The CAC always rises – and how you can beat it
There are three reasons why your customer acquisition costs, by default, will go up. It's your job to overcome this rule of nature.
Almost every financial model I’ve ever seen from a founder has a year-over-year trend where while marketing spend goes up, CAC goes down.
“That’s all well and good if that’s what you believe investors need to see,” I say, “but you do know that’s not going to happen, right?”
Customer acquisition costs – or CAC – are the costs required to acquire a customer. At its crudest, you can measure these by taking your marketing budget and dividing it by the number of new customers you acquire.
And if there’s one thing as true as gravity, it’s your CAC will naturally trend up.
This post is split into two parts.
Part one: The three reasons CAC always rises
Part two: How to overcome rising CAC
examines why this is the case. And part two looks at what your job is to try and impact that.
The three reasons CAC always rises
1. Early adopters are the cheapest to acquire
Imagine introducing your product to market like you’re an amateur market stall trader. There’s loads of footfall. But your pitch is shaky. Your stand lacks finesse. You’ve got a product that you think people want, but don’t know how to describe it. You’re an innovator, not a seller.
While almost everyone will ignore you, there will be one or two who take notice.
The ones that do are the people who have the highest need state. They are the ones who are so actively searching for a solution for their problem that they can see past the bad marketing and sales. They’ve heard a single phrase – which is in their mind every single day – buried in your pitch and think ‘maybe this is the thing that will save me.
These people are desperate. They’d elbow their way through that crowd to talk to you. These are your early adopters who are the cheapest to acquire.
They may not be the only people who benefit from your product. For your product to be successful in fact, you need there to be significantly more people than that who will benefit from it. But these are your cheapest and the lowest of your hanging fruit.
You don’t know it yet, but you’ll look back at this period of cheap acquisition for a shoddy proposition with nostalgia in years to come.
2. First-mover advantage barely exists and has no winner truly takes all
Startups are obsessed with two ideas: (1) first-mover advantage and (2) that winner takes all.
You only need to look at the constant battles between Meta and Tiktok, or Uber and Lyft, to see in even the biggest companies in the world, winners don’t take all. The Fortune 500 is full of companies, from Walmart and Amazon to the very bottom, who are all competitive with each other.
And you only need to look at what came before today’s biggest-ever companies to see that being a first mover is rarely an advantage. HBR wrote about the half-truths of first-mover advantage back in 20051 and yet still they’re repeated year after year.
Your success is an indicator to other entrepreneurs that there is opportunity. That’s the price of doing business in a market economy.
And what does competition do to your customer acquisition costs? Yep – sends them up.
3. Advertising platforms get more expensive all the time
“The first banner ad ever, on HotWired in 1994, debuted with a clickthrough rate of 78%” – Andrew Chen in The Law of Shitty Clickthrough Rates2
Every ad platform will get more expensive over time. This is a law of nature.
In the early days, there is less competition on a platform and that means it’s easier for your thing to break through.
Novel things work well. When an ad first appears on a platform, it’s rare. The first banner ad was interesting just because it was there. So you were more likely to click it. The more ads there are, the more we become blind to them. You will have seen hundreds of ads today by the time you’ve read this, and you won’t be able to recall 99% of them.
How to overcome rising CAC
‘This is great Josh, but I’ve got a business to build here, what am I supposed to do?’
Fortunately, entrepreneurs have grit in spades. Plus the self-confidence that makes them believe they will be the 1% that will make it work.
CAC naturally rises. So with that in mind, how do you achieve something like the above as we did for a client recently? Or more fundamentally: how are you supposed to build a big business with this in mind?
Run everything as a growth process
There’s a handful of tactical ways to achieve this which I’ll detail below. But at its core the thing is Growth.
By that I mean:
Deep customer understanding
An experimentation process that learns and gets better over time
Rapid execution
It is only through these things that you will be able to tactically achieve the following steps.
Constantly improve your marketing
If every force is out to get you, then that means you need always get better at marketing. Not only better at beating your competitors, but also at beating the broader market.
As ad platforms get more competitive, you need to be able to capture attention faster with better ads.
As the need/problem state moves away from the early adopters, you need to be able to sell your value in product marketing better.
As new businesses copy your idea, you need to get better at communicating why you command a premium to keep those customers.
It is only through the Growth Process, that your marketing will be able to exponentially get more effective for every pound spent.Constantly improve your product
Your product is not a fixed entity. It has to continuously improve. As discussed a few weeks ago3, this is why DTCs often struggle. Not all DTCs. The best constantly iterate based on customer feedback. That's why when Huel releases a new product it skyrockets instantly. They're great at customer-driven product development.
Every entrepreneur knows that having a great idea is not enough. But having a great product isn’t either. You’ve got to keep making it better. The 99th and 100th person in the audience have more developed needs than the 1st and 2nd.
And experimenting within the Growth Process is the most reliable way of getting here. Only building for things your customers actually want and need. Rather than what you think they do.Recognising luck when you have it
Looking back to April 2020 at Wine List, I should have put every penny we had into Facebook ds. CPAs were a tenth of what they were a year later. The iron was hot, luck was on our side. And I didn’t strike.
Likewise, in the earliest days of Thriva, there were a few months when we really struck gold on Facebook. We should have spent 10x more.
There will be times when outside factors come together and things just work. It could be external forces. It could be a particular gap or opportunity in a platform update.
It’s hard to recognise what’s luck or external when you’re in the midst of it. It’s a muscle that develops with practice. And running an agency, with many more data points than just being in-house, means you’re better able to see it too. But it is still something I am sure will always be hard.
Experimentation means you know when something outperforms something else. And it gives you a baseline. If you see something that brings CPA down, then don’t just focus on it, throw everything you’ve got into it.
A more realistic forecast for the future
If you’re in a marketing-driven business, then amend your financial model now for CAC to increase. Once you break through early adopters, then early competition, then new markets: all of these costs will rise.
The best you can hope for is maintaining CAC.
If you can balance your marketing and product innovation at the rate of growth, you can maintain CAC while increasing your customer base.
And then hope for a little bit of luck along the way too.
Fernando Suarez & Gianvito Lanzolla, The Half-Truth of First-Mover Advantage
Andrew Chen, Law of Shitty Clickthrough Rates
Notes from Amphora, What’s stopping our growth: product or marketing?