So you started a business that your family and friends (friends include free beta testers) love. You’ve been smart and easily acquired your first paying customers; in fact, it was as if they had always waited for your product to be on the market.
You believe this will be a big hit, but you also know you need to scale, and that each new customer you’ll have to convince, as more remote from your target market, will cost you more than the previous one.
In order to adjust your marketing spending, you have read about customer lifetime value (CLTV) versus customer acquisition cost (CAC); in other words, how much can you get from a client versus how much you’ve paid for him to get to know you and actually buy something from you.
This post is not a lecture you about CLTV and CAC, topics already well documented.
Reminder: both are subtle notions and should not be calculated before being understood – having said that, CLTV looks like: average basket x buying frequency x lifespan, whereas you’ll get an idea of your CAC with: direct marketing costs/ number of new customers.
Rather I’d like to point 5 mistakes related to this topic.
1/ The lower the CAC the better.
This reasoning will most likely be counterproductive: with this in mind you will slow and limit your acquisition. If you are in a market with strong emerging competitors your priority might be to aggressively preempt the market, which has a cost. If you are in a market where the winner takes all and switching costs for customers are high (yearly subscription model, solution with hardware installed, data related business…) you might not want to put yourself in a position where you will have no choice but to buy customers from your competitors. So define your target audience first, be ready to pay the price to address this segment, then and only then, try to reduce your CAC on this segment with a few tricks (find the best channels to focus on, improve conversion rates,…).
2/ Ok, let’s not be skinfit with the CAC, but let’s keep it below the average basket of my customers, otherwise I’m doomed.
This seems rather common sense; one will never generate profit if the cost for having a client buy something is actually higher than the price the client pays. That is only partially true. The best evidence of this is that this rule is not observed by successful companies, some of which I funded. The reason is they have a high level of repeat. In fact a very few models are designed for one-shot selling. For many businesses, the average basket size is not the customer lifetime value, therefore you have to consider that your customer acquisition cost covers the numerous sales your customers will bring. Always figure out a reasonable payback of your CAC (12 month is usually a maximum) and deduct your CAC from this payback, your repeat and average basket size.
3/ One euro is one euro.
This one is tough, but I’ll demonstrate this actually is a mistake when talking about CAC. Not all acquisition channels where created equal. Retargeting, TV, coupons, friend sponsoring, do not leverage the same instincts, do not reflect the same image of your brand. While one euro in customer acquisition can be used to reinforce your brand awareness, reinsure your reticent customers, reward your ambassadors with friend sponsoring or sponsor an event, it can also be used to aggressively retarget a timid customer or promote giveaway prices. Do not forget that acquisition is part of the selling process and influences your customer satisfaction! That is my first point: your marketing spending should be spent to please your customers, not force them into buying. The second one is that the different acquisition channels do not attract the same clientele. Depending on which channel the customers are coming from, as they came with different dynamics and motives, they might not have the same behavior in the future: basket size, loyalty, virality… My second advice would be; if you are to spend one euro, spend it to buy a customer, not a one-shot sale.
4/ Optimizing my CAC is finding the best performing customer acquisition channel.
It is always a bad idea to focus your marketing investment on one single acquisition channel. First, because a lot of them are not scalable: you can have a hard time trying to scale with content marketing, sales, or…”virality”. Also because as your business is becoming more mature, other acquisition channels can be better adapted (retargeting for instance) and the best channel might have changed. This you will know only if you keep continuously testing a few acquisition channels in parallel. And always keep in mind the exogeneous factors such as competition (what are they doing in marketing?) or the evolution of the advertising industry (print media advertising really? adblock? any google update?). Having said that, do not oversplit your spendings as there are threshold effects to consider (critical mass).
5/ Double counting
Your adds will be seen by future and existing customers.Two different devices can belong to the same customer. People buy for themselves…and for others (children, gifts). Some of your budget will be used for retargeting, directly or indirectly. Take this into account when calculating your CAC.
I hope this will enlighten some of the subtleties related to the use of CLTV and CAC ratios. I’d like to conclude with a word from Kevin Hale, founder of Wufoo, speaking at YC : “My feeling is marketing and sales is a tax you pay because you haven’t made your product remarkable”. Here is the lesson; customer acquisition is not only about marketing spending; it starts with your product. A little spending on product can save you bigger investments in marketing. And I believe it continues with the quality of the buying experience you offer (delivery, mailing,…), and that of your customer support. Every interaction with your customer is an opportunity to tell him a story he will like. Kevin Hale again :”Word-of-mouth is the easiest kind of growth, and it’s how a lot of the great companies grow. Figure out how to have a story that people want to tell about your product where they are the most interesting one at the dinner table. And then that person is your sales person. That person is your sales force for you.”