What it means
Traditionally, many companies sold through middlemen. A manufacturer would persuade retailers, distributors or doctors, who then recommended the product to the end customer.
Direct to consumer advertising bypasses these intermediaries and speaks to the customer directly through television, social media, search, email and other channels. The attraction for finance teams is measurability.
Digital channels show how many people saw an advert, clicked and bought, so spending can be tied to results. The company keeps the full selling price rather than sharing it with a retailer, although it takes on the cost of advertising and delivery.
Key measures include customer acquisition cost, which is the advertising spend divided by the number of new customers, and return on ad spend, which compares revenue to advertising cost. These should be read against the customer's lifetime value, the total profit expected from the customer.
If a customer costs $150 to win but brings $600 of profit over time, the advertising is worthwhile. In some industries, direct to consumer advertising is tightly regulated.
Medicines in particular face strict rules in many countries, with some places prohibiting it entirely for prescription products. Companies must follow the claims rules and keep records to support them.
The main nuance is that costs rise as a channel becomes crowded. Early campaigns often enjoy low acquisition costs, but as competitors bid for the same audience, prices climb.
Finance teams should plan for this by testing small budgets, tracking cohorts and setting a maximum acceptable cost for each new customer. Attribution is the practical challenge.
A customer may see a video advert, search for the brand a week later and buy after an email, so credit for the sale can be split in several ways. Finance teams usually agree a consistent rule in advance and compare the results over time rather than relying on one channel's own report.
In practice
Real-world examples.
Example
A mattress brand sells only online and spends heavily on social media adverts. It tracks each sale back to the advert and limits its CAC to $120, a level at which each customer still brings profit. When the figure climbs above the limit, the marketing team must justify the extra spending before it is approved.
Example
A pharmaceutical company in a country where the practice is allowed runs television adverts for a new allergy treatment. The finance team measures the rise in prescriptions after each campaign to judge whether the $30,000,000 budget was justified.
Example
A subscription software firm uses search advertising to target small businesses. It finds that customers from search stay twice as long as those from social media, and shifts $50,000 of monthly budget to search. Over the following quarter, the finance team compares retention to confirm the longer stay holds.
Formula
Calculation
Customer acquisition cost (CAC) = Advertising spend / New customers acquired
Return on ad spend (ROAS) = Revenue attributed to advertising / Advertising spend
Suppose a company spends $120,000 on a campaign and wins 800 new customers. CAC = 120,000 / 800 = $150. If each new customer generates $600 of first-year revenue, total revenue is 800 x 600 = $480,000. ROAS = 480,000 / 120,000 = 4.0, meaning every $1 spent brought back $4 of revenue.Case study
Seen in the real world.
Clearwater Skincare is an illustrative, fictional company that moved from selling through department stores to selling directly to customers online. It spent $200,000 in its first quarter on advertising and won 1,000 customers at a CAC of $200.
Each customer generated average gross profit of $90 on a first order, so the company lost money on each initial sale. The finance manager showed that 40% of customers reordered over the following year, and the lifetime gross profit of a typical customer was $260.
The illustrative company decided to continue the campaign, but set a ceiling of $220 on CAC and tracked cohorts every month. When CAC crept up to $240, it paused the weakest adverts and put money into email offers to existing customers instead.
Watch out
Common mistakes.
- Judging a campaign on clicks or likes rather than on customers won and the profit they bring.
- Ignoring the lifetime value of the customer and rejecting campaigns that lose money on the first sale but are profitable over time.
- Assuming that the cost of acquiring customers will stay the same as the campaign grows, when costs usually rise with scale.
Questions
People also ask.
Is direct to consumer advertising only for online brands?
No, because established companies in sectors such as medicines, insurance and food also advertise directly to buyers.
What is the difference between CAC and ROAS?
CAC shows the cost of winning one customer, whereas ROAS shows how much revenue each dollar of advertising produced.
Why is regulation important?
Some products, especially medicines and financial services, face strict rules on claims and advertising, and breaking them can bring fines and damage to the brand. Finance and legal teams should agree a review step before any campaign goes live.
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