With the increasing clutter in the D2C space along with a spike in demand for digital advertising, the Customer Acquisition Cost (CAC) of D2C brands has been on the rise. Founders of D2C firms and digital experts agree that due to the increase in Cost Per Impression (CPM) on platforms like Meta & Google, the CAC on digital has shot up in the last one year.

Dhruv Toshniwal, CEO, The Pant Project, shared that digital CPMs are rising at 20-25% per year. The rise in digital CPMs basically means that brands now have to pay more for their ads to be seen by potential customers. As a result, the cost of gaining visibility and reaching target audiences on platforms like Meta and Google has become significantly higher.

“I want us to acquire more new customers, faster. It is every founder's dream. But in reality, digital CAC is only rising. You are in a race to beat rising CPMs on Meta & Google, and that's a battle that's hard to win at scale,” Toshniwal added.

Experts feel that the trend has majorly set in due to the rising number of brands venturing into the D2C space. Shradha Agarwal, Co-founder & CEO, grapes, says, “It is not just the big brands who have jumped onto it, there are so many smaller brands too who are fighting for the same keyword.”

For a layman, the natural reaction to this would be to cut down on performance marketing budgets till the CAC stabilises. However, Agarwal shared that the rising costs have not deterred D2C brands from continuing to invest on performance marketing, that too quite generously.

“Everybody wants to jump onto online, and D2C brands are more than happy to continue investing there,” she said. This is essentially because the attribution on offline takes a way longer time, and for digital first aka D2C brands, immediate attribution stands stronger while allocating marketing budgets, experts note.

The catch lies when it comes to choosing a particular platform. Agarwal further explained that D2C brands are happy to invest till the time they realise that this CAC is lower on a different platform.

Deep Bajaj, Co-founder, Sirona, highlighted that in the past couple of years, a lot of younger generation came online on social media who probably were the right age but didn’t fit the income bracket to purchase the product. “So, the cost to show the product remained the same while they were not the transacting audience,” he said. This, along with aspects like funding winter leading to preserving cash, put some level of pressure on the P&L of D2C brands, founders tell us.

For Sirona, Bajaj says, the way forward is not about CAC but about being able to retain the existing customers in the best possible way. Toshniwal echoes a similar voice and says that it is crucial to focus on repeats and customer lifetime value (LTV). “For every 100 new customers acquired, look closely at the percentage of repeat rate x average order value (AOV) x no. of orders per year,” he said.

Some founders also feel that rising CAC is not just a 2023 trend but one that has been existing for a good amount of time, but came to light very recently. Shankar Prasad, CEO & Co-Founder, Plum Goodness, explained that the availability of consumers is going at a limited pace, whereas the demand for the consumers is going up at a much higher rate.

“That is why the cost of accessing these digital eyeballs is rising, naturally reflecting on the cost of acquisition,” he added. Prasad, however, also pointed out that he has not noticed a dramatic increase in Cost per Acquisition (CPA). At the moment, Plum Goodness allocates 15-20% of its ad budgets to performance marketing.

So, what can founders do as a young D2C brand to continue to acquire new customers at reasonable cost and speed?

Toshniwal advises to invest a certain percentage of spends in brand marketing. “If you are only performance marketing focused, it might help to spend 10 - 20% of your budget on brand content that's not focused solely on driving conversion. Educating your customer about your brand, and creating an emotional connection with the customer will eventually lead to more sales in the long run,” he said.