Thread by @dunkhippo33

Today I want to talk about how much you should spend to acquire a customer.

This is a topic I've thought deeply about for the last 15 yrs. It's such a complex topic, because there are so many unknowns and moving parts.

Let's dive in:

1) At a high level, conceptually, business is "easy". You want to acquire customers for less than their value to you. Right?

The prob is that when you first start, you don't actually know how much they are worth to you. On the cost side, that will vary widely based on channel

2) In this thread, I want to just focus on CAC (cost to acquire customers). Let's not talk about lifetime value etc.

First, there are a LOT of great blogs that you should read on cust acq - esp SaaS cust acq:

-SaaStr.com
-Forentrepreneurs.com
-christophjanz.blogspot.com

& more

3) A thing I've struggled w/ is many posts assume you already know something about the cost and value of your customer. But in the beginning you don't.

So what do you do if you are in this boat?

4) If you have very little capital (< $250k to work with), I would be very conservative on payback period.

For ex, if I am selling a widget for $50 (after COGs), then conservatively, I should assume a customer will buy 1. And I should spend < $50 to get him/her.

5) Even for a SaaS product - say it's now $50/mo - I would still try to acquire that customer for < $50. This seems almost overly conservative, but at this time t = 0, you don't know if you even have retention. And remember, we don't have a lot of cash to work with.

6) Later on, as we get more data around retention / addl purchases & upsells, we can start to increase how much we spend to acq a customer. But for right now, at t = 0, we don't know any of this.

7) You might say, "This is ridiculous! I won't be acq anyone at scale on immediate payback." And for many products, that's true!

But if you are building a capital efficient co, this is the characteristic most of them have. And in this mkt, where it's hard to raise, this is impt

8) Now let's segment channels a bit. The best marketers segment CAC by channel. Don't blend organic (free) customers w/ paid. Separate by channel.

Why? If you want to scale up your paid, you need to know the true cost of paid.

9) A lot of VCs hate paid acq, but the real reason is that most products are not able to get immediate payback on paid channels.

If you have that, then that is magical, and you should definitely keep pouring $ into paid until those conditions change.

10) Now, eventually if you are pouring so much $ into paid, you will see your CAC increase and the payback period will go beyond 1st purchase. But hopefully at that point you have more data about retention / increased purchases & upsells to decide whether paid will cont to work

11) Now, let's say paid mktg is profitable, but now it takes 3 mo to get to payback & you don't have cash on hand.

This is where rev based financing can help in mkts like now where VCs are more conservative. You can get a line of credit now just based on your #s & keep going.

12) If your paid mktg stops being profitable, then you need to keep a close eye on that and cut back & try new channels.

The unspoken thing about mktg is that mktg channel arbitrage opportunities are a bit cyclical.

13) For ex, sometimes everyone is using FB ads, and then your CAC goes sky high. At other times, mkters have pulled back, and FB ads are great again.

Mktg channels are like stock market arb opps. Demand for different channels affects pricing, and demand is always changing.

14) So the best mkters know that it's worth revisiting channels that stopped working from time to time.

In these mkts, I've heard from a # of portfolio cos that their CAC has gone down in paid channels. My guess is that lots of companies are pulling back on spend.

15) So, if you have profitable spend with quick payback periods (1-2 months), this is your time to lean into that mkt opportunity.

16) The other consideration is that when I talk about paid mktg, ppl immediately think about ads. Ads is certainly a big category of cust acq channels.

But MOST channels are paid. If you hire writers to help w/ SEO, that should be considered PAID - there is a cost.

17) You can figure out that cost -> how much do you pay those ppl & what rev does it yield?

If it's you doing the work as an unpaid founder, you need to use market rates (i.e. what you'd pay someone else) to compute this paid acq #. It's NOT FREE.

18) The only truly "free" marketing is uncontrolled word-of-mouth and unattributable referral sources. This could contribute as much as 50%+ of your traffic. And you just don't know where these ppl come from. But to repeat: don't blend this "free" in with your paid.

19) tl;dr

Ideal mktg:
a) Segment your mktg channels
b) Compute TRUE acq cost by segment
c) Scale up 1-2 channels that yield immediate payback on first sale
d) As you get more data on retention, extending payback period is ok
e) Channels will get saturated but revisit later.