You sell a product or service online, and you know that it takes money to earn money. But you want to make sure that each dollar you spend is being used efficiently to grow your business. Measuring your digital marketing ROI consistently is critical to improving it over time and can be used as a strong metric to help marketers make choices, especially regarding which channels they use to communicate with their customers.
When faced with a variety of channels – SMS marketing, email marketing, PPC, social media, and so on – digital marketers want to understand which gives them the best ROI.
There are a lot of misleading numbers out there, with ROIs estimated from 1650% to 4400%, without any real clarity on where the data is coming from. There doesn’t seem to be a comprehensive, well-researched study into the costs of using different digital channels and measuring their impact.
TL; DR summary:
When comparing customer acquisition costs, the breakdown is as followers:
- Google Ads: $45.27
- Facebook Ads: $18.68
- Email Marketing: $.71-$1.65
- SMS Marketing: $.06-$.09
Don’t believe us? Let’s take you through how we got here.
Digital Marketing Channels and Engagement
(Source: “Email Marketing Benchmarks”, MailChimp, updated 03/2018; “Ecommerce Email Marketing: Industry Performance Benchmarks”, Alicia Thomas, Klaviyo, 02/15/2018 | “What is the open rate of SMS Text Messaging?”, Christopher S. Penn, Shift Communications, 09/29/2015 | “How to Calculate Customer Acquisition Cost and Determine Benchmark by Industry”, Shalyn Dever, ChatterBuzz Media | “Email marketing vs. Social Media – is there a clear winner?”, Jacinda Santora, OptInMonster.com, 08/04/2019)
How is marketing ROI calculated?
Calculating the return on investment for a digital marketing campaign is simple. The investment is the cost of running the campaign, and the return is the overall positive impact it had on your sales, adjusted to reflect how expensive the campaign was. Thus, digital marketing ROI works out to (Increase in Sales – Cost of Campaign)/Cost of Campaign.
This doesn’t translate well when looking across companies and channels. The value generated from getting a customer to buy a book or buy a house is very different, and would skew ROI measurements substantially. Using this method to arrive at ROI for digital marketing channels doesn’t work.
The solution is to remove price from the equation and focus on the number of users persuaded to make a purchase. That way, we can arrive at the cost of acquiring customers (CAC), which is a very powerful marketing metric.
Why is Customer Acquisition Cost (CAC) so important?
CAC is one of the most important ecommerce and digital marketing metrics. Having a high CAC means that your marketing is ineffective and is costing too much. It also helps companies choose between digital marketing channels, and is a great way to assess your marketing ROI.
How to calculate Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the cost of acquiring a single customer. This means that you calculate it by adding up all your marketing spending and dividing it by the number of customers acquired by your marketing.
For example, if you want to measure the effectiveness of your Google Ads spending, your CAC would be – Total Spend/Number of Customers Acquired. A Q1 2018 study shows that the CAC (also known as the Cost Per Acquisition/CPA) for Google Ads is $45.27 for Ecommerce and for Facebook ads is $18.68.
We know how much SMS marketing costs at Voyage (check out our attractive pricing plans). Using the Small Business plan and the conversion rate benchmark above, for $18.68 you can acquire 359 customers. For $45.27, you can acquire 622 customers.
For Email marketing, we have to develop the CAC benchmark ourselves. Using the pricing data from one of the most prominent email marketing automation platforms, we have built the table below :
SMS – the most cost-effective marketing channel
Mail marketing platforms are usually priced on the number of subscribers and allow for unlimited emails. This means that by comparison, email marketing can potentially allow marketers to bombard their audience with messages, effectively leveraging pure quantity to overcome its lower conversion rate compared to SMS marketing. However, even with that caveat, SMS marketing is clearly substantially more cost-effective and persuasive.