Customer Acquisition Costs Vs. Free Stuff

Businesses need customers to survive. 

If nobody buys from you, you don’t have a business. 

You might have a hobby, but you definitely don’t have a business. 

So finding customers is big business unto itself. 

And understanding “free” is one of the trickiest concepts for businesses and customers alike to wrap their heads around. 

Here’s an example - my Gram made sure I knew one of the local grocery stores was running a butcher’s box promo the other day. Presumably, a few times a year they clear the freezers and offer great pricing on all sorts of meats. What would cost $250 gets sold for $100. 

Is it magic? How could this be good business? Could I really get $150 worth of free meats?

You have to look at the story from both angles. 

From my perspective, if I’m spending $100, I’m not getting anything for free. I’m getting a discount, yes. But the meat ain’t free. 

From the store’s perspective, if they’re willing to offer a steep discount, they’re willing for two primary reasons:

1. The cost of carrying the inventory (or writing it off/throwing it away for $0 revenue) makes recovering any positive amount of money attractive. Without getting into a unit economics and perishable storage conversation, we can admit, A. the grocery store paid something for those meats, B. it costs something to keep those meats in inventory, and C. the only thing better than a profit is not an absolute loss. 

2. Grocery stores are willing to spend a fair amount on acquiring customers because once you pick your grocery store, you keep going back. And this is really important - the store will spend money advertising locally to get new customers in and old customers to return. If they can create a marketing campaign that will also spread by word of mouth to get customers in the door (“2 for 1 chicken soup” isn’t as fun as “60% off butcher’s box steal!”), they will. 

A few takeaways, and again, remember to think from multiple perspectives on these: 

Any time a business does anything for free, ask how and why?

What’s the business accomplishing with this paid promotion/acquisition strategy? 

What’s the consumer getting and will it keep them coming back?

h/t Dave Nadig who’s breaking this down more in the recent financial industry ETF shenanigans, “Fidelity Reminds ETF Industry It Doesn’t Have To Care.” He talks about free investment products, shelf space costs, and gives some amazing shareholder/stakeholder explanations. 

And, if you want more on customer acquisition costs and this logic - I have more posts here.