India’s start-up ecosystem has been an exponential ride for the past decade as the number of recognised startups climbed over two lakhs from under 500 in 2016. Be it tech, consumer durables, BFSI or fashion and retail, new-age companies are coming up from each sector.
Moreover, the origin of the companies is not limited to top hotspots like Delhi-NCR, Mumbai, Bengaluru and Hyderabad– small towns are also producing startups.
Meanwhile, a new trend of selling products or services directly to the end consumer emerged over time, as new-age direct-to-consumer (D2C) brands. In such a scenario, If, you run a D2C company, you need to keep a clean eye on Customer Acquisition Cost (CAC)--a one of the top key metrics to scale a D2C company.
What Is CAC For D2C Brands?
We all see tons of Instagram and YouTube ads selling clothes, electronics, appliances, banking services and much more directly from brands' websites, surpassing conventional platforms. I personally see over 10 advertisements daily from different new-age clothing brands in social media feeds.
These advertisements have a ‘Buy Now’ or ’ Explore ’ call to action as one key tactic to acquire customers like me. I often land on their site through advertisements and return without buying or leaving some products in the basket. In such a case, I see more targeted advertisements for me from the same brand.
These advertisements that the brand is running, either to bring me to their website or re-targeting to sell products, are not free. Brands spend a significant portion to run these ads to acquire customers, and that cost is known as CAC or Customer Acquisition Cost.
Putting it in simple terms, Customer Acquisition Cost (CAC) is the total amount of money a business keeps aside to spend on sales and marketing to win new paying customers.
CAC Simplified: Easy Calculation
Let’s assume a D2C company spends Rs 600 on ads to sell a Rs 1200 MRP product to a consumer. In such a case, the CAC is 600. This means the company has to manage to attain profit in the remaining Rs 600. The new-age companies often sell products at a loss to acquire new consumers.
D2C companies consider money paid for online, social media, or print ads as CAC. However, some include salaries of the sales and marketing team in customer acquisition cost as well.
Why CAC Matters
The continuous monitoring of CAC helps companies to keep track of three important aspects–Efficiency of marketing campaigns, Sustainability or profitability, and Budget.
Efficiency: Tracking CAC could tell if marketing campaigns are working well as per the set pattern or goal.
Sustainability: If your CAC is higher than the money a customer spends to buy the product, the company sells the product in losses.
Guides budgets: CAC data helps companies to decide budgets–like where to invest more money for growth.