There are many ways companies can reduce customer acquisition costs (CAC), but it’s important to understand the interplay between CAC and growth in order to land on the right advertising strategy.
Efficient CAC and scale are opposing forces. Imagine your potential customers as concentric circles around your core value propositions. The innermost circle of customers feel the pain the strongest, benefit the most from your solution, and have the highest willingness to pay. This is where you start. But as you desire more growth, you have to expand to the next circle of customers, where the “fit” is slightly worse. This continues until you reach a mass market audience that’s huge, but is a lot harder to convert than the innermost circle.
When choosing a business to start or join, it’s important to consider how niche vs. mass market you believe the core value propositions to be, as it will directly impact your ability to scale a marketing program. Product-market fit should be considered as different for different circles, typically getting diluted as you move outwards. Many companies have product-market fit with the innermost circle of customers, but when they try to expand to bigger and broader audiences, they find those markets are different and the product actually isn’t compelling enough to produce the desired CAC.
A mandate to increase customer growth puts upward pressure on CAC, and a mandate to reduce CAC puts downward pressure on growth.
“Perfect information” means we know exactly who we are selling to and why they are interested. In other words, we fully understand the attributes of each of the concentric circles. Furthermore, we know exactly how to reach them most efficiently. For each concentric circle, we know not only the channels we can use to reach them; we know the economics of reaching them through every conceivable channel in order to reach them efficiently.
We make the .information more perfect
The other assumption underpinning the direct relationship between CAC and growth is “all else is equal.” So what is “all else”? A few common ones worth consideration include:
- our product’s capabilities, features, and pricing.
- Demand for your category as a whole.
- Your company’s market share.
- Your brand awareness.
This list is certainly not comprehensive, but includes most of the common variables that shift the curve. Importantly, shifting the curves with “other variables” is typically much more cross-functional than marketing with “more perfect” information.