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Decoding Growth: The Ultimate Startup Guide to Reducing Customer Acquisition Cost (CAC)

Contributed by Boniface Pascalraj who leads the incubation program at SSN iFound. This article was first published in his personal blog.

In the world of startups, customer acquisition is a crucial factor for success. It is a critical metric for startups as it measures the cost of acquiring a new customer. However, the cost associated with acquiring customers can significantly impact a company’s profitability and sustainability. This is where the concept of Customer Acquisition Cost (CAC) comes in. In this blog, we will explore the basics of CAC, its impact on different business models, and strategies to reduce CAC.

WHAT IS CUSTOMER ACQUISITION COST (CAC)?

Customer Acquisition Cost (CAC) is the cost of acquiring a new customer. It includes all the costs associated with marketing and sales efforts, such as advertising, events, promotions, and salaries. To calculate CAC, you need to divide the total cost of acquiring customers by the number of new customers acquired during a specific time period.

For example, if you spend INR. 8 lakhs ($10,000) on marketing and sales monthly and acquire 100 new customers, your CAC is INR. 8,000 ($100).

WHY CAC IS IMPORTANT FOR STARTUPS?

The cost per acquisition (CAC) is a crucial measure for organizations because it enables them to determine how much they must spend to bring on new clients and whether this expense is reasonable given the income these clients will bring in. More profitability and a higher return on investment (ROI) from marketing and sales initiatives are typically implied by lower CAC.

DIFFERENT BUSINESS MODELS THAT USE CAC

Customer acquisition cost (CAC) is a crucial indicator for any organization that depends on gaining new clients to expand and make money. Here are a few business models that frequently employ CAC:

E-commerce: Online merchants like Amazon, Flipkart, and Myntra use the cost-per-acquisition (CAC) metric to assess the expense of bringing in new clients using a variety of marketing channels like social media, search engine marketing, and affiliate marketing.

Subscription-based services: Businesses that provide subscription-based services, such as Netflix, Spotify, and Amazon Prime Video, utilise CAC to estimate the expense of bringing in new customers through different marketing channels.

On-demand services: Platforms that provide on-demand services like Uber, Ola, and Swiggy employ CAC to calculate the expense of bringing in new clients through different marketing strategies like referral programmes, paid promotions, and joint ventures with other companies.

Edtech: Online learning platforms like Byju’s, Unacademy, and Vedantu use CAC to gauge the expense of bringing on new customers through a variety of marketing channels like search engine marketing, social media marketing, and content marketing.

Financial services: Fintech companies like Paytm, Policy Bazaar, and Zerodha, as well as traditional ones, utilize CAC to calculate the expense of recruiting new clients through a variety of marketing channels like email marketing, direct mail, and sponsored commercials.

REAL-TIME EXAMPLES OF CAC FROM INDIAN STARTUPS

Flipkart: According to a report by RedSeer, Flipkart’s CAC for FY21 was estimated to be around Rs. 225-250 per customer. It’s important to note that this is an estimate and may not be entirely accurate. Additionally, CAC can also vary depending on the specific business unit or vertical within Flipkart that is being analyzed.

Paytm: According to their financials for FY21, their CAC was Rs. 20 (approximate figure).

Zomato: According to their financials for FY21, their CAC was Rs. 214 (approximate figure).

BYJU’S: According to their financials for FY21, their CAC was Rs. 3,963 (approximate figure).

BENCHMARK CAC FOR DIFFERENT DOMAINS

E-Commerce: The average CAC for Indian e-commerce enterprises is between INR 1,500 and 2,000 ($20 and $27) per customer, according to a survey by KPMG India in 2020. Yet, this can differ significantly depending on the sector and marketing approach being employed. However, according to industry experts, a general benchmark for CAC in Indian ecommerce startups is 15-20% of the customer’s lifetime value (LTV). For instance, due to the greater degree of competition and the requirement for more specialised marketing, e-commerce businesses in the fashion and beauty sectors may have higher CACs than those in the electronics sectors.

Subscription-based models: With Indian startups adopting subscription-based business models, the benchmark CAC can change depending on the sector, the product or service, and the target market. Nonetheless, 3-5 times the monthly subscription fee serves as a typical baseline for CAC in subscription-based organisations.

For instance, the benchmark CAC would be around INR 3000-5000 if a subscription-based firm charges INR 1000 per month for its good or service. As a result, the business should work to recruit clients for a price that is no higher than 3-5 times the cost of a monthly membership.

On-demand services: The industry, service offering, and target market can all affect the benchmark CAC for on-demand services. Yet, a typical CAC benchmark for on-demand services is 10–20% of the lifetime value of the customer (LTV).

For instance, the benchmark CAC would be between INR 1,000 and INR 2,000 if a customer’s LTV was INR 10,000. As a result, the on-demand service startup should strive to attract consumers for a cost that is no higher than 10–20% of the customer’s LTV.

Edtech: The benchmark CAC for Indian startups in Edtech domains can vary depending on various factors such as the type of product, target audience, and marketing channels used. However, according to industry experts, a general benchmark for CAC for Edtech startups is 20-25% of the customer’s lifetime value (LTV).

Fintech: Similar to edtech firms, the benchmark CAC for finance startups might range from 10% to 15% of the customer’s lifetime value (LTV).

STRATEGIES TO REDUCE CAC

Especially when working on a tight budget, lowering customer acquisition cost (CAC) is a major problem for startups and organisations. These are some methods for lowering CAC:

Marketing through referrals: Encouraging current customers to refer their friends and family to your company in exchange for rewards like discounts or rebates. A highly efficient and reasonably priced method of acquiring new clients is referral marketing. This strategy was adopted by firms like Google Pay, Ola, and others to attract new clients.

Content Marketing: Generate valuable material for your target audience through content marketing. With increasing traffic to your website and social media pages, you can enhance brand recognition and customer acquisition.

Advertising on social media: Targeting particular audiences and increasing website traffic may both be done at a reasonable price with social media advertising. Advanced targeting tools are available on platforms like Facebook and Instagram, which can help you reach your desired clients more cheaply.

SEO optimisation: To increase your visibility and draw in organic visitors, optimise your website’s content and design for search engines. Without using paid promotion, this may enhance brand recognition and consumer acquisition.

Collaborations and partnerships: Work with other companies or industry leaders to reach new audiences and increase customer acquisition. By sharing marketing expenses and utilising one another’s networks, this can lower CAC.

Keeping current customers: Finding new clients can be more expensive than keeping current ones. To keep consumers coming back, concentrate on offering great customer service, offering value-added services, and rewarding loyalty.

In general, lowering CAC necessitates a blend of clever marketing tactics, successful customer retention, and a focus on providing value to your clients. You can lower CAC and boost your bottom line by optimising your marketing channels and offering a satisfying customer experience.

IMPACT OF CUSTOMER RETENTION ON CAC

Customer acquisition costs may be significantly impacted by client retention (CAC). Because less money needs to be spent on marketing and promotion, keeping current customers might be more cost-effective than finding new ones. Customers are more likely to make repeat purchases and refer a firm to others when they are happy with the goods or services they receive, which can lead to more sales and revenue.

Also, retaining customers can aid in lowering the churn rate, which is the proportion of customers that discontinue utilising a good or service over time. A high rate of losing customers might raise CAC because the company must continually bring in new clients to make up for those that leave. Hence, lowering CAC and increasing client retention can result in increased profitability, and sustainable growth.

Certainly, it is possible to keep customers by offering superior customer service, providing individualised experiences, recognising loyalty, and consistently enhancing the good or service. Maintaining constant contact with customers, giving them helpful resources and support, and quickly responding to their issues can all aid in client retention.

It is crucial to remember that customer retention is a continual process that calls for ongoing efforts and expenditures. Businesses can decrease CAC, boost revenue, and develop a devoted client base that can aid them in achieving long-term success by putting a high priority on customer happiness and retention.

IMPACT OF CAC ON PROFITABILITY

Customer acquisition cost (CAC) can significantly affect a company’s profitability. Lower profit margins and lower profitability can result from high client acquisition costs.

CAC’s SIGNIFICANCE IN FUNDRAISING
A big part of getting money for companies is CAC. Investors often examine a company’s CAC because it offers information about its ability to gain customers effectively and sustainably. A low CAC shows that the business has a good strategy for acquiring customers and is able to make money from those clients.

The company may be spending a lot of money on customer acquisition, which could have an influence on its long-term profitability if its CAC is high, which can be a warning indicator for investors. If the CAC is high, investors can also wonder whether the company’s rise is sustainable.

In order to convince investors that they have a viable and effective customer acquisition strategy, it is imperative for businesses to concentrate on lowering their CAC. This may enable startups to obtain capital at more advantageous rates and valuations.

Additionally, startups can utilise CAC as a metric to assess the success of their sales and marketing initiatives. Startups can find areas for improvement and modify their customer acquisition strategy by tracking their CAC over time.

In general, companies should closely monitor their CAC and strive to maintain it low in order to draw investors and show their capacity for sustainable growth.

ADVANTAGES AND LIMITATIONS OF CAC

While CAC can offer useful information regarding the success of marketing efforts and assist firms in making data-driven decisions about resource allocation, it also has its limitations.

Advantages

Measures marketing effectiveness: CAC provides a clear picture of the cost incurred to acquire each consumer, which aids in measuring the success of marketing campaigns. As a result, businesses may determine which marketing channels work best for bringing in new clients and tailor their marketing budgets appropriately.

Decision-making is facilitated by CAC, which aids organisations in choosing where to deploy their resources based on data. Businesses may choose which channels to invest in and which to forego by knowing the expense of obtaining a customer.

Helps in forecasting: By calculating the expense necessary to attract new clients, CAC can assist firms in predicting their growth and income. The predicted income and the overall cost of scaling the business can then be calculated using this information.

Limitations

Calculating CAC can be challenging because it entails factoring in a number of factors, including marketing costs, sales commissions, and other administrative costs. Accurate CAC calculation might be difficult for firms due to its complexity.

Perhaps not accurate: The timeframe for which the CAC is being estimated, the particular marketing channels used, and the industry are just a few examples of the variables that may have an impact on this estimate. The real cost of acquiring a customer may therefore differ from the CAC estimate.

Customer lifetime value is ignored: CAC does not account for a customer’s potential value over the course of their relationship. In other words, if a company anticipates making more money from a customer in the future, they may be ready to spend more to get them.

In conclusion, CAC is a critical metric that provides valuable insights into a startup’s customer acquisition strategy and its ability to generate revenue. Startups should focus on CAC to ensure the sustainability and profitability of their business. Startups can achieve this by keeping their CAC low by implementing effective marketing and sales strategies, improving customer retention, and reducing costs wherever possible. Startups can position themselves for sustainable growth and attract the attention of potential investors by keeping a close eye on CAC and continuously striving to improve it. By understanding the concept of CAC, startups can develop effective customer acquisition strategies, optimize their marketing and sales efforts, and attract investors. It is essential to continuously monitor and reduce CAC while prioritizing customer retention to achieve long-term success.

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