ensure a return on investment. This left insufficient funds for long-term brand awareness” – says José Antonio Ramos Calamonte, CEO of ASOS.
Airbnb also admitted to over-reliance on performance. The company spent a lot of money to increase traffic to the site, although more than 90% of its traffic is organic. The planning for brand-building actions that would ensure marketing balance was inadequate.
The allocation of marketing spend had not been effectively prioritized to ensure a return on investment. This left insufficient funds for long-term brand awareness
José Antonio Ramos Calamonte, CEO of ASOS
Originators of confusion
Brands tend to over-rely on performance marketing. Often this is because it is viewed as the safest option and more immediately measurable.
Performance marketing is indeed a powerful lever, but it relies on attracting customers who are already in-market or aware of a brand in the first place.
When you capture all of that demand and are not refilling the funnel, there is no one left to efficiently convert. It is also highly dependent on external forces, such as competition, availability of data for targeting, and platform nuances. To drive long-term growth, you need a sophisticated performance strategy, coordinated with upper-funnel marketing activity.
Other players in the market will always copy you. And customers are fickle. As soon as you come up with something new to stand out from the crowd, they will immediately start creating the same thing. And some customers will switch to a similar or more affordable alternative.
As we know from the work of Byron Sharp, mental availability is a powerful lever for brand growth – a brand needs to be ‘easy to mind’ and ‘easy to find’. If brands do not invest in upper funnel activity, to remind potential customers of their value proposition (or even that they simply exist) they may lose their customers to another brand that happens top-of-mind when that customer comes into the market.
Wrong CAC calculation
Often, companies don’t draw a distinction between the overall business CAC and the CAC of each individual paid advertising channel. However, each channel–depending on its role in acquiring a new customer and the attribution methodology adopted–can have a significantly different CAC.
Using a single average CAC, which also takes into account the effect of organic and direct traffic, as well as owned channels, is a simple way to help brands understand if they’re prioritizing overall business growth versus individual channel metrics.
Adopting a full-funnel growth approach
The moment your costs reach the limit and the results do not meet expectations, your profits automatically decrease, and your payback period increases. And even if you’re still growing (but slower than before) it’s clear that you need to pivot. Try something else.
The best way? A full-funnel strategy that includes brand building, performance marketing, and all activities in between to drive measurable growth.
A stronger brand will mean more vital awareness, and therefore more customers coming in organically. Take a holistic, full-funnel approach to your marketing strategy. Instead of focusing on paid channels, consider a range of different ones, including brand building and customer engagement.
This will ensure not only customer acquisition at the bottom of the funnel but also the creation of demand and customer attention at the top. In addition, you’ll see how each stage of the funnel correlates with the other.
For example, how video campaigns can reinforce email campaigns, or how PR drives traffic to your social media and offline stores. This means that you will always be able to manage the direction of your marketing without losing additional funds.
By incorporating both brand-building and performance elements into your campaigns, and by tailoring your spending to the most effective channels, you can achieve up to a 15-20% increase in your marketing ROI compared to using performance marketing alone.
ASOS has already made this pivot and increased investment in platforms like Tik Tok, focusing on brand awareness as well as a “steady level” of advertising activity.
Airbnb also began to invest more in full-funnel marketing and PR campaigns aimed at building its brand. The result was not long in coming: “Our marketing has been so successful that we are expanding our presence in more countries” – said Brian Chesky, CEO of Airbnb.
When implementing an integrated marketing approach for your brand, however, don’t forget to create a clear measurement system. Brand campaigns should really be optimized according to the KPIs at the top of the funnel and marketing teams should always be closely connected to the health of the business This will help to allocate costs wisely and maximize brand effectiveness.
Also, remember the people behind it – your teams. Break down silos, both internal and agency silos, and start creating synergies by running brand promotions and performance campaigns simultaneously.
The right team, vision, and measurement approach will help you to introduce a culture of growth and marketing effectiveness.