{"id":133014,"date":"2021-04-22T21:52:41","date_gmt":"2021-04-23T02:52:41","guid":{"rendered":"https:\/\/ahrefs.com\/blog\/?p=133014"},"modified":"2023-05-12T08:45:37","modified_gmt":"2023-05-12T13:45:37","slug":"customer-acquisition-cost","status":"publish","type":"post","link":"https:\/\/ahrefs.com\/blog\/customer-acquisition-cost\/","title":{"rendered":"How to Use &amp; Reduce Customer Acquisition Cost (CAC)"},"content":{"rendered":"\n<div class=\"intro-txt\">Customer acquisition cost (CAC) is the average amount of money you spend to acquire a single customer.<\/div>\n\n\n\n<p>You calculate CAC by dividing customer acquisition expenses by the number of acquired customers. So if you got ten new customers from $1,000 marketing and sales spend over a certain period, the formula would be: CAC = 1000\/10 = $100.<\/p>\n\n\n\n<p>It\u2019s an important marketing metric that\u2019s especially useful when you relate it to your customer lifetime value (also known as LTV or CLV). But as with most things in data analytics, there\u2019s a few pitfalls you should be aware&nbsp;of.<\/p>\n\n\n\n<p>In this article, you\u2019ll learn:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"#how-to-use-cac\">How to use&nbsp;CAC<\/a><\/li>\n<li><a href=\"#how-to-reduce-cac\">How to reduce your&nbsp;CAC<\/a><\/li>\n<li><a href=\"#problems-with-cac\">What the problems with CAC&nbsp;are<\/a><\/li>\n<\/ul>\n\n\n\n<div class=\"post-nav-link clearfix\" id=\"section1\"><a class=\"subhead-anchor\" data-tip=\"tooltip__copielink\" rel=\"#section1\"><svg width=\"19\" height=\"19\" viewBox=\"0 0 14 14\" style><g fill=\"none\" fill-rule=\"evenodd\"><path d=\"M0 0h14v14H0z\" \/><path d=\"M7.45 9.887l-1.62 1.621c-.92.92-2.418.92-3.338 0a2.364 2.364 0 0 1 0-3.339l1.62-1.62-1.273-1.272-1.62 1.62a4.161 4.161 0 1 0 5.885 5.884l1.62-1.62L7.45 9.886zM5.527 5.135L7.17 3.492c.92-.92 2.418-.92 3.339 0 .92.92.92 2.418 0 3.339L8.866 8.473l1.272 1.273 1.644-1.643A4.161 4.161 0 1 0 5.897 2.22L4.254 3.863l1.272 1.272zm-.66 3.998a.749.749 0 0 1 0-1.06l2.208-2.206a.749.749 0 1 1 1.06 1.06L5.928 9.133a.75.75 0 0 1-1.061 0z\" style \/><\/g><\/svg><\/a><div class=\"link-text\" data-anchor=\"How to use CAC\" data-section=\"how-to-use-cac\">\n\n\n\n<h2 class=\"wp-block-heading\">How to use&nbsp;CAC<\/h2>\n\n\n\n<\/div><\/div>\n\n\n\n<p>CAC is an averaged metric. It doesn\u2019t take into account how diverse in value your customer segments are. That\u2019s important to keep in mind because you should be willing to spend more to acquire the most valuable customers.<\/p>\n\n\n\n<p>That said, there are two ways to use customer acquisition cost properly.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Use CAC in relation to&nbsp;LTV<\/h3>\n\n\n\n<p>CAC is an excellent marketing performance indicator when you <a href=\"https:\/\/ahrefs.com\/blog\/marketing-kpis\/#customer-lifetime-value\">measure it together with LTV<\/a>. That\u2019s because LTV is yet another averaged \u201cmoney metric.\u201d<\/p>\n\n\n\n<p>The industry consensus on an ideal LTV:CAC ratio for <a href=\"https:\/\/ahrefs.com\/blog\/saas-marketing\/\">SaaS businesses<\/a> seems to be between 3:1 and 4:1. So if your LTV is $350 and your CAC is $100, you\u2019re right in the middle of those ratios.<\/p>\n\n\n\n<p>But because business models differ, you should try to run the numbers yourself to see how your other business costs and margins fit into such a ratio. The 3:1 to 4:1 range seems rather arbitrary as I didn\u2019t find any data or case studies to back this&nbsp;up.<\/p>\n\n\n\n<p>So, to illustrate how business costs might affect things, I created a few hypothetical scenarios:<\/p>\n\n\n\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-133038\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/01-customer-acquisition-cost-1.png\" alt width=\"1800\" height=\"1892\" srcset=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/01-customer-acquisition-cost-1.png 1800w, https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/01-customer-acquisition-cost-1-404x425.png 404w, https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/01-customer-acquisition-cost-1-768x807.png 768w, https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/01-customer-acquisition-cost-1-1461x1536.png 1461w\" sizes=\"auto, (max-width: 1800px) 100vw, 1800px\"><\/p>\n\n\n\n<div class=\"sidenote\"><div class=\"sidenote-title\">Sidenote.<\/div> *Other monthly costs include fixed business expenses besides CAC like staff and infrastructure. By including these, you can get net LTV and the breakpoint in months when you cover CAC and start making a profit.<\/div>\n\n\n\n<p>Judging by the numbers alone, all of these business models seem to make sense even though the LTV:CAC ratios fall outside of the 3:1 to 4:1 benchmark for two of them. However, regardless of these numbers, we need to dive into marketing spend effectiveness to make any rational decisions based on&nbsp;CAC.<\/p>\n\n\n\n<p>Why? Because reducing your CAC and being more effective in marketing don\u2019t necessarily go hand-in-hand.<\/p>\n\n\n\n<p>If CAC is too low, you\u2019re limiting your exposure and under-spending on your marketing activities. That might look good on a paper in the short-term, but you\u2019d be missing out on substantial growth opportunities in the long&nbsp;run.<\/p>\n\n\n\n<p>CAC can also grow much faster in terms of percentage than your LTV while you remain more profitable. $10 CAC to $100 LTV is technically worse than $70 CAC to $170 LTV. The difference to cover your other costs and margins is $90 compared to $100 in the second scenario.<\/p>\n\n\n\n<p>In conclusion, lowering your CAC shouldn\u2019t always be your objective. You need to take your LTV, customer base growth, and overall marketing effectiveness into account when you think about adjusting your&nbsp;CAC.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Use CAC in isolation for performance ads channels<\/h3>\n\n\n\n<p>As tempting as it may be, don\u2019t try to segment your CAC per all your marketing channels. It only works for your performance channels like <a href=\"https:\/\/ahrefs.com\/blog\/ppc-marketing\/\" target=\"_blank\" rel=\"noopener\">PPC<\/a>.<\/p>\n\n\n\n<p>There are two reasons for this. I already talked about the first one, so here\u2019s the second one:<\/p>\n\n\n\n<p>CAC locks you in for short-term decision-making if you link it to separate marketing channels. For example, measuring CAC for display campaigns doesn\u2019t make sense. That\u2019s because these ads typically appear early in the <a href=\"https:\/\/ahrefs.com\/blog\/marketing-funnels\/\">customer journey<\/a>&nbsp;when most people seeing it aren\u2019t ready to buy your product or aren\u2019t even aware of&nbsp;it.<\/p>\n\n\n\n<p>On the other hand, when it comes to the performance channels, Google Ads even has a CAC equivalent built-in. It\u2019s called Cost Per Conversion:<\/p>\n\n\n\n<p><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/1-ad-group-view-1.png\"><\/p>\n\n\n\n<p>We can take this channel-specific cost per conversion and use it to optimize the performance of that channel.<\/p>\n\n\n\n<p>But you might be thinking that it doesn\u2019t reflect CAC in its entirety. True, it only covers the cost of the last step in the customer journey. But that\u2019s the best we can do here as you can\u2019t attribute other channels\u2019 costs to&nbsp;this.<\/p>\n\n\n\n<p>Attribution is assigning credit to marketing channels that contributed to the conversion. Imagine a soccer player scoring a goal after getting a pass from three other players and one more teammate cleared the way. All of them helped to score the goal. But most businesses can\u2019t make it work like this in marketing.<\/p>\n\n\n\n<p>Default Google Analytics reports work with a flawed \u201clast-non direct click\u201d attribution model. That\u2019s like giving 100% credit to the player who scored the goal. This player could be an analogy of performance marketing channels as they often take the full credit. I\u2019ll talk a bit more about attribution in the CAC problems section.<\/p>\n\n\n\n<p>Bottom line: if you try to account for CAC per all of your channels, you\u2019ll run into attribution problems, and you wouldn\u2019t account for other more brand-focused channels.<\/p>\n\n\n\n<div class=\"post-nav-link clearfix\" id=\"section1\"><a class=\"subhead-anchor\" data-tip=\"tooltip__copielink\" rel=\"#section1\"><svg width=\"19\" height=\"19\" viewBox=\"0 0 14 14\" style><g fill=\"none\" fill-rule=\"evenodd\"><path d=\"M0 0h14v14H0z\" \/><path d=\"M7.45 9.887l-1.62 1.621c-.92.92-2.418.92-3.338 0a2.364 2.364 0 0 1 0-3.339l1.62-1.62-1.273-1.272-1.62 1.62a4.161 4.161 0 1 0 5.885 5.884l1.62-1.62L7.45 9.886zM5.527 5.135L7.17 3.492c.92-.92 2.418-.92 3.339 0 .92.92.92 2.418 0 3.339L8.866 8.473l1.272 1.273 1.644-1.643A4.161 4.161 0 1 0 5.897 2.22L4.254 3.863l1.272 1.272zm-.66 3.998a.749.749 0 0 1 0-1.06l2.208-2.206a.749.749 0 1 1 1.06 1.06L5.928 9.133a.75.75 0 0 1-1.061 0z\" style \/><\/g><\/svg><\/a><div class=\"link-text\" data-anchor=\"How to reduce your CAC\" data-section=\"how-to-reduce-cac\">\n\n\n\n<h2 class=\"wp-block-heading\">How to reduce your&nbsp;CAC<\/h2>\n\n\n\n<\/div><\/div>\n\n\n\n<p>I hope it\u2019s becoming clear that you should always strive for the highest effectiveness, which doesn\u2019t necessarily mean reducing your CAC. But there\u2019s no doubt that you should balance your paid advertising with cheaper and often more sustainable marketing channels and <a href=\"https:\/\/ahrefs.com\/blog\/marketing-tactics\/\">tactics<\/a>.<\/p>\n\n\n\n<p>Here are a few ways to inherently reduce your&nbsp;CAC:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">With SEO and content marketing<\/h3>\n\n\n\n<p>Organic search is the main traffic and conversion driver for many businesses, including ours:<\/p>\n\n\n\n<p><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/2-ahrefs-traffic.png\"><\/p>\n\n\n\n<p>The beauty of SEO is that it\u2019s a suitable channel for all <a href=\"https:\/\/ahrefs.com\/blog\/marketing-funnels\/\">marketing funnel<\/a>&nbsp;stages\u2014from awareness to retention. People search on Google all the&nbsp;time.<\/p>\n\n\n\n<p>So not only is SEO able to grow your business by itself, but it also massively helps your other channels\u2014like paid search ads. That\u2019s because you usually bid on keywords closer to the conversion stage, but a solid <a href=\"https:\/\/ahrefs.com\/blog\/content-marketing-strategy\/\">content marketing strategy<\/a>&nbsp;includes content throughout the whole customer journey.<\/p>\n\n\n\n<p>In other words, the combination of great <a href=\"https:\/\/ahrefs.com\/blog\/seo-vs-ppc\/\">SEO and PPC<\/a>&nbsp;ensures that your brand is present throughout the whole customer journey. People would be less likely to convert if they heard about you only when they\u2019re ready for the purchase.<\/p>\n\n\n\n<p>For example, our article \u201c<a href=\"https:\/\/ahrefs.com\/blog\/what-is-https\/\">What is HTTPS? Everything You Need to Know<\/a>\u201d is not focused on a topic people usually search for when they\u2019re ready to <a href=\"https:\/\/ahrefs.com\/webmaster-tools\">sign up for an SEO toolset<\/a>. But it\u2019s a relevant \u201ctop-of-the-funnel\u201d content because some of the searchers have websites and might want to tackle SEO in the future.<\/p>\n\n\n\n<p>Promoting such an article through search ads would be a questionable expense at&nbsp;best.<\/p>\n\n\n\n<p>But thanks to SEO, this article gets almost 30 thousand clicks from organic search each month. That would cost us over $12,000 if we were to pay for the traffic in Google Ads:<\/p>\n\n\n\n<figure class=\"wp-block-image is-style-default\"><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/3-https.png\"><\/figure>\n\n\n\n<p>And that doesn\u2019t even take into account that you wouldn\u2019t be able to get so many clicks from Google Ads anyway. That\u2019s because <a href=\"https:\/\/ahrefs.com\/blog\/serps\/\">most people<\/a>&nbsp;skip the ads and click on organic search results only.<\/p>\n\n\n\n<p>Of course, for <a href=\"https:\/\/ahrefs.com\/blog\/what-are-keywords\/\">keywords<\/a>&nbsp;closer to the conversion stage, you often want your website to appear in both paid and organic search results. Ranking high in organic search results for competitive keywords can drive \u201cfree\u201d traffic that could otherwise cost hundreds of thousands of dollars from Google Ads:<\/p>\n\n\n\n<p><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/4-top-pages.png\"><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">With Conversion Rate Optimization (CRO)<\/h3>\n\n\n\n<p>CRO is the process of adjusting your website or app to convert a higher percentage of visitors.<\/p>\n\n\n\n<p>If you don\u2019t optimize your website or app for conversions, it\u2019s highly inefficient\u2014even if it attracts tons of visitors. CRO is arguably one of the most efficient ways to make you more money and lower your acquisition costs.<\/p>\n\n\n\n<p>Let\u2019s say that you drive 100,000 users to your website each month, 5% sign up for your free trial, from which 15% convert to your $100\/month subscription. Your monthly marketing spend is $100,000.<\/p>\n\n\n\n<p>Here\u2019s how increasing your conversion rates influence revenue and CAC in this simplified case:<\/p>\n\n\n\n<figure class=\"wp-block-image is-style-default\"><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/02-customer-acquisition-cost-1.png\"><\/figure>\n\n\n\n<p>If you increase your conversion rates by 30%, your CAC drops by 41%, and your revenue increases by 69%. And you didn\u2019t do anything to get more people to your website; you just worked with what you already had.<\/p>\n\n\n\n<p>CRO is a whole marketing field that\u2019s quite complex. You need to be versed in UX, copywriting, behavioral economics, user testing, analytics, and statistics.<\/p>\n\n\n\n<p>You can try to learn CRO yourself as it\u2019s useful across marketing. But investing in a CRO specialist is likely one of the quickest and most effective returns on marketing spend that you can&nbsp;do.<\/p>\n\n\n\n<div class=\"recommendation\"><div class=\"recommendation-title\">TIP<\/div><div class=\"recommendation-content\">\n\n\n\n<p>What you see in Google Analytics default reports under goal or e-commerce conversion rates is based on the number of sessions, not users. Take that into account when you look at user-level conversions like signups or payments. You can <a href=\"https:\/\/www.monsterinsights.com\/how-to-create-google-analytics-calculated-metrics-to-track-conversions\/\">create a custom conversion rate metric<\/a>&nbsp;based on&nbsp;users.<\/p>\n\n\n\n<\/div><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Create a solid balance between performance marketing and brand building<\/h3>\n\n\n\n<p>While you can\u2019t really attribute brand-building activities to conversions, it plays a crucial role in converting visitors into customers. But that doesn\u2019t happen overnight.<\/p>\n\n\n\n<p>In fact, if you\u2019re behind with brand building, it will&nbsp;actually increase your CAC in the short-term (~1 year) because these activities don\u2019t have an immediate effect on your sales. But it will pay off very well in the long run, including a lower&nbsp;CAC.<\/p>\n\n\n\n<p>As a general rule of thumb, the ideal balance between marketing spend on sales uplift and brand building is roughly 40:60. It\u2019s one of the most important marketing concepts to keep in&nbsp;mind.<\/p>\n\n\n\n<figure class=\"wp-block-image is-style-default\"><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/pasted-image-0-1.png\"><\/figure>\n\n\n\n<p>There\u2019s a lot of <a href=\"https:\/\/www.amazon.com\/Long-Short-Balancing-Long-Term-Strategies\/dp\/085294134X\">research<\/a>&nbsp;on this. The key takeaway is that brand building is <a href=\"https:\/\/www.youtube.com\/watch?v=2LkK-UdbMuM\">proven<\/a>&nbsp;to be the primary driver of long-term growth and success.<\/p>\n\n\n\n<div class=\"post-nav-link clearfix\" id=\"section1\"><a class=\"subhead-anchor\" data-tip=\"tooltip__copielink\" rel=\"#section1\"><svg width=\"19\" height=\"19\" viewBox=\"0 0 14 14\" style><g fill=\"none\" fill-rule=\"evenodd\"><path d=\"M0 0h14v14H0z\" \/><path d=\"M7.45 9.887l-1.62 1.621c-.92.92-2.418.92-3.338 0a2.364 2.364 0 0 1 0-3.339l1.62-1.62-1.273-1.272-1.62 1.62a4.161 4.161 0 1 0 5.885 5.884l1.62-1.62L7.45 9.886zM5.527 5.135L7.17 3.492c.92-.92 2.418-.92 3.339 0 .92.92.92 2.418 0 3.339L8.866 8.473l1.272 1.273 1.644-1.643A4.161 4.161 0 1 0 5.897 2.22L4.254 3.863l1.272 1.272zm-.66 3.998a.749.749 0 0 1 0-1.06l2.208-2.206a.749.749 0 1 1 1.06 1.06L5.928 9.133a.75.75 0 0 1-1.061 0z\" style \/><\/g><\/svg><\/a><div class=\"link-text\" data-anchor=\"What are the problems with CAC?\" data-section=\"problems-with-cac\">\n\n\n\n<h2 class=\"wp-block-heading\">What are the problems with&nbsp;CAC?<\/h2>\n\n\n\n<\/div><\/div>\n\n\n\n<p>I already mentioned that CAC is an averaged metric with attribution problems. Let me expand on that before diving into two other more minor issues.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Attribution problems with getting more granular data<\/h3>\n\n\n\n<p>The most useful segmentation you could do with CAC would be with your customer segments. For example, if you look at our <a href=\"https:\/\/ahrefs.com\/plans-pricing\">pricing model<\/a>, we\u2019re willing to spend many times more our average CAC on acquiring customers for the Agency plan:<\/p>\n\n\n\n<figure class=\"wp-block-image is-style-default\"><img decoding=\"async\" src=\"https:\/\/ahrefs.com\/blog\/wp-content\/uploads\/2021\/04\/5-ahrefs-pricing.png\"><\/figure>\n\n\n\n<p>But it\u2019s close to impossible to get any reliable data to know that you spent $X on segment A or $Y on segment B, which would be needed for this calculation. Most of your marketing channels target multiple segments.<\/p>\n\n\n\n<p>There are possible solutions for creating more reliable attribution models, but that usually requires tons of data and resources to create a custom data ecosystem. And even this can\u2019t solve attribution problems some B2B businesses targeting enterprise segments face.<\/p>\n\n\n\n<p>For that reason, I\u2019d suggest most people stick to simple CAC formulas.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Taking your business cycle into account<\/h3>\n\n\n\n<p>It\u2019s intuitive to take your monthly marketing and sales spend and divide that by the number of new customers you got that month. I used that too in the examples here. But this can only work if your spend is somehow constant month over&nbsp;month.<\/p>\n\n\n\n<p>The problem lies in your business cycle. If you consider new users in March, then a significant portion of them converted thanks to your marketing activities in February or even earlier.<\/p>\n\n\n\n<p>Of course, it\u2019s impossible to track everything back, but you should know how many days on average it takes your visitors to convert from their first visit. If you have a 14-day trial, then the average business cycle will likely be between 2-4 weeks. Count with months for enterprise customers.<\/p>\n\n\n\n<p>So, if you wanted to calculate the cost of customers acquired in March and your avg. business cycle is four weeks, you should use your February marketing spend in the formula instead.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">It\u2019s more useful for established companies<\/h3>\n\n\n\n<p>If barely anyone in your market knows about you, it won\u2019t be easy to keep CAC within any reasonable range. Getting your first customers is a challenge.<\/p>\n\n\n\n<p>For this reason, I\u2019d recommend you start using CAC when you already have at least one marketing channel that consistently drives new customers.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final thoughts<\/h2>\n\n\n\n<p>Like all <a href=\"https:\/\/ahrefs.com\/blog\/marketing-metrics\/\">marketing metrics<\/a>, you shouldn\u2019t get obsessed with CAC. It\u2019s an important metric, but you should already know why it might not be the most suitable <a href=\"https:\/\/ahrefs.com\/blog\/marketing-kpis\/\">marketing KPI<\/a>. Remember the pitfalls and all the other aspects of it when you analyze CAC.<\/p>\n\n\n\n<p>Do you have any other CAC insights? Do you want to ask anything regarding this metric? Ping me on <a href=\"https:\/\/twitter.com\/michalpecanek\">Twitter<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You calculate CAC by dividing customer acquisition expenses by the number of acquired customers. So if you got ten new customers from $1,000 marketing and sales spend over a certain period, the formula would be: CAC = 1000\/10 = $100.<span class=\"ellipsis\">\u2026<\/span><\/p>\n<div class=\"read-more\">Read more \u203a<\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":149,"featured_media":133036,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"wp_typography_post_enhancements_disabled":false,"footnotes":""},"categories":[390],"tags":[],"coauthors":[375],"class_list":["post-133014","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-marketing","odd"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How to Use &amp; Reduce Customer Acquisition Cost (CAC)<\/title>\n<meta name=\"description\" content=\"Customer acquisition cost (CAC) is the average amount of money you spend to acquire a single customer.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ahrefs.com\/blog\/customer-acquisition-cost\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to Use &amp; 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