I spent $10 on an ad and I got 3 customers within hours.
Wow! That was so unexpected.
My digital product sold for $10. So I was twenty dollars richer!
I quickly got out the calculator. For every one hundred dollars I spend on Facebook ads, I will make two hundred.
One dollar in 3 dollars out. I had found a magical money machine.
I soon found out that it doesn’t work that way. The math just didn’t scale. Within a few days it was costing me double that, and the more I spent the less I got back. Soon it was costing me $15 to make a $10 sale. The money machine was now sucking money back out of my wallet right into Mark Zuckerberg’s quarterly earnings report.
How come the more I spent, the more expensive the CAC (cost to acquire a customer) got?
There are a lot of reasons, but one of them is that the more you spend, the further out Meta, or whatever ad platform you are using has to go to look for new prospects and those “closest” to you are most likely to convert first.
Let me explain it with a real world example that’s easier to understand.
Pretend you are the advertiser and I am the ad platform.
Imagine you give me $10 to invite people to your birthday party.
I invite all your family members. 20 of them say yes immediately (0.50 per)
You are impressed, and you give me $20 to invite more people.
I invite everyone in your contacts. I get 20 more guests ($1 per).
You are still happy with the results, so you give me $60 more.
I invite everyone at your office. They are less enthusiastic, but I still get 20 more guests ($3 per).
You still want more people, so you give me $300 expecting to get 100 more guests.
I’ve gone through your family, your friends, and your coworkers.
So now I stand on the corner in your neighbourhood handing out flyers.
I get six more guests at $50 per guest.
I think you get the idea. It’s easy for me to get the hot prospects to convert. In the ad world, your family may be people who have tried your product, maybe even put the product in the cart but didn’t check out.
Eventually though, if you want to reach millions of people, they are going to be colder and less likely to purchase, and all along the way, the cost rises.