CAC will rise. What to do about it?
The power of 1% on a brand's combined P&L and the importance of your cap table for longer term pricing pressure.
What is CAC? CAC is the cost to acquire a customer, AKA CPA (cost-per-acquisition), AKA CPP (cost-per-purchase)...and a few more acronyms we use to make ourselves sound smart.
This metric is one a lot of brands, and therefore agencies live by as it’s the ultimate metric of how expensive it is to acquire a customer, ideally New Customer CAC: the cost of acquiring a first time customer. The benchmark ratio that accompanies this KPI is the LTV: life-time value. This is the lifetime dollar value a customer is expected to generate as revenue.
This is incredibly relevant when understanding how much you can afford to spend to acquire a new customer, knowing their LTC is going to be X. In some cases, subscription brands, unlike brands where a customer is likely to purchase once, can afford to spend more than their target CAC and take a loss on purchase one, if it means they have such strong retention and LTV that they’ll still be profitable on a per customer basis. For example if it has cost them $50 to acquire a new customer, and that customer has spent $40 buying the product, they’re at a loss on first-purchase (cost of the product - ad spend - other fees + revenue, is negative). But if the average LTV of first time customers is 10 months or $400, then you’ve profited quite a lot from that sale spending only $40 to acquire someone spending $400 (10x gross ROI).
Now the challenge almost all brands face, is the auctions to acquire those customers, primarily through Facebook Ads and Google Ads (though at least with Google the CPC’s are transparent) get more expensive as more brands bid for that customer. This is defined by the CPM (cost per million impressions), and this has been a constant battle for brands since the dawn of time, as they look to increase spend.
On top of increased competition, you’re also dealing with the size of your audience. You may say (for example as a baby brand): “But there’s 10 million babies born every year, we have a huge market.” That’s not the point, the better question is how many people you can reach, and at what cost can you reach them, with the algorithms you cannot control, and the competitors standing in your way.
In comes me. The media buyer, I like to think of a flaming chariot from a land far far away.
What are the fundamental assumptions founders make?
“CAC’s doing better this week, how much can we scale?”
“How can we keep CAC down while scaling the budget? Is it creative? Is it targeting?”
These are all questions we'll get as an agency before, during, and even after partnerships have ended. The problem is they're all built on the same assumption: that CAC (cost of acquiring a customer) CAN IN FACT STAY LOW while scaling.
But how do you know? Did God reach down and bless your FB ads with a strategy unique to the other millions of founders asking the same questions? Did your incredible new creative come down on a lightning bolt from Zeus, and a message tied to it that says, “Take thou this creative, for it is blessed amongst all others. Deploy it unto Meta, and thy CAC shall falleth by 20%, whilst thy competitors look on in envy." Sadly I think not.
The sooner you accept that diminishing returns, regardless of your category, is inevitable, whether you’re spending $200 p/day or $100K a day, the better you’ll be able to structure the brand to position yourself for growth, manage your agencies and forecast your return.
This isn’t just a post iOS issue, though Meta and Google have published data that every year auctions (CPM’s) and therefore CPC’s are getting more expensive.
So perhaps the better question isn't "How do we keep our CAC low?" But where else in the business can we seek a couple basis points? Because the math may be more attainable than you think…
The maths might be kinder than the auction
Imagine you're running a $1M revenue brand. Your instinct, like most founders, is to spend the next six months trying to shave 10% off your CAC, pressuring the creative team, battling with influencers because your hardline is a $40 CAC and without that you can’t scale. New creatives. New agencies. New attribution software. New landing pages. Anything to squeeze another few bucks out of Meta.
But what if you stopped looking at FB Ads manager or Triple Whale for a moment and looked at your P&L instead?
A 1% improvement in returns. A slightly lower discount rate. Negotiating a better payment processing fee with Stripe. Improving gross margin by a point by saving on material cost. Trimming fulfilment fees by moving 3PL’s? None of these changes are particularly exciting on their own. Yet, because they compound through the profit waterfall, the combined effect can be surprisingly meaningful!
But how can you forecast this as a new brand? This is something that’s very hard to forecast prior to launching the brand until you actually have an MVP or baseline KPIs about CAC:LTV. So only then can you bake in questions like: “OK my CAC is averaging $40, give or take 25% depending on the performance of PPC, how do I build a model, where if CAC increases to $50 average, that I can still scale my business?”
Then you can start pressuring other parts of the brand, to commit or negotiate even 0.5-2% exemptions or improvements to reach that goal. Then the forecast alters dramatically. In the graph below, you can see what happens if multiple areas of your operations improve by just a few notches.
Important note: Negotiating rates and terms, or fees is really hard. Granted not all your suppliers (knowing their costs will go up), want to negotiate rates on shipping, FedEx are too big probably to give you preferred rates if they have opportunity costs elsewhere, and the shipping container pricing moves so much (thank you tariffs also), that you’ll spend a lot of time improvising. But it’s important to simply emphasise that it’s not a waste of time to say “Let’s see where else we can look.”
How a few basis points can make all the difference
Let’s assume the brand operates in a competitive category. It spends roughly the same amount on marketing each year for 3-years. Like every other brand, it experiences the same reality of Zuckerberg's wrath, with CAC increasing by 25% over a few years (I think it’s a fairly pragmatic expectation?), as competition intensifies and auctions become more expensive.
Path A is the one many founders naturally take. Every conversation revolves around reducing CAC. The P&L remains largely unchanged. Gross margin stays the same. Return rates don't improve. Logistics costs are untouched. Payment processing fees remain identical. As CAC rises, contribution margin is squeezed, EBITDA declines and the business gradually loses confidence to keep scaling or even justifying added media budgets. Growth slows, not because demand disappeared, but because the unit economics no longer justify spending more while they’re battling profit decline month-on-month.
Path B accepts that higher CAC is simply part of the game. Instead of fighting the auction, the business optimises everything around it. Returns improve by a couple of percentage points, by improving a post-purchase flow. Or gross margin edges higher through product sourcing (takes time and negotiations). Logistics become slightly more efficient (granted this is hard to control, unless locked-in on rates, tariffs obviously suck etc, so this is often unlikely). None of these changes are transformational in isolation, but together they compound through the P&L, creating a healthier contribution margin as a percentage of revenue. By Year 3, the business has recovered more profit than the additional acquisition cost consumed, increasing its allowable CAC and giving it the confidence to continue investing in growth.
How easy is it to do this, and what some brands are doing
The lesson isn't that CAC doesn't matter. It absolutely does. But obsessing over making it cheaper every year assumes you're somehow exempt from the same auction dynamics affecting everyone else, and unfortunately you are no deity.
The better operators I've worked with rarely build a business around today's CAC. They build one around CAC:LTV perhaps under assumption it’ll rise, as well as understanding how to become a total supply chain and ops control freak, so that every part of that puzzle finds its way to the P&L (assuming the minor detail that people even want to buy your product in the first place). One of the best things a new brand can do, in my opinion, is give away equity or build incentives to keep those different stages incentivised. You shouldn’t HAVE TO have 100% of the business to feel incentivized to grow it, in my opinion. Everyone’s different. Stay with the largest piece of the puzzle: COGS.
That means negotiating manufacturing costs with future volume in mind. It means designing packaging and fulfillment that become more efficient as order volumes increase. It means creating pricing power, improving retention, reducing returns and building supplier relationships that return a couple of basis points every time the business reaches the next milestone. Some brands go as far as giving their suppliers options and shares, so at least there’s pressure on material fees on their side as both parties share a mutual goal (most likely an exit).
However, at the end of the day, what does a contract mean to a Chinese manufacturer? Is it even possible to do that and deal with the bureaucracy if you haven’t even built a business yet? It's basically a "Hey are you okay to keep prices low for the next couple years? Thx." Basically as good as toilet paper, so if you're thinking of building a cap table with your supplier, that relationship needs to be a great one. Not as uncommonly as you may think, companies occasionally will go to competitors and actually ask them to be a shareholder in their brand, to leverage their valuable partnerships with suppliers for pricing power. Oftentimes, if you're scaling into a 'disruptive' market share territory at some stage, you become a target acquisition from competition anyhow, and because EBITDA multiples grow with scale, an ownership stake in an exciting small brand isn't always a bad play for a large business.
This could land your cap table looking something like: Brand/Founders + Investors (if you have any) + Sourcing Partner/Brand Competitor + Supplier. This way at least you have a few years of cost suppression (in theory) with everyone’s interests aligned for you to grow and pricing power to give CAC a little flexibility.
In my experience, the businesses that continue to win aren't necessarily buying cheaper customers. The founders or directors are often OK with increasing the amount they can afford to pay for customers, subject to placing pressure on other areas of the business to stay lean. And in a world where every advertising auction becomes a little more competitive each year, that may be one of the biggest competitive advantages you can build before you even launch.