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Steve Blank - Customer Acquisition Cost in Digital Channels
Customers bring in revenue... but before they do, they cost money. You have to invest to acquire a customer. This is called CAC (customer acquisition cost). It’s very important for startups to know this number in order to create a financial plan based on it.
It looks so promising. We’ve started four advertising campaigns, among others on Google through AdWords, on Facebook, Twitter Ads… Our budget was 10,000 euros and our first goal is getting 500,000 users on our platform. It seems to have worked, so let’s calculate: 10,000 euros for 500,000 visitors equals 2 cents per visitor. Of these visitors, at least 10% have created an account, so 50,000. This has, in fact, cost us a little more, namely 10,000 euros for 50,000 accounts and therefore 20 cents per account created. Of these 50,000 accounts, only 0,1% have switched to a paid account on alugha, and in this case only to the cheapest plan. So we got 50 paid accounts. The campaign budget was 10,000 euros and in the end we got 50 paying customers, which is a conversion rate of 200 euros per customer.
First of all, it has to be said that this rate isn’t so bad and, in all fairness, we have to look at some of the additional positive effects. Our platform was visited by 500,000 people, so we did something to increase our brand awareness. Consequently, we got 50,000 accounts, and even though they don’t pay anything we have them “in the bag” and we can actively factor them into our platform and thus increase the appeal for our future producers. What’s interesting is that we now receive a steady income over an extended period of time because the paying customers pay 39 euros per month with which we can start additional campaigns. It’s important to realize that the investment can be split into several positive effects and so we can better evaluate the investment and therefore minimize the risk slightly.
Here, we use several providers to start the same campaign at the same time with the same budget. We always let them run for about a week and then compare them. This lets you optimize your expenses and goals, and quickly recognize if a campaign on a platform is worth it. When both the campaign and the advertising platform are suitable, we approve a higher budget and constantly check the performance. As a startup, you should definitely heed this because the money is faster gone than customers take the bait.
Even though the video uses a digital product as a basis, it works exactly the same way for physical products.
This article is written by our CEO, Bernd Korz. With his experience as an entrepreneur, he shares his vision about the lessons provided by Steve Blank. Join us every week for a new article on Steve Blank’s lectures.
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