June 24, 2020
Jacob Sussman
  •  
2 min

CAC as a Product of Funnels and Loops

A key metric of DTC profitability is customer acquisition cost, or CAC. Although CAC is influenced by a range of factors like the strength of one's product or brand, a well-grounded business will find the key levers for CAC within its marketing infrastructure. Effective marketing can be conceptualized as a series of funnels and loops, two complimentary frameworks for lead growth and attrition.

Funnels

Funnels are the art of lead preservation, and illuminate how an initial pool of prospects decrease over time. Mapped from left to right as an increasingly narrow triangle, these charts indicate where and when prospects defect from an intended purchase journey.

A funnel might proceed as such: 50% of those served an ad click on it. 30% of those who arrive at the landing page enter their email. The introductory email's open rate is 25%. 10% of those who click on the email make a purchase. And so on. Funnels often connect with other funnels, adding new prospects to pre-existing lists. This process is not dissimilar to Minard's timeless data viz of how Napoleon's army was segmented and unified over time.

One of the most famous funnels in history

Of course, some attrition is natural. After all, consumers may change their mind and lose interest in a product. But other sources of funnel shrinkage are in your hands. Buggy websites, confusing UX, and tone-deaf messaging are all culprits in driving would-be consumers away from the shopping cart.

The goal of auditing a funnel is to identify and correct defective events that are costing you business. For example, an ill-conceived landing page might fail to gather emails, wasting most of an ad campaign's inbound traffic. Once such flaws are corrected, a funnel can operate like a well-machined pipe in carrying your leads from discovery to purchase.

Loops

Loops can be thought of as events that branch off from the main funnel, and reinvigorate it by establishing new prospects. While funnels map attrition, loops represent organic sources of growth. The beauty of loops is they are self-perpetuating, making them an essential framework for improving CAC efficiency.

The loop marketer has to be savvy to earn these "free" impressions. Opportunities to turn customers into promoters are key, like the famous Refer-a-Friend bonus. Understanding that people will trust their friends more than an ad, many brands encourage customers to hawk favorite products in exchange for a small discount. The referred friend thus becomes a prospect, initiating a new funnel altogether.

This example also illuminates the virtuous cycle of loops. Every customer can be offered the Refer-a-Friend bonus, resulting in the creation of new leads. Those leads may be offered the bonus as well, and as well as any new leads they refer. And so on, ad infinitum. Accordingly, one simple technique can offer boundless exposure without a cent of paid media.

Diamond Hook's newsletter is a great place to learn about more specific executions of Funnels and Loops. To hear about these techniques, drop into our funnel by entering your email below, or create a loop by sharing this article with a friend!

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