Tag: cac

Customer Acquisition Cost Communication (CACC)

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One way to change the CAC is to change the communication. When an organization communicates well it clearly frames the exchange which helps people ‘get it’.

It happens in politics. It happens in emergencies. It happens in sports and in investing too. When asked why he didn’t bring part of his business to a new venture, Bill Miller replied, “We are only interested in having clients that understand you’re going to get volatility. We try to monetize the volatility.“

The simplest form of this is the dating advice: be yourself.

Who is the message for and how would they like to hear it? At Duolingo the how is short.

“Any page on Duolingo has the minimum amount of text, the minimum amount of instructions and an intuitive simple interface. That’s in contrast to how language is traditionally learned, which is in a textbook, which usually begins with a conjugation table. What works better is to let the user jump into the exercise, get some hints, answer questions, and then we unlock new concepts.” – Cem Kansu, The Science of Change, October 2021

In sports the idea was unlocked with images (like heat maps). In investing the idea was unlocked with shareholder letters. It’s the same thing over and over – it’s just finding a fit. Kansu said they’ve run hundreds of experiments, on probably every part of their service. Part of those are how to find a good way to communicate well.

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My own version of this is the sixty-two ideas drip. Like this post, it’s a short daily email about an idea. Communicating well is one. It’s five bucks.

Covid and breakfast cereal

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cereal selfie

Me, a box of cereal from Aldi, and our kitten. When I bought this cereal the checkout process was 40% faster than rival stores. Plus the cost savings! Sure I had to collect my cart – with the quarter deposit in hand – and also return the cart, but often I meet someone half way and we do the Aldi parking lot exchange of quarter for cart and some goodwill good-to-see-yas.

This Aldi aesthetic is intentional. The cart, the product, the extra long barcodes for the extra fast cashiers are all tactics that support a strategy. I’d heard tactics are not strategy but it’s through the Aldi aisles and Marc Lipsitch’s interviews that the idea becomes as clear and legible as that bar code.

One of the lessons from Covid is how much conditions matter. We’ve learned that individual treatments are dependent on disease stage. We’ve also learned that societal actions are dependent on infection stage. The travel ban, Lipsitch said in May 2020, “was a tactic not a strategy, it was an attempt to show we were doing something rather than a piece of a strategy to make us safe from this virus.”

Strategy is important because our resources are limited. Sure, I’d love to invest in the cryptocurrency of the moment as a lottery ticket but there’s no extra dollars in our investing budget to allocate to a different strategy.

“In the beginning of the intense phase, New York City was working very very hard to do contact tracing at a time when they knew they had lots of cases and didn’t know about most of them. That’s exactly the setting where contact tracing can’t work. No matter how hard you fight the 10% you know about, you’re not doing anything about the rest.” – Marc Lipsitch, May 2020

When tactics fit together like puzzle pieces it creates a beautiful strategic picture. Aldi’s boxes are optimized for speed rather than customer acquisition. Classic cereals use bright colors and cartoons to scream pick me! The cereal aisle is the competition. It’s Cap’n Crunch vs Cinnamon Toast Crunch. Aldi’s products are private labels, so the competition is between big box stores not boxes in stores. The Aldi CAC is speedy checkouts, self-service, and quality goods.

A good strategy has a collection of homeotelic responses. Aldi is one example, but they’ve had almost eighty years to figure it out. Covid is a non-example, but we’ve learned some good lessons and it probably won’t happen again.

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There’s a certain amount of what economists call ‘transaction utility’ at Aldi too, we like finding deals. Also, Lipsitch is such a balanced voice on Covid or any field with some uncertainty in the future.

Fifty cent students

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CAC is the most interesting problem in business because a low CAC makes for interesting unit economics. And, CACs can have unconventional solutions.

“For kids that have taken the SAT, schools can buy their names for fifty cents a name from the College Board, which oversees the test. Schools get the name and address of a kid who went to the trouble to take the college entrance exam which is a good sign of a prospective applicant and someone where it would make sense to mail a shiny catalog, postcard, or other marketing material.” – Sally Herships, September 2021

Some colleges buy sixty-thousand names! Buying names is a customer acquisition cost. The thinking being that kids who take tests to get into college will be good customer of college. It’s not the best CAC attack we’ve looked at, but here’s a list for you to see for yourself.

In 1912, Leon Leonwood Bean got a list of out of state hunters who might need his duck boots. In 1918 each American G.I. got a Gillette shaving kit. In 1959 Warren Buffett wrote a letter to his shareholders. In 1975 Michael Dell thought the best families to sell newspaper subscriptions to were new families, sourced from the newlyweds section of the paper.

The ’80s Tupperware inspired the ’90s Hotmail signature. In 1999 Zappos paid $18,500 per customer for one advertising campaign. In 2004 Zillow launched with the Zestimate. It was Bill Gurley who told the founders they better think of a way to generate attention (and customers!) because buying ads to sell ads wasn’t a good business. In 2011 antiques attention sold shirts.

So, there’s a lot of ways to test for good customers.

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This blog post? A CAC for my Gumroad store, a collection of non-fiction short stories.

“Going for the no”

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Mike Maples Jr. worked for a software company that enabled telecom companies to offer broadband service. Mike’s job was sales.For many telcos it wasn’t even a buy or build? question because they were in the hardware business: driving tucks, laying cable, and climbing telephone poles.

But not every company was a potential client. “I started” each pitch, Maples said, “by saying, ‘This many not be a good use of your time.'”

“I would start to make body language like I was going to leave because my goal was to have them reach out, pull me back, and go, ‘No, I’m screwed I’ve got to have three million subscribers in the next eighteen months, my CEO just committed to that on their last Wall Street call.” – Mike Maples Jr., Founder’s Field Guide August 2021

It wasn’t just customers Maples wanted, but the right customers. In high-cadence systems, the wrong customers slow a business’s innovation cycle. “They’re going to ask me for requirements that don’t matter for building a different future” Maples said, “because they’re conventional thinkers who live in the present.”

Traditionally we think of CAC as customers per dollar spent, but customers are heterogeneous, that’s a two-dollar word we learned during Covid. Maples is a venture capitalist so he wants to invest in things that are small now but will be huge later. In the current circumstances that means technology. So Maples restricted his customers because the product he sold (or, wanted to sell in the future) was very specific.

The opposite case can work too: expanding a customer base by offering a more generic product. This is the American Picker case. People browsed the antiques but bought the t-shirts.

A business model is not static. It’s more like a philosophy combined with a Bayesian formula. It has to change with the conditions, but that starts with an awareness of one’s system.

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Systems and CAC are two of my favorite ideas. Read them all in a daily email drip on Gumroad. Find it on Amazon too.

Hiring stakeholders

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Every business has stakeholders. Each entity in “the supply chain” is a stakeholder. There are supplier stakeholders: credit card companies deciding who or not to service. There are customer stakeholders: voting with their feet. There are government stakeholders: adjusting the dials of the economic system as if it were an aquarium.

There are also employees as stakeholders.

“I think of Masterclass, I think of Coda. I think of a company that we just invested in. They’re very clear and upfront about their culture and the process. And I think that A, attracts people who are excited about that type of culture and B, by the time that somebody has actually gone through the process, it’s very clear to them what working in the company is like.” – Roseanne Wincek, Invest Like the Best, August 2021

The LTV/CAC idea applies to all stakeholders. There are many ways to lower the CAC, and it’s one of the more interesting business questions because the lower the CAC the better the business model.

But even a CAC of one doesn’t work if the LTV is zero. The most important part then is getting the right stakeholders, and the best way to do this is clarity. We are the kind of people who do this sort of work.

This isn’t easy. It’s not like a business can say: this is our business model, because alpha erodes. And, it’s not just competitor stakeholders that affect how an organization runs. Any stakeholder can change the rules. Landlords raise rents. Suppliers vertically integrate. Life changes!

Zappos once ran a campaign with a CAC of $18,500. That was inefficient. But a company who does more convincing that clarifying will have the same results: a lot invested and little to show. For instance, Ottawa Canada is a phenomenally good place to built a software company?

“If I hire someone through this very intricate hiring process that we have, there’s an understanding the chance of us still working together in ten years is really high. It’s a commitment from both sides. The company needs to be worth working for in ten years, but because of that, we can have a very different relationship than in a place where the expected tenure is eighteen months.” Tobi Lütke, The Tim Ferriss podcast, June 2020

Shopify filters employees through an “intricate hiring process.” Investment managers filter limited partners through ominous letters. Brands filter customers through advertising.

Maybe flexibility is the best way to think about stakeholders. How much do your stakeholder restrict your range of motion, and is there a way to increase ones flexibility?

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Erik Jorgenson calls analogies our mental ‘sporks’. Brilliant!. The credit card companies were top of mind because the OnlyFan payment situation was news around the same time as the episode. Visa and MasterCard have stakeholders too. Sometimes it’s situations like this that provide opportunity for a business. If someone won’t “do X”, that’s a smaller market and more of a chance to avoid alpha erosion. Lastly; CAC, alpha erosion, and stakeholders are all on the list of my favorite ideas.

Selling shirts, planning planes

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We’ve looked at a few different customer acquisition cost strategies : F1 racing, Zappos’s mistake, and P.S. I love you, from Hotmail.

The CAC ideal is to acquire the best customers for free. That’s ideal. L.L. Bean started when Leon Bean mailed his catalog to out-of-state hunters. Michael Dell sold newspaper subscriptions, but sourced his leads from the “Just Married” records. Both men found pretty-good customers for a pretty-good price.

Customer acquisition might be the most interesting puzzle in business because the lower the CAC the more flexible the business model. Today we’ll add two more.

About Mike Wolfe, of American Pickers:

“He would go from barn to barn and buy some cheap stuff, something sold in the store for fifty bucks. We would buy something like an old motorcycle that was art which we could sell for twenty grand. And each day all these people, from all over the country, would come into the store and we would probably sell five-thousand-dollars worth of items and probably thirty-thousand-dollars worth of t-shirts.” – Sam Parr, My First Million, August 2021

The American Pickers television show is the customer acquisition vehicle for selling merchandise. Brilliant right? Okay, the second one.

“Growing a financial services company is so brutally difficult, and the growth is so restrained by customer acquisition costs that it is literally worth it to start flying people around the country. That is the most cost effective way to sign people up for credit cards, and the credit card business is so lucrative it is actually worth it.” – Byrne Hobart, World of DaaS August 2021

The business model of airlines is to operate a hub location that allows for network effects and to maximize the capacity of each plane because each additional customer costs, per Hobart, a drop of fuel and bag of nuts. Hobart’s whole interview is wonderful.

Finding customers has evolved over time. When customers were rural, catalogs ruled the day. As customers moved to cities, it was the department store. Then customers got cars, and the mall and big box retail came to be. The most recent step then is to the internet. It’s the same question Bean bandied in 1912: where the customers for what I am selling?

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bonus: look for ‘lost’ monetization opportunities, like Matt Levine’s Money Stuff Bloomberg email.

Swedish-style as a service

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People love IKEA, to the effect of nearly one billion annual visits. The flat pack furniture and furnishings yields twenty-four billion euros in revenue each year. But could there be more in store for this store of galore?

One way to find business opportunities is to observe users and follow their lead. Instagram for example, developed both polls and shops (in-part) because users hacked those features before they were available. IKEA faces a similar opportunity.

If you’ve never been, IKEA is organized as an upstairs showroom and a downstairs warehouse. When a customer likes a lamp upstairs they note the aisle and bin code and when downstairs find the item. An upstairs room might look like this:
An IKEA "show room"

For larger item like couches and shelves, customers do the above and haul, unbox, and assemble their purchase. Flat packs, material selection, design choices, and scale all contribute to IKEA’s success.

Here’s the pitch: IKEA as a service.

The upstairs showrooms have appealing arrangements. It’s modern. It’s clean! For this made up start up an IKEA specialist comes to customer’s home to clean and arrange it in the flat packer’s fashion. The program includes a points program, where customers earn points toward future delivery and installation of IKEA products.

An IKEA saas offers a few advantages: recurring revenue, reduced churn, and a chance to grow their customer base. Wow Mike the house looks great, someone might say and of course I would tell them about the service, and offer my IKEA referral code.

Consider cleaning a car. My car isn’t new but it looks new after a good cleaning. The same thing occurred to college-me while shopping at The Gap. It wasn’t the clothes that looked good, it was the manikins! If I wanted to look good it wasn’t the clothes I needed, it was the body. Some number of people must do this at IKEA. Their goal is appearance and one way for that job-to-be-done is buying IKEA products.

The IKEA effect may be taken but this saas business might have great legs, like the beautiful bamboo ones available at IKEA.

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Made up start ups is an ongoing series. They’re intended to be half-tongue-in-cheek and half-serious. The point is thinking in different ways, like Tyrone.

F1 CAC

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Customer Acquisition Costs might be the most fun business topic because it offers a lot of room for creativity and a CAC near zero makes the unit economics much easier.

One way to think of CAC is like a Nigerian Prince: how do I find my ‘customers’ cheaply so that the resource intensive activities are focused on the ones most likely to ‘buy’.

Via Business Breakdowns:

“This is probably the area where Liberty has done the most in the shortest amount of time, where what’s going on behind the scenes has changed quite a bit. They’re fine with paid TV but also want to make sure there is access to live TV to keep the F1 fan base engaged.” – Arman Gokgol-Kline

There is an opportunity cost to giving away content, but that must be balanced with the customer acquisition costs down the line.

We’ve highlighted some fun CAC ideas like viral marketing (Zillow), email signatures (Hotmail), coupons (Netflix, AOL) and bundling and reframing (McDonald Happy Meal). One addition here is beauty.

This isn’t brand new. One insight that led to AOL CD proliferation was that people will open (direct) mail that feels substantial. Rory Sutherland harks on this too: no one has ever thrown away a substantial 9 x 12 package addressed to them.

This is Todd Synder’s angle. His catalogs are purposefully beautiful and meant to be left out. The aim, said Snyder, is to have the recipient’s partner see it and say something like ‘You would look great in these clothes’. This catalog angle is decades old. Sears supposedly make their catalog’s footprints slightly smaller than the competitors so that when the housewife tidied up, the Sears one came out on top.

It’s easy (but not cheap) to buy customers. It’s not simple (or easy) to have customers find you. But a low CAC has a high value.

Thanks to Tren Griffin for repeating the ideas of CAC and LTV so many times they’re a well-worn mental model.

A CAC of $18,500

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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

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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.