There’s a mistake I see a ton of startups making today, in the of age of new efficiency in SaaS and pressure around making capital last:
They are treating every customer the same for CAC purposes. And you just can’t if you are scaling.
What do I mean? Well of course the burn is the burn, and the budget in the end is the budget. If you have $2m to spend this year on marketing and growth, then that’s all you have.
But what I see more and more these days is a lack of segmentation in CAC as you scale.
For example, I’ll see a startup just starting to take off at $2m, $5m, $10m., $20m ARR … and then start to cut back certain marketing initiatives, certain sales initiatives, campaigns, even markets because the CAC is higher than average there.
But here’s the simple thing, that still many miss: as you expand into new market segments, new verticals, new buyers … your CAC will be higher there.
If you force your CAC in a new segment to hit the same ROI as your overall, blended CAC goals, you’ll never leave your core safe ICP. You’ll never expand beyond the core niche where you always win.
Roughly, here’s a framework to think about it: 80% of your new customers should hit a sustainable CAC goal. That’s the discipline you need to put on marketing, outbound, and sales.
But 20% that you identify as new market segments? Just try to barely break even there. In fact, try to close any deal in new market segments where you make $1 for every $1 you spend on marketing and outbound.
That doesn’t work for all your customers. But it’s a simple way to think about how much to spend to break into new markets:
- Stealing customers from the competition is more expensive.
- Entering new geographies is more expensive, at first.
- Going upmarket can be more expensive, at first, to get those first 10-20 big deals going.
- Entering new verticals can be more expensive. If you want to start selling to sales execs and not just marketers that know your brand, that will likely be more expensive to start.
You have to give these new market segments 24 months to hit the same CAC efficiency as your core. That doesn’t mean throwing away money on things with $0 CAC. But it does mean maybe, spending $1 to make just $1, i.e. with no net margin, is OK in emerging segments.
Importantly, this lets you play dominant strategy. If you only stick to your core buyers, and only expand slowly from there … that can work in a less competitive space. But the best of the best find a way to grow in spaces where initially they are less competitive, too. They’ll come for you.
A related post here:
(image from here)
