CAC is not a marketing problem (mostly)

CAC is the single North Star metric for most of the businesses. Including businesses built on digital.

Acquiring a customer is never just a function of marketing.

The journey of a user to become a customer can be long and can be influenced by multiple factors.

Many founders believe CAC is always a marketing problem. 

CAC is usually a business problem.

As we move towards more of ads automation, this will become more clear in times to come.

As of date, high CAC can be a marketing problem too in some cases.

If at all CAC is a marketing problem for your business, it is relatively easy to identify and fix.

If you are solving a problem that is actually a problem consumer cares about, if you have tested your MVP (minimal Viable Product) with a MVS (Minimal Viable Segment), if you have defined your niche well and are seeing customers coming back. If your website is of ‘A’ class performance grade.

If you have done competition analysis and found a gap in the market or you have found your differentiation or if you are clear that you are in the business of just taking away the market share from your competition without any major differentiation apart from Brand.

If you have done the basics of building a business right and still land up with a high CAC then a high CAC is likely a marketing problem.

Tell this to a founder, they seldom accept this.

However, only when you accept it, you can fix it.

Here is why high CAC can be a business problem:

a) Cross-departmental influence: CAC is not just determined by marketing efforts.

This metric is also significantly influenced by product, sales, customer service, and even the finance department of your organization.

For instance, the product team's ability to deliver features that meet market needs can enhance customer satisfaction and reduce churn, indirectly reducing CAC by improving customer lifetime value.

If an AI-based chatbot is critical for your business growth and can hugely influence the sales cycle and help in consumer decision-making, it is something your product team needs to deep dive into and introduce it to your users.

Similarly, if the website is your primary destination to drive sales however if your website performance is sub-standard, CAC is more of a tech problem. Are you asking them tough questions the way you probably ask your marketing team daily?

b) CAC and Business model: Different business models can have different CAC implications. If yours is a category that has a high repeat, you may be able to afford high CAC- for example, in the case of FMCG or quick-commerce.

CAC can vary for omni-channel businesses too. Users may discover your brand online but convert offline. A phenomenon retail brands go through. When I used to work at the Future group. One of the marquee brands we had was Big Bazaar.

Big Bazaar also had an online e-commerce portal.

On digital we were running purchase-based campaigns.

For offline stores, we used to run footfall-based campaigns.

Our CAC for online was ₹50-70

Our cost per footfall in a big bazaar store was ₹21. Not every one of those people shopped from a big bazaar store.

Blended Cost per Transaction for the brand was ₹65-70

On the other hand, another small store format we used to run purchase-based e-commerce campaign was called Easyday.

The idea was to go hyperlocal for Easyday brand and the catalogue was comparatively smaller than that of Big Bazaar, CAC for Easyday’s e-commerce website used to hover around ₹150-170.

However, the repeats in the case of Easyday is comparatively higher because of low ticket size shopping and therefore more frequent shopping.

Same category, a hugely different CAC.

Individually both brands were making money.

Subscription-based businesses, for example, might initially invest more in acquiring customers, expecting the lifetime value (LTV) of these customers to justify the high upfront CAC. This strategic decision impacts not just marketing budgets but also financial forecasting and product development cycles.

c) CAC in the Context of Market Conditions:

There are many uncontrollable when you start running a business. One of such uncontrollable is Market conditions.

While you do not come across an unprecedented event like Covid every time, you cannot control competition dynamics.

If your competition ran an offer which is much better than yours or if they increased spends on ads because they have recently raised funds, your CAC is bound to go up.

In highly competitive markets, CAC can skyrocket making it a strategic issue that transcends marketing.

Companies may need to innovate not just in marketing but in product offerings, customer experience and pricing strategies to remain competitive.

For instance, if you are in a business where the differentiation is the distribution and experience, not the product or service, you will have to constantly innovate and maintain top class user experience while keep building towards higher distribution.

Let’s take Health insurance as an example, product offering is more or less the same from one insurer to the other, it is a highly regulated segment so insurers or distributors can only play on building on distribution or Branding. Not so much on offers, messaging, tweaking the product etc.

Therefore in this case CAC can hugely differ on the basis of distribution (in the case of offline) and branding (in the case of online).

HDFC Life and Ditto Insurance have very different approaches to selling health insurance. The former is more inclined towards brand messaging and branded campaigns, latter is more focused on education, value-based information and consultative selling.

However, a brand that blends both will be the true winner. To some extent, GoDigit tried finding a blend with Brand campaigns (hiring Virat Kohli as a brand ambassador) and Education-based content on their social + website (SEO).

Plus GoDigit went big on distribution too, they did listing campaigns on Policy Bazaar and built the offline distribution by collaborating with different banking partners and NBFCs.

One of the reasons why GoDigit grew fast while being profitable. Smart tactic to keep CAC under control.

There will always be market dynamics and competition activations that will be uncontrollable, none in your organization can influence or control it, hence the CAC will differ based on these factors.

d) CAC, Pricing Strategy and Profitability:

This can be a fundamental problem in the pricing.

If you consider the pricing of products that are sold on your platform (and you are not a reseller platform or a marketplace) then you need to tactfully set the pricing of your product to accommodate high CAC.

Setting a low prices to capture the market initially can be a good strategy in the short term but profitability and keeping the CAC low consistently is usually a challenge for such businesses.

Let's consider a hypothetical example of a startup company, EcoBottles, that sells eco-friendly water bottles online. Suppose the CAC for EcoBottles is ₹50, which includes marketing campaigns, sales team efforts, and any discounts or promotions offered to attract customers.

If EcoBottles sets the price of each bottle at ₹30, without considering the CAC, they may initially see a surge in sales but will eventually face profitability issues. Here's why:

Cost Breakdown: For each bottle sold, let's assume the cost of goods sold (COGS), including manufacturing, shipping, and handling costs, is ₹10. Without factoring in the CAC, the gross profit per bottle seems to be ₹20 (₹30 sale price - ₹10 COGS).

CAC Impact: When incorporating the CAC of ₹50, the real cost to sell a bottle becomes ₹60 (₹10 COGS + ₹50 CAC). Selling the bottle at ₹30 results in a loss of ₹30 per bottle once the CAC is accounted for.

Strategic Pricing: To ensure profitability, EcoBottles needs to reconsider its pricing strategy. If the target is to maintain a healthy profit margin while covering the CAC, they might need to increase the price of each bottle or find ways to reduce the CAC or COGS.

I have worked and consulted with many businesses who after a lot of persistence (and at times education) realise that CAC can also be a business problem.

I talk about this topic in detail in the Dream Performance Marketing Masterclass where we cover all of the above points and more reasons on how to identify if CAC is a marketing problem, a business problem or a bit of both.

Learn as I unfold such strategic topics in this masterclass that puts you miles ahead of other people in the market and we do all of this LIVE with a project.

On another note, I am conducting an online event on one of the most underrated but most impactful topics in Digital Marketing:

How Marketing Automation will shake up businesses in 2024

If you are a business owner or in a mid to senior position in your organisation, it is high time you know how to rotate the wheel of effective customer lifecycle management.

Your CAC may or may not be a marketing problem but if you do not know cohort analysis, data segmentation, cohort-based communication strategy, or segment-based trigger staretgy to drive higher customer lifetime value, it is very much a marketing problem.

On top of this, if you are a Top Decoders Community (TDC) member, you are eligible for the below benefits as part of the above event:

If you are not convinced about joining the Top Decoders Community, you can also buy a Backstage ticket for this event in particular which will give you the access to below:

BackStage ticket is priced at a nominal fee of ₹299.

Please note;

Recording of this event will only be shared with either people who are a part of Top Decoders Community (TDC) or

People who buy BackStage tickets from the above link.

Hope to see you soon in the Dream Performance Marketing Masterclass or in Clicks 2 Cash event or both.

Cheers,

Apurv