In the last email, I shared how you can cluster your customers to find the most profitable groups, and target them instead.
In this email, I’ll share more about how to combine the principles of LTV and CAC to maneuver around your competition.
What is CAC?
CAC stands for Customer Acquisition Cost. As a marketer, you might measure this as the cost of the campaign that generated a lead; you would be wrong.
CAC is the entire cost of acquiring customers, divided by the total # of customers acquired.
Suppose you added 100 customers last year, and you paid $100k for sales and marketing. Your CAC is $1,000.
As a business owner, it is important to understand your CAC to make sure you don’t go broke selling to the wrong customers.
But generally the value in CAC is not in measuring it, but in understanding the options it gives you.
Returning to our example of Amazon Prime: Like Costco, Amazon knows their subscription membership actually increases LTV. This allows them to spend their CAC in creative ways that Target won’t try.
So you go to Costco, and you can get free samples of dozens of delicious foods, and then stop after at the gas station and get the lowest priced gas in your city.
You go to Amazon, and you get award winning movies and TV shows, exclusively on Amazon, for free.
Then you go to Target, and they want you to self checkout so they can reduce spend on minimum wage employees.
One of these is not like the other.
Costco and Amazon understand the power of CAC: it need not be spent on sales and marketing.
While Target spends their CAC on billboards and display ads, Costco and Amazon spend their CAC on improving the products and services they offer.
The same pattern occurs in most B2B businesses.
Many B2B companies can talk about their acquisition costs, but they focus on campaign attribution, first touch modeling, and ROI of marketing.
The slightly more advanced companies will think past this, and talk about ABM, how they flip the funnel, land and expand. This is better, but it misses the real opportunity.
When you focus on ABM, you hope that you can win by upselling.
But when you focus on LTV and CAC, you win by upvaluing.
When Amazon gives you free shipping, they upvalue. When Costco gives you free samples, or the best price on fuel, they upvalue.
Upvalue is a new term for most of us; based on a Google search, it seems more well known in programming languages than in selling.
Sometimes we upvalue by accident.
Marketing: truly great content marketing upvalues by improving the experience of your customers. Example: Josh Pigford writes for the Baremetrics blog and shares the real experience of his journey as a founder.
Product: often a product starts out by upvaluing, and becomes so valuable that others want to buy it. Example: Justin Mares built GiveLocal over 72 hours in March (and sold it one week later to USA Today.)
Selling: the best selling often occurs when you seek to help your customers rather than close a contract. Example: When I met my first client in Bangkok, I was genuinely interested in his business, not expecting to sell him anything. Result: easy sale.
Upvalue is not free. When you give your product away for free, often it is because you don’t believe in its value, not because you seek to upvalue.
Upvalue is a Wow! moment in your product. Upvalue is the signal to your customers that you care about relationships more than transactions. Upvalue is the story that your product, already a good buy, will make your customer look even smarter a year from now.
You can actually profit more from upvaluing than upselling.
When you upsell, you spend some of your social capital (between you and your customer) to increase their contract size, so you can increase LTV.
There are ways to mitigate this extraction of social capital, but few salespeople do.
When you upvalue, you increase your social capital, and this decreases churn, which increases LTV.
There are many wrong ways to upsell, but you almost can’t upvalue the wrong way. So given the choice of increasing LTV through an upsell, or increasing LTV through upvalue, you should lean toward the upvalue whenever possible.
Mediocre businesses spend their CAC on acquisition costs, and hope they can make up for it through an upsell later.
Successful businesses spend their CAC on upvaluing, extend the LTV through retention, and only upsell when it benefits the customer.
To do otherwise would be to destroy your social capital.
Why does social capital matter?
In the next part, I’ll share how to deploy social capital to dramatically increase your LTV and grow without relying on paid advertising.