Customer acquisition cost is the lifeblood of a startup
It literally makes or breaks you. To get more technical, the holy grail of startups is to get to positive unit economics. If you go into a funding pitch with positive unit economics; the VC’s first question will be — why do you need our cash, you can self-fund through profits. Their second question will be, where do I sign? Positive unit economics is, in practice, incredibly difficult to achieve – especially if you are a marketplace, selling a SaaS product, or more generally, are in a competitive space.
Higher margin = higher CAC
Typically in higher margin businesses you’ll see higher acquisition costs. As the market gets more competitive, incumbents and new entrants sacrifice an increasing amount of their margin in order to win the customers. Keep in mind, if your margin is £400 and your CAC is £395, as long as you have enough ammo, you have positive unit economics and should push hard to win marketshare.
The area where some startups start to slip up is by running to long in negative unit economics. This means they are paying more for the customer than they’ll make through LTV. This is fine to start with, but as you burn through your cash, and keep returning to investors without showing meaningful progress on the CAC / LTV equation, some will start to lose faith.
There is no magical fix
Startups, CEOs, and growth marketers sometimes lie to themselves, thinking that they’ll either reduce it through a new mystical innovative marketing channel, or through increasing LTV. When reality is — they’ll struggle in the long run as the market gets more competitive to really get a rein on the spend.
Focus on differentiated channels from the outset
This is why it’s important to focus on differentiated acquisition strategies from the outset rather than just digital spend. Jumping straight into Google Adwords (PPC) is a death march for some industries; for example, getting on the front page of an insurance related term is suicide — I’ve got it under good authority that the PPC managers of the large insurance incumbents will notice new entrants and push up their maximum bids, effectively entering a spending war, one in which the new entrants simply can’t compete on.
For smaller more niche players, having a good email distribution list, powered through quality content and inbound may suffice. For someone wanting to enter a more competitive, more expensive market, such as insurance, you need to think out of the box.
Take GymShark as an example, the number of sportswear brands launching over the past few years has been unprecedented, that’s not even touching on the fact that it was already a competitive market to start with. However, the guys at GymShark where one of the first to really understand influencer marketing, they were able to arbitrage the market by being first to a new channel. As a result they have become a leading player in the space, with a community of very vocal fans. There’s a more detailed post on their specific growth here.
Thanks for reading this quick deep dive. I might start doing this every week, let me know if you’d like to see more posts like this!