Why Customer Acquisition Cost is the New Rent

A few weeks ago Inc. Magazine wrote a fascinating article whose argument could be summed up in one phrase: Customer Acquisition Cost (CAC) is the new rent [1]. For those not reading tech reports for the past two-years, customer acquisition costs represent the cost of acquiring a repeat customer whether through Google AdWords (search advertising), social feeds (Facebook advertising), or even a marketplace such as Amazon or eBay (sellers’ commission). The crucial point is this concept can also be applied to the physical realm: CAC is a useful tool to compare online digital businesses to businesses which exist primarily in the physical world. I suspect these economic concepts can be extended beyond merely explaining the broad disruption of physical retail but also provide a framework for predicting what business configurations might flourish in the future.

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Why Modularized Distribution Costs Matter

A few weeks ago I discussed why the 18th century post office might be the best analogy to understand the role of emerging B2C internet platforms such as Facebook, Tencent, Netflix, and Amazon. I wrote:

The internet today might be best thought of as a number of category verticals: search (Google / Baidu), social (Facebook / Tencent), e-commerce (Amazon / Alibaba), entertainment (Netflix / Tencent), transport (Uber / Grab / Lyft), payments (paypal / mastercard, visa) etc. For instance, Alibaba-owned Ant Financial is using data from its consumer e-commerce business to underwrite new retail loans to cunsumers. Grab is trying to expand its transportation platform into payments through existing relationship with customers. Tencent is using its WeChat chat platform to expand into online stores and payments. In each case a direct relationship to the end consumer (B2C) is being leveraged to both dominate a category and attempt to expand into new adjacent categories.

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The Internet as a 18th-century Post Office

Last month I finished reading China’s Mobile Economy which described China’s emerging internet eco-system mostly among Baidu, Tencent, Alibaba (BAT). What struck me from the book is how internet platform businesses are using their category dominance to expand into adjacent services. The internet today might be best thought of as a number of category verticals: search (Google / Baidu), social (Facebook / Tencent), e-commerce (Amazon / Alibaba), entertainment (Netflix / Tencent), transport (Uber / Grab / Lyft), payments (paypal / mastercard, visa) etc. For instance, Alibaba-owned Ant Financial is using data from its consumer e-commerce business to underwrite new retail loans to cunsumers. Grab is trying to expand its transportation platform into payments through existing relationship with customers. Tencent is using its WeChat chat platform to expand into online stores and payments. In each case a direct relationship to the end consumer (B2C) is being leveraged to both dominate a category and attempt to expand into new adjacent categories.

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