A CAC of $18,500

When former Zappos CEO Tony Hsieh heard about selling shoes online he thought the business would never work only to be told by Nick Swinmurn that already, at that moment, millions of dollars of shoes were sold via catalogs every year.

In 1999 Zappos was a rough business. It was the early days of the internet. People were getting used to buying things online, in a limited way. eBay was there. Amazon existed, but those were different. Amazon was hundreds of listings, but every copy of Who Moved my Cheese was identical. eBay was full of Beanie Babies, but only one for each listing. Zappos might’ve had the richest library of offerings.

That early Zappos used a now common DzTC strategy: arbitrage. Find a thing being made or sold in one not-online and sell it online. That’s what Zappos did, but with no mark-up. In those early days whatever someone paid for shoes on Zappos was the same price Zappos paid for those shoes.

It was a terrible business model. They had to find the sweet spot: acquire customers cheaply and get them to stick around.

At first Zappos whiffed on the “cheaply” part. Here’s how Hsieh told it:

> “We did what all the other internet companies did back then, we got high profile advertising. For example, we bought the billboard behind home plate for a Giants game. That cost us $75,000, we tracked it and we got four customers out that. We did it all in the name of market share. That’s a good strategy if your goal is to go out of business as quickly as possible. We stopped that when we realized that even though every other dot-com at that time was doing this, we realized that we couldn’t make the numbers work. Instead of worrying about new customers we just focused on what we could do to make customers we already have repeat customers. How do we make them happier? How do we get them to come back again and again?” – Tony Hsieh

The answer was service.

Hsieh thought there were three competition arenas for Zappos: price, selection, service. The first two were devilishly difficult. The third though, that might have legs.

It worked. Zappos worked.

One thing that’s so much fun studying businesses is seeing the different ways a company solves a problem. Gillette’s CAQ was WW1, where each GI got a razor and blades. L.L. Bean started with out of state hunting licenses. Michael Dell got his chops selling newspapers. His cheap customers? Newlyweds.

CAQ :Customer AcQuisition.

CAC Pack

Patrick O’Shaughnessy asked about clever customer acquisitions. The replies are pretty good.

In college, I played ultimate frisbee. Recruiting was kind of difficult. The traditional method was to buy card stock table tents and litter the dorm eateries. That seemed cluttered to me. I took our marketing money and subsidized t-shirts to $5 each. One guy on the team bought four. Did they work? Who knows. Was it better than table tents? For sure.

Customer Acquisition (Costs) strategies are not so easy to organize. Marketing? Samples? Scrolling through replies I settled on five. The whole stories are in podcast form: Overcast, iTunes.

The highlights:

  1. McDonald’s Kid Meals were created in Guatemala by a struggling franchise. The thinking was: kids eat less and different food. The Happy Meal was created in Chicago when an advertiser Bob Bernstein watched his son eat cereal for breakfast and read the box.
  2. AOL discs were everywhere because AOL had previously sent boxes to homes and saw a staggering conversion. At the time people had computers, but not software the getting people to try AOL was like a lot of other consumer products. Steve Case had worked at P&G and gotten shampoo distributed the same ways. (At one point AOL was half of worldwide CD manufacturing).
  3. “PS I love you, get your free e-mail at Hotmail.” was the original email signature. VC Tim Draper was an ’84 Harvard MBA and studied Tupperware. The I love you was dropped and the line worked.
  4. Netflix used coupons in DVD players in 2000-2002, a lollapalooza of technology, selection, and customer demand.
  5. When Rich Barton launched Expedia he asked Bill Gates for millions to buy TV ads and Gates said ‘Yes’. When Barton launched Zillow he asked Bill Gurley for millions to buy TV ads and Gurley said ‘No’. The difference was the business model. What might work instead? The Zestimate.

The theme across these is that a business disrupted an incumbent (or itself) by taking something that worked in one area and applied it to another. The cleverer the angle, the less the financial cost.