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TODAY’S STORY
20 Aug
,
2022

Clear your CAChe

Customers who pay for the services or products determine if the business will flourish or perish in the long term. If you are wondering why we are stating the obvious, read on.

We have grown accustomed to advertisements. Indifferent rather.

Traditionally,  television ads, radio jingles and newspaper covers determined the reach of a business. Now, in addition to the traditional media,  social media apps and internet websites influence the reach of a business.

But, reach never guarantees acquisition.

But first, let us see some tactics businesses trying to enter a market have been using to acquire new customers.

Discounts:

Discounts for the first-time purchase. I have come across multiple D2C stores and e-commerce websites that use first-time user discounts to lure customers. These discounts are often conditional, and available only after one creates an account on the store website or downloads the app and places their first order.

(Learn how to do discounts well, here.)

Cashbacks:

I remember downloading GPay when I saw one of my friends receive a significant cashback for making a payment via the app. I used to wonder how feasible it was to use the cashback to get the first few customers. The subsequent decrease and disappearance of cashback amounts from Gpay made me realise how Google had successfully incentivised me to use their product. I realised much later that Google paid me to create a habit of using their app.

(But did it really work?)

Free samples:

Businesses that sell small ticket consumable goods like soups, sauces, biscuits or hair oil regularly attach sachets in newspapers or set up kiosks in malls to get their first consumers. A free sample is the most tangible incentive a business can offer but it isn't feasible for all products.

Trial period offers:

Software-as-a-service (SaaS) businesses rely on this method to offer the customer a real-time experience of using their product for a limited time.

Mystery offers and exclusivity:

I remember Cred and Clubhouse as invite-only apps when they entered the market. The Ikea store in Mumbai had a strict pre-booking policy in the first six months of its launch.

Referral Programmes:

So many chain businesses like Amway, and Tupperware depend immensely on the success of referrals given by each customer. Yesterday, we talked about our own experience with them, you can read it here.

Now, here's the thing.

The strategies to acquire customers should also double up as ways to gather feedback for their products. A business post-launch aims to get the first set of customers quickly and become memorable within its target audience.

While building customer reach and awareness about the business is hygienic, figuring out the methods employed to get the first 100-1000 paying customers and retain them makes the business healthy.

The money spent on acquiring this set of customers via marketing and other growth tactics is called the customer acquisition cost (CAC).

You can think of CAC as an overhead cost that a business incurs over and above the cost of manufacturing a product.

In some sense, CAC is the cost borne by the business to fight customer indifference.

For everyday essentials, a customer usually depends on the brand choices made in their household. These choices remain unchallenged until a later stage in life when they become income-earners. For infrequently purchased goods, a customer will look for discounts, alternatives, and offers.Customer indifference can be made sense of for the following reasons.

  1. The products and services are replaceable commodities
  2. Price over quality is a bigger determinant of which product is bought for such products

It is also useful to note that price is an objective variable, extremely visible and can be easily manipulated to lure a customer in. Quality is the subjective variable usually realised post-purchase.

Now you might be wondering where I’m going with this line of thought.

I think these tactics miss the forest for the trees — which is building product stickiness and differentiation.

Since the methods employed by a business to gather the first 100 customers are very similar to those employed by its competitor, a business's health is always defined by how it does business after spending on customer acquisition.

Customers are bombarded with brand awareness campaigns from the same category of products. Naturally, they react by gaming the incentives provided when making a purchase.

At present, I have three payment apps on my phone, Google Pay, PayTM, and PhonePe. As a customer, I am least bothered by which of these apps I use because my goal of convenience is met one way or another. There is no differentiation. As a business if enabling payments was my raison d’etre, I now have to look at other ways of getting customers to my platform and diversifying my services.

Another instance when I’ve noticed this is while ordering food. I’ve checked which coupons are applicable for my order and try my best to get the best deal possible. In both experiences, the end job an app does is totally identical to what another app in the same category allows for. A business reacting by spending more on customer acquisition without focusing on stickiness and differentiation thus ends up in a wild goose chase.

How to avoid the wild goose chase

Products need to have a real differentiation outside of acquisition hacks.

Too many performance marketers get hung up on optimizing single metrics like CAC, retention, sign-ups, subscriptions, etc. while missing the forest for the trees. A business that falls in the trap of fixating on tactics is trying to solve a math problem without coding in the right variables that matter for long-term stickiness.

The aim of the customer acquisition efforts should be to understand customer needs, make advancements in the product and create feedback loops that make the good, better. This form of sensibility may not apply to fast-moving consumer goods but is most useful where the ticket size is high.

The other day my friend told me about his experience of buying a Kindle from Amazon. He shared that soon after buying the kindle it got stuck while transferring the books from the older device. He raised a complaint and Amazon sent a  new device the very next morning and took the dysfunctional piece back. No questions asked. Even though Amazon competes with multiple e-commerce apps providing the same services, they create customer stickiness because of their "customer first" motton and the subsequent amount of trust they bestow in the customers.

In business news and conversations, calculating CAC, and the lifetime value of customers get so much importance that it is easy to forget how humans function.

There is no way to save face when the CAC is high, and customer retention is low.

For the customers, indifference is at play until they feel delighted after using a product. Delight, for one, is a by-product of real product differentiation, which keeps customers coming back even though they may not be financially incentivized to do so.

A business that optimizes for delight makes the customer a part of the business journey. The CAC becomes redundant when a business approaches acquisition as a way to learn not just earn.

Maximizing reach or adding new customers is not the end goal. And spending mindlessly on growth hacks without focusing on real product differentiation is a sure-shot way to get played by low switching costs fuelled by customer indifference.

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