It’s no secret that growth is paramount in today’s fast-paced world, particularly for startups and emerging sectors where competition to establish market dominance is rife. Once funds are secured and growth strategies are built, it all comes down to customer acquisition – and keeping those customers.
Customer Acquisition Cost (CAC) is an age-old business metric for all types of businesses looking to scale, yet it isn’t the magic key. Despite being the most well-known metric, the reality is that it isn’t the most appropriate metric for all business types. While metrics like the Lifetime Value (LTV) of a customer often fall by the wayside – a crucial mistake.
At our most recent Founder Summit, Nishit Garg of RTP was joined by Ramp’s Sri Batchu and Flipkart’s Smrithi Ravichandran to explore – and re-emphasise – the importance of reevaluating the significance of CAC when it comes to business growth. Exploring how it must be considered alongside a range of other metrics to achieve a holistic view of business growth, Nishit, Sri and Smrithi share their three key insights.
1) Understand the customer value base
Organisations should consider how valuable their customer bases are when looking to unlock new growth. Brands should be willing to invest more for customers of greater value, focusing on this value as a key metric, in addition to how many customers can be acquired. The reality is, a good driver and measure for growth, is using a customer payback period in addition to CAC.
Customer payback periods (CPP) used alongside CAC helps to determine not only the effectiveness of a business’ customer acquisition strategy, but also how valuable the customers are. A shorter CPP implies a much speedier return on any investments made, helping a business to better understand the overall return of investment and how to evolve different acquisition channels, performance tracking, and identify other optimisations to be made.
2) Choosing the right metrics alongside CAC
In some businesses, CAC is only valuable when used in conjunction with other metrics, such as ARR, MRR and LTV. For example, via a CAC and LTV ratio, businesses can determine the return a business would expect from their investment in a new customer, all to assess profitability.
However, a key issue is that these metrics still don’t take customer loyalty – or disloyalty – into account. In some instances, valuable time could be spent on reducing CAC, but it ignores two vital problems that ultimately hinder growth: low customer retention, and the possibility of cross-selling to other product categories.
Determining the long-term value of customers using metrics like repeat purchase rates, loyalty programme participation and customer engagement rates alongside CAC can help evaluate where additional investments should be made. These investments can then more accurately focus on encouraging customers to buy similar products, and more. In short, it means businesses can better identify where greater ROI will be achieved when looking to invest more funds into part of a customer base, all to ensure loyalty and repeat purchases.
3) Determining repeat spend
You’ve found out which customers to invest more into, but how do we actually get them to repeat purchase? Rather than channelling significant funds through customer acquisition alone, businesses need to spend more on finding out what matters to their existing customers to achieve loyalty – it isn’t as simple as selection and price.
In some industries, finding a way to diversify customer offerings beyond these points is necessary for survival. Take the grocery sector, for example – it’s far harder to provide a unique customer offering that encourages loyalty when the products on offer and their associated price points are identical.
In these cases, spend should be instead focused on strategies that will emphasise the customer experience, convenience and offer unique value propositions that competitors cannot beat. Building a loyal customer base needs to move beyond price point and instead consider innovation in product offerings, the delivery of personalised services and exceptional shopping experiences, from browsing to checkout.