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what is channel saturation

Channel Saturation: How to Keep From Getting Soaked on Your CPA

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Most performance marketers are familiar with the term channel saturation. Channel saturation is a term we use to describe the concept of diminishing returns; that is, that you can only push your ads on a channel so far before it stops being worth it. 

That’s a pretty vague definition though, right? It’s also reflective of how we think about saturation in general, as if it’s some kind of nebulous, mysterious phenomenon that occurs after some arbitrary level of spend. 

If we dare to dig a little deeper, we start to uncover more questions about what functions saturation plays, why saturation happens, and how to anticipate it before it does. Let’s take a look. 

What Is Channel Saturation?

If spend were irrelevant to performance, brands would only ever pay to advertise on their best performing channels. In other words, they’d pile every dollar they have into their top performing channels. (And everyone’s jobs would be so much easier, wouldn’t they?) 

In reality though, performance on a channel has a lot to do with how much you spend — but not in the way you think. In fact, what happens is counterintuitive: Often when channel spend increases, efficiency metrics (CAC, RoAS, etc.) decline rapidly. This inverse relationship is the key to understanding channel saturation.

The point at which a channel becomes saturated is the point at which it becomes inefficient to spend more money on that channel — when each additional dollar spent generates less than a dollar in profit. 

One way to think of this is in terms of marginal efficiency metrics, like a channel’s average cost per acquisition (CPA): how much it costs on average to acquire a customer. In addition to this familiar concept, it’s also helpful to think of channels as having a marginal cost per acquisition — that is the cost for that channel to bring in one additional customer.

Thinking this way, we can say that a saturated channel has a marginal cost per acquisition at or above the profit you make from each customer acquired. Any more acquisitions from that channel will result in a break-even at best, and more likely a net loss.

Why Does Channel Saturation Happen?

The short answer: Channel saturation happens because, as you increase your spend on a channel, the ads bought with those additional dollars get served to increasingly less relevant users.

Here’s a longer answer. Think of it like this:

  • If you only had $10 dollars to spend on a channel, you’d be able to serve your ads just to the fraction of a percent of users who are most likely to convert for your brand. 
  • If you then scaled your budget up to $100, you’d have to find slightly less relevant users to spend your additional $90 of budget on.

This process recurs each time you increase your budget. Eventually, you reach the point where each additional budget increase is spent on targeting less relevant users. Because these users are less likely to convert for your brand, the CPA on that additional segment of users gets worse and worse.

This causes your average and marginal CPAs to increase in tandem as you keep increasing your budget, until ultimately your marginal CPA is equal to your LTV — and the best you can do is break even on each new customer.

It’s worth acknowledging that on some platforms efficiency can temporarily increase with budget, giving the channel a marginal CPA below the channel’s average CPA. This happens when a channel is able to learn more effectively from the extra volume, and thereby deliver more acquisitions at a lower CPA. This effect is often fairly small though.

How Do You Know When a Channel Is Saturated?

So far we’ve looked at the theory behind channel saturation, but we haven’t looked at how to implement this knowledge in practice.

To be able to answer this question, we need to return to our earlier definition of saturation: that it occurs when the channel’s marginal CPA is equal to (or higher than) the profit per customer acquired on that channel.

So, to estimate when a channel will get saturated, you need to know two things:

  1. Your profit per customer, also known as LTV. A good first step would be to know what this is for all the brand’s customers. For even better analysis, it’s also good to know the LTV broken down by channel.
  2. Your marginal CPA curve. Learn what your CPA looks like on a given channel at different volume levels.

The easiest way to build a marginal CPA curve is to run a channel at various volume levels, and record how much is spent at each level of volume. This allows you to build up a scatter plot with axes of cost and volume, like this:

chart plotting cost and volume to determine channel saturation

Once you determine those two factors, you can create equations that focus on the marginal CPA and LTV metrics. Then, using these metrics, you can come up with a volume term that indicates just how much you can do on a given channel before it is saturated.

Heading Off Saturation

Saturation is a term that gets thrown around a lot, often with little understanding of what it actually means. Framing it in a more quantitative light — and talking about it in terms of marginal metrics — can help demystify it as a concept, and ensure we’re doing more with performance marketing. 

Mapping out your channels’ saturation points provides the huge technical advantage of knowing exactly how much to spend on each of them before you will see negative returns.

For help building your own equations to gauge channel saturation, or just to talk through your brand performance strategy, get in touch any time.

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