A friend in VC recently emailed me to get my take if I thought CAC would increase/decrease/trend over time for a specific product and business. The question isn't if it will increase? It is when, by how much, and how you keep growing. There are a few forces I think about when thinking through this question.
Saturation - Things That Increase Costs
The primary headwind that increases costs will be one or more forms of saturation. The main types of saturation are:
Audience Saturation - How quickly you saturate your current target audience. Most importantly, how quickly do you saturate high intent customers to a lower intent audience? As you saturate your audience or move from high intent → low intent your costs will increase due to decreasing performance (The Adjacent User Theory from Bangaly Kaba).
Channel Saturation - How quickly does your channel or specific growth mechanism saturate? Each channel is able to access a portion of the total target audience, but not the entire audience and is therefore a subset of audience saturation. Each channel has a ceiling, and as you approach that ceiling CAC will increase.
Market Saturation - Simply put, more competition. The more competition, tends to mean more friction to convert potential customers and therefore costs increase.
All of these will happen over time for a successful product. So the real question at the early stage is how quickly it will happen and is there enough ceiling room to get the growth you need to get to the next venture round and/or enable the below.
Model Expansion - Things That Decrease Costs or Increase Floor of Affordable Costs
One way to fight off saturation is by making model improvements. The main ways would be:
Growth Model Expansion - You are able to sequence to another part of the growth model that has a higher ceiling, ability to access another portion of the audience, or able to do it at a lower cost. For example, HubSpot went from an inside sales model (content + sales), then layered on a VAR program that unlocked a new ceiling of growth, then layered a product led motion. This method is harder than most teams think it is and is one we teach in Advanced Growth Strategy.
Audience Expansion - You layer on new features and use cases in the product that expand your target audience. This fights off audience saturation by expanding your target audience. This is what most early stage companies are doing going from some small segment of early adopters to the majority.
LTV Expansion - You layer on new functionality/use cases that increase the LTV of customers and therefore increases the floor of what you can spend on CAC holding LTV:CAC the same. Taught in Product Strategy and Monetization Deep Dive.
Capital Expansion - Raising more money and applying it to existing growth model. This doesn't decrease CAC, it actually increases CAC, but still creates growth. Expanding the pool of capital available to increases the CAC and Payback Period you are able to afford.
Scale Effects - Things That Decrease Costs and/or Increase Floor of Affordable Costs
This is the age old question of how does the company get better with scale? The common answers:
Network Effect - As a network effect kicks in, conversion rates somewhere in the growth model will increase, which will decrease costs and/or increase LTV.
Economies of Scale - As economies of scale kick in, costs decrease or the experience gets better in a way that increases conversion rates in the growth model which leads to decreased costs or an increase in LTV.
Brand - If Brand is an important aspect of the category it can increase conversion rates, which decreases costs. It can also help increase retention, which extends LTV and increases the floor of the CAC you can afford.
We go deep on each of these in Advanced Growth Strategy.
Net Effect of Saturation, Model Expansion, Scale Effects
The net effect of Saturation, Model Expansion, and Scale Effects is what determines when CAC will increase, by how much, and how to keep growing despite it.
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