When Warby Parker filed their S-1 late last month, all anyone wanted to talk about was CAC. Or, more specifically, how Warby Parker was calculating it wrong.
(The brand, if you missed it, calculates CAC by dividing marketing dollars by active—not just newly acquired—customers.)
Nowhere, it seems, was there a question of why they might be calculating in that fashion. Or why this calculation might actually make sense. Just a bunch of posturing about how wrong they got it.
If you’ve read this newsletter long enough, you’d probably guess that this annoyed us. So bare with us, while we air our grievances against the latest “hot take” crowd.
While Warby’s definition is a bit odd (given CAC stands for “customer acquisition cost”), it’s not like there’s no basis for it.
In fact Warby’s CAC is based on the same principle as Marketing Efficiency Ratio, which divides total revenue by total marketing dollars.
While MER is fairly popular, especially for omni-channel, Warby owns its distribution (and its data), so it can take a similar, yet slightly more granular look at it. In short, Warby’s CAC definition is a DTC riff on MER: a blended number meant to look at the overall effectiveness of the brand’s marketing efforts on a per-customer basis.
And for a brand that has just north of 1% market share, that’s a pretty significant metric to track.
After all, they’re still very much in land-grab mode.
Costco, for reference, is estimated to have 3% of the U.S. eyewear market while Luxottica has 6%. Some retailers have 8X as many retail stores as Warby does.
Warby, despite being the largest DTC player in the space, is still quite small.
Given this, they’re likely to have lower loyalty than the incumbents. (See Double Jeopardy.) We’d be willing to bet Warby knows this—and that’s why they’re calculating their CAC in such a novel fashion.
In other words, this CAC calculation appears to be a message from Warby that needs to spend heavily to land a repeat purchase from a customer.
At first glance, that might seem problematic. We’d argue it’s smart.
In fact, we laid out an an argument on this topic in February:
By strict definition, retention is to keep possession of or continue having something. This would be accurate when discussing subscription products, sure, but given the fact that most customers don’t subscribe to the everyday products they use, we’re using the wrong words to describe this aspect of our marketing.
A better term might be reacquisition.
Go ahead; cringe. When you’re done, keep reading because there’s a value to shifting mindsets here:
Retention-focused mindset: I am not competing in market for my existing customer, because my customer is committed to my brand and illustrates that commitment through her/his behavior and emotional reactions to my brand’s message. It will take something significant for me to lose that commitment from the customer.
Reacquisition-focused mindset: I am in a competitive market and my customer has a lot of choices. My customer likes my brand and uses it, but also knows better products and better deals may exist (and probably takes advantage of them on occasion), and is not averse to change. It takes very little for me to lose that customer.
What we see, then, is a retention-focused mindset runs the risk of overestimating a brand’s position in market. It’s defensive in nature, maybe even passive.
A reacquisition-focused mindset, though, forces you to constantly think about how you can deliver a better product, at a more compelling value, in more places. It puts you on the offensive.
Which brings us back to Warby’s CAC.
This is, it seems, what Warby Parker is driving at with its calculation. It’s different, sure. But it’s probably not wrong. Not for what they’re trying to achieve.
If anything, it’s a signal for where they’re at and where they’re trying to get.
And that’s something worth considering when you’re thinking about how to measure whether the path you picked to hit your desired business outcomes is working.