Startups today have a far better understanding of the value of marketing dollars than they did when I started investing 7+ years ago. Customer acquisition cost (CAC) became part of the startup marketing vernacular after a number of SaaS companies and investors started to write about it in that context. Contemporaneously, online gaming companies like Zynga and Playdom*, which had their heyday in this period, built sophisticated methodologies to measure CAC for consumers as well.
Part of our job as consumer investors is to routinely analyze CAC relative to the value of a customer. We break out CAC on a per channel basis, in an attempt to understand not only the average CAC, but the CAC for a marginal user. We also look at the mixture of channels over time to see if there is spillover between paid and organic sources.
One thing we don’t do as frequently is evaluate CAC across customer segments. Why? Unfortunately, early stage startups rarely have this data on hand and view it as a second- or third-order problem.
I believe that customer segmentation is a first-order problem and that we’ll see more startups working on segmentation at earlier stages in the years ahead. One segment that nearly every consumer business should care about is “heavy buyers.” According to one study by investigators at Northwestern, many consumer markets are skewed such that 30% of buyers accounts for 70% of sales:
The 30% of buyers who are “heavy” far outweigh the value of buyers who are “light” on a per buyer basis by more than 5x:
Moreover, heavy buyers are much more loyal than light buyers. Of the top 12% of buyers (call them super-heavies), only 13% churned year over year in the study, implying a 7+ year customer lifetime:
In reality, the 30% of buyers we would consider heavy are somewhere between the 13% and 36% churn rate above. Call it 25% annually, and you’re looking at a 4-year customer lifetime. The lightest 50% of customers churn 85% after a single year, which implies just over a 1-year lifetime.
Not only do heavy buyers constitute more than 5x the value at a given moment in time, but they also stick around for 4x as long! This is why heavy buyers are so important: their customer lifetime value could be an order of magnitude greater than light buyers.
None of this matters of course, if you can’t differentiate your marketing to find heavy buyers a priori. If you really believed heavy buyers were out there, you’d rationally pay 10x the dollars to acquire them vs. a light user. Maybe you wouldn’t even target light buyers at all! Regardless, this knowledge — if you’re armed with it — can drastically change CAC and your marketing strategy in general.
So, how do we differentiate between the two populations? Unfortunately, there is no general answer. It depends entirely on the path to purchase for your customer. I’ve decided to provide one example though that I think we can all get behind — avocados.
The Hass Avocado Board releases a report periodically answering exactly this question: who are their buyers, what do they want, and how are they getting it? The Board defines heavy buyers as those who purchase 37+ avocados per year, while light buyers purchase 1–36. It finds many key differences in heavy vs. light buyers:
- 66% of heavies vs. 51% of lights decide to purchase avocados before visiting the store.
- 39% of heavies vs. 20% of lights chose their grocery store in part because of avocados.
- 37% of heavies vs. 3% lights consider avocados a “staple” food. (Lights tend to purchase in response to a specific recipe.)
- 25% of heavies vs. 9% of lights purchased more avocados than planned.
- Heavies are more likely than lights to be 25–34 (30% vs. 17%), male (48% vs. 33%), hispanic (23% vs. 14% light), employed (72% vs. 44%), higher paid ($74K vs. $63K), and urban (43% vs. 24%).
If you were selling avocados, data on heavies vs. lights would drastically change your marketing campaign. For instance, advertising alongside recipe sites or visual search tools like Pinterest would likely work better for lights than heavies, since lights make a choice to buy avocados for a given recipe, whereas heavies tend to foster a replenishing behavior.
Heavies, on the other hand, are attracted to grocery stores in part due to the quality of their avocados, so it may make sense to invest heavily in outdoor advertising emphasizing the quality of produce in general, or avocados specifically. Assuming they have the ability to measure ROI, a retailer may want to spend more on these campaigns than normal because they target heavies specifically.
If more startups approached their customers the way the avocado industry does, marketing dollars would be spent far more effectively. Differentiating between heavies and lights a priori is no easy task, but the payoff is huge — unlocking 10x customers who will be your best and most loyal brand advocates.
* Denotes a Lightspeed portfolio company.
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