C.A.C.
Customer Acquisition Cost defined - for Edtech and Education
Since the frenzy of edtech has picked up - a lot of people want to know more about C.A.C. (or CAC). The need to know is understandable. However, before I dig into the topic I thought let me search the historical perspective on CAC. The results throw some interesting perspectives.
In 2014, it didn’t seem like a popular perspective but even today my head hurts thinking about CAC. Hopefully, by the end of this blog post, your head won't hurt as much.
My head mostly hurts because I have been on both sides of the spectrum. The first in a mostly offline world, I have run an edtech business with 2% CAC and then I have been at the mercy of Google, FB and LinkedIn with a 20% CAC. Both were equally difficult to achieve. And for those asking how does one operate an edtech business in an offline marketing environment?!? That’s a story for a later day.
Recently I found this interesting linkedin article which listed several challenges with edtech and CAC is one of them.
So, what is C.A.C.?
CAC (Customer Acquisition Cost) is the total cost that it takes to acquire a customer. So, simply put:
CAC = (Sales +Marketing Cost)
There is going to be some dispute at this stage itself. Some companies like to think of only marketing as the cost of acquisition. Before we settle this dispute - I suggest we wait till we get to some bigger disputes slightly later.
2U - a large online program management company - uses a good formula for CAC. They call it TCA (Total cost of acquisition) and while I subscribe to the P.U.M.A philosophy (Please Use More Acronyms), I will keep it simple today. So let’s just replace TCA with CAC and I may make similar replacements elsewhere without calling them out.
CAC = Spend + People + Content + Infra/ # of enrollments | 2U's definition
Now, the promised complexity. Does spend include Brand spends? or is that supposed to go to the balance sheet? We will wait to answer this question. Let's first dig into something else.
Objectives of marketing and CAC
As per study.com “Marketing objectives” are goals set by a business when promoting its products or services to potential consumers that should be achieved within a given time frame.
So, there, as a business, you have the full right to define if branding is a balance sheet asset. You can argue with your auditor till the cows come home but someday the asset has to start paying (psst: by bringing free leads, and natural traffic).
I consider branding as a part of CAC. Why? For one a brand helps bring strong credibility to the product and convinces the customer that the edtech provider is not a fly-by-night operator and will be able to provide the promised service. So anything that helps sell should be a part of the cost. But, for this article we will keep it simple and keep branding out.
Acquisition Models and outcomes
To go deeper into CAC we need to talk about certain acquisition models and demystify a few more acronyms.
One time purchase: Let’s start with the easy one; a customer pays a fixed fee once ( I am going to ignore the risk of installment collection if any - as that is service-related mostly). In this case the ARPU (Average Revenue per user) is the total fee less any discount (Assuming just one 1 learner, but you get the drift).
edtech example: Whitehat Jr - where you pay one time for a certain package. If you upgrade that’s upselling/x-selling
Subscription-based models: Here LTVc (Life Time Value of Customer) is important unless you are Byju’s. Remember Byju’s charges an upfront fee for 3 - 4 years. The Byju’s variant “Byju's Classes” will fall under this model.
So, if a typical Byju’s classes learner sticks around for 12 months; and say the average monthly price is Rs. 2500, then the LTVc = 2500 *12 = 30,000/-
Freemium model: This is where the customer tries a significant amount of the material for free before converting (or ever converting). A good example here is the MOOCs with edx, coursera. Another example is Unacademy, where user acquisition through Youtube is an important channel.
Why do I not list unacademy as a subscription model and Whitehat as a freemium model given their aggression with a demo/trial, you ask? The acquisition cycle and payment models for many edtech players are a combination of these three strategies. I list their dominant model. For whitehat; the payment is upfront and the demo is just a sales tool. For Byju’s; the customer believes they are on a subscription model but they are locked-in. For Unacademy; a large section of the users never get beyond the free youtube content.
Combinations: This is explained in the previous paragraph. We will use the most dominant acquisition model when we speak about CAC.
Book a free demo class acquisition strategy for WhitehatJr. It seems to be really working well for them and they have an AMF(Acqusition-Strategy Market Fit) {term coined by Varun Dhamija, in 2020}. Why do I say they have an AMF? Look at their home page.
Free trial is being promoted and not a direct signup. Which brings me to an interesting point. Generally speaking, edtech is an assisted sale - especially in India - vs. being a self serve sign up. And typically, the sale is assisted by a human being. After all, we are in a country where Naukri.com sells it’s login (parlance for subscription) to recruiters using a traveling salesman. No wonder Byju’s had to hire 2000 feet on street salespersons to sell its product.
Netflix’s free trial
Unacademy JEE’s youtube page.
So what metrics should I be looking at?
While this is going to change by case and acquisition channel, each company usually comes up with a common way to look at their acquisition costs. I will try to use some examples here - taking unacademy as a base.
CAUTION: All numbers hypothetical
Direct acquisition | using Google search
If I land up at Unacademy’s home page using SEM/Social, Google in this case, then the cost of acquisition is:
Total cost of ads/(conversions*average price). Say unacademy lists its subscription at Rs. 1000/- and a google impression costs Rs. 5 and 10% of the people click an ad the cost of acquisition will be:
1000 ad impressions = 5000 Rs. (5*1000); resulting in 100 clicks (1000*10%); resulting in 5 signups (assuming a conversion rate of 5%). The revenue will be?
If you are saying it’s 5000 then you are wrong. Just scroll back up and try again.
The revenue will be 4500 (remember the 10% off discount code, let’s assume everybody applied it).
CAC = 5000/4500 (ad cost/revenue) = 111% of revenue not including the cost of people and tech
Let’s make it more complex. If I subscribe to unacademy’s youtube channel and assume that they got me there by spending 20 Rs. (how? say using a youtube ad - and while this has it’s own calculations we will ignore them for now). Once I am on the youtube channel and subscribed; imagine that unacademy makes me download their app and subsequently gives me a free trial of 15 days. What will the CAC be in this case?
Say there are a 1000 youtube subscribers acquired at 20 Rs. each, so a total of Rs. 20,000/-
Let’s say unacademy is successful in 50% of them downloading the unacademy app, so 500 downloads
How many apps do you have on your phone? Do see an unused apps menu as I do on my Android? I have 205 apps on my phone and 64 are unused.
As a usual statistic only about 40% of the people who download an app ever open it. So if 200 people open the app and 150 of them signup for a free-trial and then say 30% sign up for unacademy’s subscription what will the CAC be?
Well, it still depends. Of the 45 people who sign up (150*30%) there will a waterfall on how long they stay with the platform. While some will stay say 12 months, some will stay a month only. For simplicity, let’s say they stay an average of 6 months.
So, CAC = (20,000 + 15* 1000 +100 * 150)/(45*1000*6) = 18.5%
Here, 20K is the cost of 1000 youtube subscribers. 15 Rs. is the cost that unacademy’s finance assigns as cost of service for each youtube subscriber, 100 Rs. is the cost of trial for the 150 who signed up for the trial (assuming the app is free to service for others to not make this more complex). Revenue, for the 45 people is 6000 Rs. each.
So how much is too much?
As per a 2018 2U student acquisition metrics report
Total cost of acquisition (TCA) equates to roughly 20% of a student’s total tuition.
And while these metrics will vary by each company and stage of company. CAC is a metric that can make or break an edtech business. I suggest you use this guide only as a base and remember all numbers used above are hypothetical examples. They have nothing to do with unacademy’s real figures.
As a parting note, If your head still hurts then reply to this email with your address and I can get you a Saridon pain relief, but first you have to subscribe to my blog. At Rs. 3.32 for a Saridon tablet and an e.courier cost of Rs. 30, Rs. 33.32 is not a bad CAC for acquiring a newsletter subscriber🙂 well, assuming my time holds no value 🤕 If you are an international subscriber then send me your venmo I gotta keep my costs in budget.
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Great insighs ....great initiative....