How to Lower Your Customer Acquisition Costs (CAC)

There are many ways companies can reduce customer acquisition costs (CAC), but it’s important to understand the interplay between CAC and growth in order to land on the right advertising strategy.

Understanding CAC and its relationship with growth

Efficient CAC and scale are opposing forces. Imagine your potential customers as concentric circles around your core value propositions. The innermost circle of customers feel the pain the strongest, benefit the most from your solution, and have the highest willingness to pay. This is where you start.

But as you desire more growth, you have to expand to the next circle of customers, where the “fit” is slightly worse. This continues until you reach a mass market audience that’s huge, but is a lot harder to convert than the innermost circle.

When choosing a business to start or join, it’s important to consider how niche vs. mass market you believe the core value propositions to be, as it will directly impact your ability to scale a marketing program.

Product-market fit should be considered as different for different circles, typically getting diluted as you move outwards.

Many companies have product-market fit with the innermost circle of customers, but when they try to expand to bigger and broader audiences, they find those markets are different and the product actually isn’t compelling enough to produce the desired CAC.

The tradeoff between CAC and growth: Why efficiency and scale compete

A mandate to increase customer growth puts upward pressure on CAC, and a mandate to reduce CAC puts downward pressure on growth.

Imagine CAC and growth on a curve: 

Assuming “perfect information” and “all else is equal,” growth comes at the expense of efficiency and vice versa. You simply move along the curve based on your desired balance of CAC and customer growth. 

The problem for marketers is that CEOs and BODs are rarely satisfied with growth at a much higher CAC, nor are they content when CAC targets are hit, but growth goals are missed. No, usually CEOs and BODs want marketing to shift the curve. They want more growth tomorrow at today’s CAC or a lower CAC tomorrow at today’s growth numbers.

How to shift the curve and reduce CAC effectively

So how do you shift the curve? You have to break one of the assumptions we made. 

Perfect information: Improving audience understanding and segmentation

“Perfect information” means we know exactly who we are selling to and why they are interested. In other words, we fully understand the attributes of each of the concentric circles. Furthermore, we know exactly how to reach them most efficiently.

For each concentric circle, we know not only the channels we can use to reach them; we know the economics of reaching them through every conceivable channel in order to reach them efficiently.

And finally, we know exactly how to pitch them with words, sounds, and visuals to most efficiently help them realize our product is the right solution for them.

Of course, as defined above, “perfect information” is only theoretical. So how do we lower CAC without sacrificing growth? We make the information more perfect.

• Product marketing. We strive to better segment our audiences and deeply understand their pain and how our solution will solve it.
• Growth marketing. We strive to know and test all of the high potential channels to reach each audience most effectively and affordably.‍
• Sales and performance creative. We strive to find the right combination of creative inputs, within different constraints for different channels, to most effectively convert prospects to customers.

Optimizing growth channels for efficiency

Step function improvements in audience understanding, growth channel execution, and/or conversion optimization and selling will shift the curve.

Generally speaking, we advise CEOs and BODs to strive for continuous improvements and to ensure conclusions are data driven and institutionalized to avoid starting over again every time a new marketing leader comes in with their own “playbook.”

Other business variables that impact CAC

The other assumption underpinning the direct relationship between CAC and growth is “all else is equal.” So what is “all else”? A few common ones worth consideration include: 

• Your product’s capabilities, features, and pricing. An improving product is the number one way to shift the curve in a major way. Imagine a feature that dramatically increases the utility customers get from the product and separates your company from the competition. Every concentric circle of customers’ willingness to pay increases, and conversion rate with it. Similarly, if the price of your existing product changes, it shifts the curve accordingly. 
• Demand for your category as a whole. In emerging categories, the innermost circle of customers may have 5,000 prospects that can be acquired at $50 each. If demand for the category increases by 50% and your market share remains constant, you can now acquire 7,500 prospects at the same CAC of $50 each (i.e., not at a higher CAC). 
• Your company’s market share. Let’s assume you could acquire 100,000 customers at $50 each with 10% market share. Even if the category demand doesn’t increase, if your market share goes up to 20%, you have an incremental 100,000 customers that can be acquired at $50 each. Market share gains may result from competitors’ actions or inactions, even if you’ve changed nothing. 
• Your brand awareness. Reputation is an important variable that directly impacts conversion optimization—and therefore CAC. Over time, brand awareness typically grows and provides a tail wind with respect to shifting the curve. However, it’s not always positive. Companies that go through a scandal often experience a shift of the CAC/growth curve to the left, making it harder to maintain historical growth rates without paying a much higher CAC. 

This list is certainly not comprehensive, but includes most of the common variables that shift the curve. Importantly, shifting the curves with “other variables” is typically much more cross-functional than marketing with “more perfect” information.

Why CAC is a business KPI, not just a marketing KPI

CAC is a business KPI, not a marketing KPI. The other variables are a hatchet; marketing execution is a scalpel. Marketing gets far too much credit and blame, in my view. Companies should task their leadership teams, not just a growth leader, with shifting the curve in order to have more flexibility to move along the CAC/growth curve profitability and at whatever scale is desired. 

By focusing on refining audience targeting, optimizing marketing channels, and enhancing product-market fit, businesses can achieve sustainable growth while maintaining a healthy CAC. 

‍Interested in discussing customer acquisition costs and/or your growth strategy with a senior marketer at Right Side Up? We’d love to chat—drop us a line and we’ll be in touch.