You don’t have to go far to get into a conversation about user acquisition at any major marketing conference. Most of the sessions and panels are geared around this topic because that’s what is on most of the attendee’s minds.
This obsession with user acquisition and it’s related metric, CAC, can be misguided. Let’s start with the metric itself and why it can worthless to look at it in isolation.
CAC On its Own is Worthless
Having a CAC of $5 doesn’t tell me much about your company. I don’t know if these are profitable customers, how long they stay with you or if this is a sustainable growth channel.
I don’t even know if you properly calculated this number of $5. Did you include salaries, overhead, and software tools or just direct costs i.e. what you paid Facebook? These are some of the common mistakes that Brian Balfour sees among companies.
If you ever see an ad or promotion that promises users for a low CAC, then run away. The number is different for everyone and depends on many factors including the size of your company, product type, and industry.
I find it funny when I come across companies that are acquiring users at a “profitable” level but would be unable to pay for salaries, overhead and even the basic software costs of hosting the product.
Industry, in particular, is interesting. We may think that low CAC is always the goal but not every industry functions like this.
Industries With High CACs: Vegas Clubs, Telecom and Banks
Some of the best learnings can happen in other industries. I was recently in Vegas and you can see how most of the businesses there are functioning on high CACs.
For example, when you go to a club, you’ll be faced with $20 drinks (at the lowest level) and $40 cover which you can get waived if you get free tickets or get there early enough. This may seem weird until you realize that clubs are really making money on the private tables and bottle services.
In some of the clubs, I estimated that 85% of the people inside the club where using bottle service which starts at a few hundred dollars. These clubs can afford to give free cover and free drinks because they know that most people will opt for their most expensive offerings.
You can also see high CACs in industries like telecom and banks. Both of these industries have relatively high stickiness which means it makes sense to spend more to acquire customers.
The point here is that don’t assume that low CACs is always the goal. Low CACs may also bring lower-quality users who may be unwilling to pay for bottle service or will cancel their monthly phone bill once it increases in price.
Don’t Tell Incomplete Stories About Acquisition
Besides the issues with the calculation of CAC, you also need to understand how different levers work within your product. Andrew Chen talks about how companies like Dropbox and Slack failed to make paid ads work for them which forced me to use their product to acquire new users.
Dropbox did this through referral systems and Slack did it through the sharing of channels. These are two examples of using other variables in your customer journey to acquire customers profitably.
Think of all the steps in a typical customer journey:
- Views landing page
- Signs up for product
- Onboarding sequence
- Uses the product
- Invites other users
You could work on finding other levers that could make the overall acquisition equation work that aren’t at the top of the funnel. This is, of course, harder than just running more ads or tweaking your landing pages.
In summary, start by ensuring that you’re measuring CAC properly by including direct costs, overhead, salaries, and tools. You then can work on telling a complete story as to how paid customers are acquired. Finally, think of the different levers or variables within your product that could be improved instead of just working towards getting customers for less money upfront.