CAC: Customer Acquisition Chaos - The Road to a $100M Company Doesn’t Start with Product

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Sep 27, 2023

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CAC: Customer Acquisition Chaos - The Road to a $100M Company Doesn’t Start with Product

In the vast landscape of commerce, customer acquisition has always been a challenge. From the earliest recorded forms of trade with cattle to the modern global market valued at $26 trillion, businesses have been constantly striving to acquire new customers and increase their revenue. However, with the rise of digital payments and e-commerce, the dynamics of customer acquisition have evolved.

There are two primary types of shopping: search-driven shopping and discovery-driven shopping. Search-driven shopping is dominated by Amazon, which captures 74% of online shopping searches in the U.S. This dominance has enabled Amazon to build a formidable advertising business, making it one of the top global players in the industry. On the other hand, discovery-driven shopping is like wandering around a mall, browsing and stumbling upon something you might want to buy. In the U.S., social commerce has not reached the same level as in China, but companies are leveraging existing social platforms like Instagram and Facebook Marketplace to blend social and commerce.

When it comes to advertising, there are two types worth knowing: direct response advertising and brand advertising. Direct response advertising aims to make a transaction happen immediately, while brand advertising focuses on building brand equity over time. Direct response advertising accounts for approximately 80% of all digital ad spending. However, when customer acquisition costs (CACs) become too high, direct-to-consumer (DTC) brands often resort to brick-and-mortar retail locations to generate revenue.

Influencer marketing has emerged as a popular option for customer acquisition. The industry has grown rapidly from $1.7 billion in 2016 to $16.4 billion in 2022. Influencer marketing relies on upfront payments and discount codes for attribution, but often yields poor ROI and lacks efficient scalability. Brands are now seeking new channels, and one promising opportunity lies with creators. Brands want to pay only when they acquire a new customer profitably, have control over who promotes their brand, and need the ability to measure and optimize their efforts.

While customer acquisition remains a priority for businesses, the road to building a $100M company doesn't start with the product. Brian Balfour emphasizes the importance of focusing on the problem and market before searching for the solution. Understanding the market and its categories, target audience, problems, and motivations is crucial. Similarly, identifying the core value proposition, hook, time to value, and stickiness of a product is essential.

The search for market product fit is not a linear process but rather occurs through multiple cycles of iteration. It involves building an initial version of the product, identifying who derives value from it, and refining both the market and the product. Market product fit is not a binary outcome but exists on a spectrum from weak to strong. Net Promoter Score (NPS) can provide a qualitative understanding of market product fit, as it measures customers' willingness to recommend a product.

Quantitative measures like retention curves and direct traffic are also valuable indicators of market product fit. For most B2C and B2B products, flat retention curves are desirable, indicating that customers are staying engaged. Direct traffic, resulting from word-of-mouth recommendations, is another positive sign that a product is solving the target audience's problem.

Achieving market product fit is an exhilarating experience for businesses. It feels like everything is falling into place, with customers eagerly adopting the product and driving its success. To attain this, it is crucial to start with the market and identify the problems and motivations of the target audience. Market hypotheses should focus on category, target audience, problems, and motivations, while product hypotheses should revolve around core value proposition, hook, time to value, and stickiness.

In conclusion, customer acquisition remains a challenge in the ever-evolving landscape of commerce. Understanding the different forms of shopping, the types of advertising, and the opportunities provided by influencers and creators can help businesses navigate the chaotic world of customer acquisition. By prioritizing market and problem identification before developing a product, companies can increase their chances of achieving market product fit. To ensure success, businesses should combine qualitative, quantitative, and intuitive indicators to assess their market product fit and make necessary adjustments.

Actionable advice:

  • 1. Focus on understanding your target audience's problems and motivations within the market before developing a product. This will ensure that your solution aligns with their needs.
  • 2. Continuously iterate and refine your product and market hypotheses to achieve market product fit. Embrace the spectrum of weak to strong fit and leverage qualitative and quantitative indicators to evaluate your progress.
  • 3. Utilize the power of influencers and creators to reach and acquire new customers. Seek channels that allow for profitable customer acquisition and provide control and measurement capabilities.

Sources:

  • CAC: Customer Acquisition Chaos
  • The Road to a $100M Company Doesn’t Start with Product — Brian Balfour

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