Why Your CAC Doesn’t Matter
You’ve heard it said, “It's not the size of the dog in the fight, it's the size of the fight in the dog”. That quote is first attributed to Mark Twain, though it has been invoked by many others General Dwight D. Eisenhower to retired Ohio State football coach Woody Hayes.
Meant to remind people to never sell anyone short based on their outward appearance, I found a connection to content with that quote in an article I discovered this week. In a slightly stretched application of the Mark Twain quote to content, I’d say “it’s not always the date when the article was published, it’s the importance of the content in the article that matters.”
Forerunner is an early stage venture capital firm that focuses on investment that create “intentional transformation rather than disruptive chaos”. They seek companies operating at the intersection of “shifting behaviors, unmet needs, and business model transformation” to find opportunities to build “influential, culture-transforming companies.”
I was doing research in Table22 this week, a 2020 start up with products and services designed to help restaurants generate incremental new revenue through subscriptions, including memberships, CPG products, and events. Through that research I found an article written by Jason Bornstein, Partner and Head of Research at Forerunner. The opening sentence caught my eye “The brands of the next decade will win with loyalty, not acquisition.”
Jason notes that he was leading acquisition at Bonobos - a pioneering digital apparel brand for men founded in 2007, and one of the first to reach scale with $100M+ in funding backed by Forerunner, Lightspeed and Accel – at the time he first encountered Forerunner.
Why should you care about this?
Bornstein starts with the premise that 10 or so years ago, building a brand was relatively easy, but scaling was a challenge. Today, the opposite is true, technology is available for most brands to scale and grow but cutting through the noise of a crowded marketplace is the bigger challenge.
In other words, all the tools are available to build a big business, and your success is going to be determined by your ability to establish brand awareness, recognition, and trust. He illustrates the growth of Facebook advertising revenue and the number of Shopify merchants over a ten-year period ending in 2020 as evidence of how noisy the market is today.
The Tension between Acquisition, Growth and Retention
In our most recent Loyalty Academy™ workshop, we had a thorough discussion of the tension between acquisition and growth/retention. While organizations tout their commitment to customer centricity, they continue to dedicate marketing budgets to acquisition efforts. In my view, acquisition is necessary in specific parts of the business growth cycle, but failure to shift investment to develop customer loyalty means the brand can be stuck in a cycle of continuous customer churn.
Capitulating to a long term pattern of customer churn will diminish brand value over time. There is nothing beyond the transactional to get customers in the door and when they leave for a competitor – or maybe bounce between competitors and your organization – they do so with no brand remorse.
The Power of Loyalty
The power of loyalty is illustrated in this article as I haven’t seen it before, except in some work done by Phil Rubin, Founder Grey Space Matters while he was operating his strategy firm rDialogue. Examples:
- Nike members account for 70% of sales in newly opened stores
- Amazon Prime members spend 2.3X more than non-members
- Marriott Bonvoy members book 50% of rooms
- Ulta members drove 95% of sales
- Nordstrom members spend 4x more than non-members
If we are to capably illustrate the power of loyalty to C-Suite stakeholders, we need to take this top line view of loyalty outcomes and also think of the comprehensive value that customer loyalty delivers to the business with the same mindset as an investor. Bornstein highlights these reasons to lead with loyalty:
- Foster defensible brand enthusiasm
- Create predictable repeat revenue
- Generate higher customer lifetime value
- Offer a compelling acquisition hook
- Delver increased CAC (cost to acquire a customer) thresholds
As he tells the story, Bonobos stayed focused on acquisition for the first 6 years of its existence. The company focused on CAC (cost to acquire a customer) but did not create a framework to target and measure Lifetime Customer Value (LTV) until later in its development. Their highest priority metric was a ration of LTV to CAC (3x LTV: CAC) and CAC was the darling of the equation, receiving more attention and resources than LTV.
A chart on public company marketing spend shows how early-stage companies spend much more as a percent of revenue on marketing than mature companies, some as high as 64% of revenue. Most of this investment is made in support of top of funnel efforts, i.e., acquisition and the author contends that a plan for reallocation towards customer loyalty should occur much earlier in the growth cycle.
The Untapped Potential of Customer Loyalty
Bornstein’s prediction of the future (made in 2020 as the pandemic was in full gear) is very much on target. He says, “the timeliness of loyalty is especially relevant in the context of Gen Z’s emerging purchasing power and brand loyalty, the increasing scrutiny on data privacy that will limit targeted advertising, and the lessening influence of traditional department store and travel reward programs.”
He continues “The loyalty landscape is shifting: a path is emerging for venture-backed brands and platforms, long-tail merchants and SMBs alike to create compelling and modern loyalty offerings that have previously been reserved for incumbent at-scale brands and platforms. Successful strategies will vary by category, business model and scale.”
There is more detail in this article which you can read here, but the points made that warrant a review of a 2020 article support my opening statement about the quality of content ruling at times over its vintage.
Brands continue to struggle to rationalize the balance of marketing budgets between acquisition and growth/retention while at the same time the loyalty marketing community wrestles with creating quantitative support for the full attribution of value that a customer loyalty strategy can generate - at least in sufficient form to convince the C-Suite that their ideas should rise to the top of the investment stack.
At Wise Marketer Group, we are transforming the traditional transactional based customer loyalty economic models to be more inclusive of other sources of value creation. We tested some of these ideas in recent presentations at the BIG Handshake and in our Loyalty Academy™ CLMP™ workshop and we will share these with members of our CLMP™ community. We encourage you to become part of that community and join us in this journey to better document and prove the value of customer centricity to any business.
