Is CAC the New Rent?

Traditional brands are familiar with paying a monthly rent to house their products in a brick-and-mortar. In the new age of rising digital advertising costs, the expense of driving traffic, nevertheless acquiring a customer, is inching closer and closer to the cost of traditional rent.

Customer acquisition cost (CAC) has essentially become the new rent for online advertisers. As competition on auction-based platforms continues to increase so does CAC due to brands bidding more for the same real-estate (i.e. news feed, stories, or search results).

Direct to consumer (DTC) brands, in particular, understand the tradeoffs of rising CAC and they’re taking the following measures to scale efficiently and effectively.

An omni-channel approach to growth

Build out an omni-channel strategy that serves customers in a way that creates an integrated and cohesive experience no matter how or where target consumers find the brand (online or offline). Today, in-store sales represent 90% of total retail sales. For brands, it’s not a question of online or offline, but rather a question of how to maintain brand integrity across several touch points, and how to do that in an efficient and scalable way.

For early stage digital-only brands, consider the chart below as you strategize to maintain a healthy CAC.

As ad spend increases for a brand, being overly dependent on one or two acquisition channels introduces high platform risk. Early stage consumer brands understand the positive impact Facebook and Google ads have on their paid acquisition, therefore, they deploy a meaningful amount of cash to get traction. Successful DTC brands, however, look to diversify quickly and start investing in branding efforts, public relations, organic search and word of mouth.

Almost all brands that want to become big businesses need to expand offline by either opening up their own retail storefronts or partnering with big box retailers. Hitting a digital ceiling is inevitable. Even Kylie Cosmetics is looking to partner with Ulta to influence revenue growth.

Develop smart analytics and measurement strategies

An important rule to consider when measuring data is to avoid looking at blended CAC as a metric for success. To some extent, it is reasonable to focus on this in the early stages of growth, however, long-term brand success should never be dependent on blended CAC. At scale, there will be enough word-of-mouth and awareness of your brand, where looking at blended CAC will not service you well. It instead becomes misleading.

Andrew Chen, a general partner at Andreessen Horowitz, warns brands to not become infatuated with the blended CAC model. He often discusses the idea that if you optimize based off your blended CAC, then over time your blended CAC will simply reflect the CAC of your brand’s dominate channel. And I couldn’t agree more.

Consider the following when evaluating performance:

• Examine each ad platform separately to get a valid attribution report.
• The customer journey is non-linear and there will be multiple touch points during the consideration phase.
• Last click attribution models do not work in a cross-device, multi-platform world.
• Less than 2% of people will convert on first-click-same-session. Yet every brand desires this outcome.
• If you rely heavily on FB ads, then it’s important to know that majority of of people that purchase products do not click on ads.

Measurement and attribution is half-science-half-art. Agency partners and in-house teams need to work together to answer important questions like: how many impressions does it take to influence purchase intent?

Model out your LTV/CAC ratio

The lifetime value (LTV) to CAC ratio is mission critical for brands to model out when they start scaling ad spend. Once a brand determines their ideal ratio, they become more informed with their paid acquisition strategy.

LTV should not be viewed as revenue per customer. After combining cost of goods, warehousing, packaging, shipping, and other associated costs that are taken into account, brands can then look at the incremental profit that is generated from that customer.

Today, it’s not difficult to build a $10M e-commerce business, but majority of those businesses are not that valuable and multipliers are not very attractive. Brands who wish to become valuable businesses must think about mass awareness and an omni-channel experience. Spending money to make money on pure-play return on ad spend (ROAS) will slow down eventually and that’s when the LTV/CAC ratio comes into play.

Go offline. A brand that starts on digital does not have to continue to only build on digital. This Inc. article identifies many successful DNVBs that began online and transitioned offline.

Focus on EBITDA. For venture-backed companies, raising capital to deploy into acquisition and marketing can sometimes be a tricky game to play. There’s an immense amount of value VC funds bring to DTC brands, but oftentimes high expectations and exponential growth targets push the brand to spend more even if CACs significantly increase over time. This creates a vicious cycle as brands will continue to raise money to focus on growth and not enough on efficiency or profitability.

Please note: It’s okay to have a negative EBITDA during early growth stages, but brands should know exactly when they plan to become EBITDA positive.

CAC is the new rent. Online retailers have the ability to reach people based on site traffic, lookalike segments, interests, behaviors, jobs, and the list goes on. The cost of rent has indeed gone up, but at a price that leads to real conversions. Next generation of DTC brands will hopefully diversify acquisition efforts early-on and take an omni-channel approach to scaling.

Picture credit goes to vccafe.com.