Thread by @dunkhippo33

Today I was talking with a @HustleFundVC portfolio founder about how aggressive they should be with customer acquisition spend.

What customer acquisition cost (CAC) should they aim for? Payback period?

A thread on this topic >>

1) First off, I think a lot of founders think about what number they should aim for for their CAC.

I think this is the WRONG way to think about it. There's no holy grail number. But there are good and bad ways to think about CAC.

2) At a high level, your CAC must ALWAYS be less than your lifetime value (LTV) at scale - in order to have a real business!

The problem for startups is that you often don't know what that lifetime value is, so it's a moving target of what your best guess is. Refine as you go.

3) But let's assume you have high certainty that your LTV > CAC, then it's a matter of how long you can let your payback period be and how much access to working capital you have.

4) Let's play out a scenario. Let's say I have a SaaS product. I charge $10/mo & have a sticky product.

Let's say I start getting customers via ads. I spend $10 to get a customer.

I'm basically breakeven on first transaction, because I make back the CAC on the first month.

5) That's great! So I pour as much $$ as I can into ads as long as these conditions hold.

But can I afford to spend more? Technically yes because I have a sticky product.

If I spend $20 to get a cust, I basically make that back after 2 months and still retain the customer.

6) The same goes for 3 mo or 4 mo payback, etc.

But then I start to have a working capital problem. I need $$ to put into ads. But now I'm only getting paid back a fraction of that immediately & have to "wait out" when I get fully paid back.

7) So it's possible to get to be profitable BUT not be able to sustain the customer acquisition costs.

This is where access to capital - either equity or debt investors is key. I need more $$ to pour into ads even though those ads are profitable for me AND making me good $$.

8) Going back to my portfolio company, today, they are running ads and they have a 2 mo payback.

Based on how much $$ they have in the bank today and their low burn, I felt that they can certainly afford to pour a LOT more $$ into ads even if that drives up CAC.

9) And I recommended they evaluate how their newer cohorts of customers are once they hit a 3 mo payback period - just to make sure the high quality of retained customers remains the same with the increased ad spend.

10) From there, if things are still looking good, they should do that again -- pour MORE $$ into ads even if the payback period goes up to 4 mo. And then analyze the cohorts again to ensure quality.

Etc...

11) With the capital they have + their traction I think they could also easily get a startup loan to fuel their ad spend as they continue.

12) The ideal situation for them is that eventually they have a revolving loan where they can pour $$ into ads, get customers, pay back the loan after X months when they get fully paid back after those customers are retained for a while.

13) In short, there's no magical CAC number that companies should be aiming for. There are def constraints on what it can be (i.e. it should be well below LTV. And, LTV needs to pay for overhead too).

Payback period is a big factor - that's largely driven by capital access.