What Is Your Customer Acquisition Cost Online?
I have watched some Shark Tank episodes lately. Every time a business would sell entirely online direct-to-consumer, a shark will inevitably ask about their customer acquisition cost (CAC).
CAC is the cost of winning a customer to purchase a product/service. There are two major problems around this concept.
First, CAC is often compared with customer lifetime value (LTV). If LTV is higher than CAC, then you have a viable business model. Was there ever a more simplistic and naïve notion than this? CAC and LTV have different time horizons. While the duopoly (Facebook and Google) allow for some attribution (CAC estimation), I don´t know which fortune teller can estimate LTV.
Second, the CAC concept suggests a myopic view of online advertising, skewed towards short-term activation (a.k.a. sales). Putting your entire marketing budget towards activation will give you the highest return in the short term. However, in the long term you’ll have the highest return with a combination of activation and brand-building.
Conclusion: The overinvestment in and concentration on customer acquisition cost imply a tremendous potential for online direct-to-consumer businesses to benefit from brand advertising.