Marketing

Is CAC the New Rent?

Faheem Siddiqi / October 18, 2018

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.

Cost per acquisition (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 a rising CAC. It’s an undeniable fact that CAC goes up over time. However, that doesn’t necessarily translate to brands being unable to scale efficiently and effectively.

There are three key ways to combat rising CACs and scale successfully.

Taking an Omni-Channel Approach To Growth

Build out an omnichannel 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.

Is CAC the New Rent

As ad spend increases, being overly dependent on one or two acquisition channels negatively impacts CAC, leading to 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 DNVBs, however, look to diversify quickly and start investing in branding efforts, public relations (PR), 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 wholesalers. Hitting a digital ceiling is inevitable, even Kylie Cosmetics is looking to partner with Ulta to influence revenue growth.

Developing Smart Analytics and Measurement Tactics

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 should 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 on your blended CAC, then over time your blended CAC will simply reflect the CAC of your brand’s dominate channel.

Consider the following when evaluating ad performance:

Examine advertising platforms 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; albeit every brand desires this outcome

Measurement and attribution are 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?

Constructing a Healthy Lifetime Value (LTV) Over CAC Ratio

The LTV/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 the 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 the 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 omnichannel experience. Spending money to make money stops working at one point and that’s when the LTV/CAC ratio comes into play.

Additional things to consider:

Go offline. A brand that starts on digital does not have to continue to only build on digital. This article featured on Inc. identifies many successful DNVBs that began online and transitioned offline. Given that CAC’s rise over time, in reference to the previous chart, within 2-3 years of establishment, brands should consider the omnichannel approach of introducing new product categories, markets, and channels. In fact, most brands should begin thinking about this day one.
Focus on EBITDA. For venture-backed brands, 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 it means CACs double or triple 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. Note: EBITDA is earnings before interest, taxes, depreciation, and amortization
CAC is the new “rent.” Online retailers have the ability to track their audiences likes, interests, hobbies, jobs, the list goes on. Perhaps the cost of “rent” has gone up, but at a price that leads to real conversions. With collected data, brands are now able to provide their audience with better service, product improvements and the list of advantages go on. Be mindful of the platform risk you run into if you remain dependent on one channel, with an acute POV on your business. Instead, take the omnichannel route to expand brand presence.