CAC: Customer Acquisition Chaos - Shedding More Light on How Instagram Works

CAC: Customer Acquisition Chaos - Shedding More Light on How Instagram Works

Commerce has come a long way since the earliest recorded forms of trade, such as cattle trade in 10,000 B.C. Back then, commerce revolved around the exchange of cattle for goods and services. Fast forward to the present day, and commerce has become a $26 trillion global market, with e-commerce accounting for about $10 trillion of that figure. This massive market is primarily driven by various forms of payment, including cash, credit cards, debit cards, and digital payments.

When it comes to shopping, there are two primary types: search-driven shopping and discovery-driven shopping. Search-driven shopping involves actively searching for specific items or brands, and in the digital age, Amazon dominates this space. In fact, 74% of online shopping searches in the U.S. now originate on Amazon.com. Amazon's dominance in search-driven shopping has allowed it to build a formidable advertising business, making it one of the top global players in the advertising industry.

On the other hand, discovery-driven shopping is more about serendipity and browsing. It's the experience of wandering around a mall and stumbling upon something that catches your eye. In the U.S., social commerce hasn't reached the same level as in China, where social platforms seamlessly blend social interactions with commerce. Instead, in the U.S., commerce is often layered on top of existing social platforms like Instagram, Pinterest, and Facebook Marketplace.

When it comes to advertising, there are two main types worth knowing: direct response advertising and brand advertising. Direct response advertising aims to prompt immediate transactions, while brand advertising focuses on building brand equity. Direct response advertising tends to dominate the digital ad space, accounting for about 80% of all digital ad dollars spent online. A classic example of brand advertising is Coca-Cola, which aims to create a lasting impression and influence consumer choices in the long run.

However, as customer acquisition costs (CACs) continue to rise, many direct-to-consumer (DTC) brands have turned to brick-and-mortar retail locations as a way to diversify their revenue streams. Brands like Warby Parker and Jessica Alba's Honest Company now generate 50% or more of their revenue from physical retail stores. This shift highlights the importance of finding new channels and strategies to acquire customers and drive growth.

One such strategy that has gained popularity in recent years is influencer marketing. The influencer marketing industry has experienced significant growth, with spending on influencer campaigns increasing from $1.7 billion in 2016 to $16.4 billion in 2022, representing a compound annual growth rate (CAGR) of 46%. Influencer marketing plays a crucial role in discovery-driven commerce, but it also has its challenges. Many influencer campaigns rely on upfront lump-sum payments and use discount codes to track attribution, resulting in poor ROI and measurement difficulties. As a result, brands are in need of new channels and approaches to effectively scale their marketing efforts.

One potential solution lies in working with creators. Brands are primarily concerned with three things: acquiring new customers profitably, controlling who promotes their brand and where, and being able to measure the effectiveness of their marketing efforts. By partnering with creators, brands can address these concerns. Creators can be compensated based on performance, meaning brands only pay when they acquire a new customer. This model allows brands to have more control over who represents their brand and where their products are promoted. Additionally, with the right tracking and analytics tools, brands can measure the impact of their collaborations with creators and make informed decisions about scaling their efforts.

In the realm of social media, understanding how platforms like Instagram work is crucial for brands and content creators alike. Instagram doesn't rely on a single algorithm to determine what users see on the app. Instead, they utilize a variety of algorithms, classifiers, and processes, each serving a specific purpose. For example, the algorithm used in the Feed ranks posts based on what users care about most, taking into account various signals.

These signals include information about the post, the person who made the post, and the user's activity and history of interacting with someone. In the Feed, Instagram looks closely at five key interactions: the likelihood of spending time on a post, commenting on it, liking it, saving it, and tapping on the profile photo. The more likely a user is to take these actions, and the more weight Instagram assigns to these actions, the higher the post will appear in their Feed.

Similarly, in the Explore section of the app, Instagram ranks content based on signals such as information about the post, the user's history of interacting with the person who made the post, the user's activity, and information about the person who made the post. The most important predictions in Explore include likes, saves, and shares.

Instagram's Reels feature, designed to entertain users, follows a similar pattern. The algorithm predicts how likely a user is to watch a reel all the way through, like it, find it entertaining or funny, and visit the audio page. Reels primarily feature content from accounts users don't follow, with the aim of introducing users to new and engaging content.

It's important to note that posting on Instagram doesn't guarantee reaching all of your followers. In fact, the majority of your followers may not see what you share because they only look at less than half of their Feed. This highlights the importance of creating engaging and compelling content that stands out in a crowded social media landscape.

In conclusion, customer acquisition can be a chaotic process, especially in the ever-evolving world of commerce and digital marketing. However, by understanding the different types of shopping, the role of advertising, the potential of influencer marketing, and the inner workings of social media platforms like Instagram, brands and marketers can navigate this chaos more effectively. Here are three actionable pieces of advice to consider:

1. Diversify your customer acquisition channels: Don't rely solely on search-driven shopping or traditional digital advertising. Explore new channels and strategies, such as influencer marketing and partnerships with creators, to reach and engage new customers.

2. Focus on building brand equity: While direct response advertising is important for driving immediate transactions, don't neglect the long-term impact of brand advertising. Building brand equity can lead to loyal customers who choose your brand over competitors in the long run.

3. Create compelling and engaging content: In an era where users are bombarded with content, it's crucial to create content that stands out. Understand the algorithms and signals used by social media platforms like Instagram, and craft content that encourages users to take meaningful actions, such as liking, saving, and sharing.

By incorporating these strategies and insights into your customer acquisition efforts, you can navigate the chaos and drive sustainable growth for your business.