How low can your CAC go?
March 18, 2021
In this episode, we talk about the reality of low CAC.
How big is your CAC? You might hear something like that on Shark Tank by Mr. Wonderful when he's asking about your company, he might ask you what is your CAC and CAC, of course, is your cost of customer acquisition.
And a lot of times when the sharks asked this question at the beginning, at least in the first few seasons, you would see founders start trembling and shaking because they don't know what their CAC is. And someone like Mr. Wonderful will say "You don't even know what your CAC is?" and make him feel dumb and make him feel stupid at that moment since made every founder feel like they need to know what their CAC is before they pitched to anyone.
So they started getting obsessed with the CAC. And one of the first things that first-time founders do is they will look up the industry averages for their cost of customer acquisition, and then they will start benchmarking what it is like for them.
So this is before any companies have made any kind of revenue. They are just working on building up their customer list and they'll be able to build up a customer list of 1,000 people, and then they'll go look at the industry average and say, "Oh, wow, for our industry, it costs $8 per lead and we have 1,000 people. That means that we were able to do this."
Let's say that our cost was a dollar per lead. Then we were able to do this for $1,000 where for someone else it might cost $8,000. And now all of a sudden, the founder feels super stoked and super happy because they feel like they have some kind of edge. Or that their product is so good that they have cheaper acquisition costs because customers just come to their page and they convert.
But is that what's really going on? And, of course, by the change of my tone, you could already sense that. No, that isn't what's going on. So here's what's going on.
You have to be aware of the CAC stack. And what the CAC stack is is this notion that when you first go out to market the first people that you do get into your sales funnel, they're going to likely be at a cheaper cost because these are your low-hanging fruit. These are the easiest people to bring into your funnel, so it's going to be cheaper.
So if the industry averages $8 and it's costing you $1 will, of course, because this is the low-hanging fruit. Once you've exhausted that first tranche, that first piece of the CAC stack, then you have to go to the next piece of the cat stack. And as you go up the CAC stack, your CAC starts going higher and higher until it starts reaching that industry average.
So you might think that you have a CAC advantage because you have a very low CAC. But you might just be playing at a lower level. And that's why your CAC is so low.
If you think about this in terms of oil, for example, I think that's a really good way to visualize it. If I'm a dude in Texas and I'm just walking around on my land and all of a sudden I find some oil and I strike it rich, well, this was like the really easy oil for me to find, right? It's like right there. I didn't even have to look. I don't even have to drill or do any kind of analysis. It was just right there.
And I might think that I'm a genius because I'm I'm a genius oil man that was able to find this oil. And it was, like, so divine that I didn't even need to try. And I might think that this is all because of my performance that I'm able to find this oil. But then after I started drilling the oil and I've exhausted that entire well and when I start drilling, I don't even know like how much is in there, right?
But let's say that I start drilling and I exhausted the entire well, Well, then that cheap part of the stack is gone. And now I have to either go deeper or wider for me to go find more oil and for me to go deeper and for me to go wider, that's going to cost more money.
So I start going up the CAC Stack and my CAC starts going higher till it gets somewhere close to these industry averages. If you do want to reduce some CAC and you do think that you have some kind of CAC advantage, the only way that you will actually have some type of CAC advantages, if you're using some type of technology that no one else is using, and as long as you keep using that technology and no one else is using it, then yes, then you will have a CAC advantage. But as soon as someone else gets ahold of that technology or that model and starts using it in the same way, then the market will start getting saturated again and your CAC will start going up.
So be aware of the CAC stack. Don't delude yourself into thinking that you might have a low CAC it just might be that you're playing at a lower game. And as you start getting more customers, if you can start comparing yourself with other companies that are in your industry with the amount of customers they have, let's say that your competitor pulled in 1,000 customers with the CAC of $3 and you pulled in 1000 customers with a CAC of $1 you know, then you might be able to say something, but until you have that kind of information just because you have a low CAC You might just be playing at a lower level and I will see you guys in the next episode.
Continue your journey with me on my other channels:
And a lot of times when the sharks asked this question at the beginning, at least in the first few seasons, you would see founders start trembling and shaking because they don't know what their CAC is. And someone like Mr. Wonderful will say "You don't even know what your CAC is?" and make him feel dumb and make him feel stupid at that moment since made every founder feel like they need to know what their CAC is before they pitched to anyone.
So they started getting obsessed with the CAC. And one of the first things that first-time founders do is they will look up the industry averages for their cost of customer acquisition, and then they will start benchmarking what it is like for them.
So this is before any companies have made any kind of revenue. They are just working on building up their customer list and they'll be able to build up a customer list of 1,000 people, and then they'll go look at the industry average and say, "Oh, wow, for our industry, it costs $8 per lead and we have 1,000 people. That means that we were able to do this."
Let's say that our cost was a dollar per lead. Then we were able to do this for $1,000 where for someone else it might cost $8,000. And now all of a sudden, the founder feels super stoked and super happy because they feel like they have some kind of edge. Or that their product is so good that they have cheaper acquisition costs because customers just come to their page and they convert.
But is that what's really going on? And, of course, by the change of my tone, you could already sense that. No, that isn't what's going on. So here's what's going on.
You have to be aware of the CAC stack. And what the CAC stack is is this notion that when you first go out to market the first people that you do get into your sales funnel, they're going to likely be at a cheaper cost because these are your low-hanging fruit. These are the easiest people to bring into your funnel, so it's going to be cheaper.
So if the industry averages $8 and it's costing you $1 will, of course, because this is the low-hanging fruit. Once you've exhausted that first tranche, that first piece of the CAC stack, then you have to go to the next piece of the cat stack. And as you go up the CAC stack, your CAC starts going higher and higher until it starts reaching that industry average.
So you might think that you have a CAC advantage because you have a very low CAC. But you might just be playing at a lower level. And that's why your CAC is so low.
If you think about this in terms of oil, for example, I think that's a really good way to visualize it. If I'm a dude in Texas and I'm just walking around on my land and all of a sudden I find some oil and I strike it rich, well, this was like the really easy oil for me to find, right? It's like right there. I didn't even have to look. I don't even have to drill or do any kind of analysis. It was just right there.
And I might think that I'm a genius because I'm I'm a genius oil man that was able to find this oil. And it was, like, so divine that I didn't even need to try. And I might think that this is all because of my performance that I'm able to find this oil. But then after I started drilling the oil and I've exhausted that entire well and when I start drilling, I don't even know like how much is in there, right?
But let's say that I start drilling and I exhausted the entire well, Well, then that cheap part of the stack is gone. And now I have to either go deeper or wider for me to go find more oil and for me to go deeper and for me to go wider, that's going to cost more money.
So I start going up the CAC Stack and my CAC starts going higher till it gets somewhere close to these industry averages. If you do want to reduce some CAC and you do think that you have some kind of CAC advantage, the only way that you will actually have some type of CAC advantages, if you're using some type of technology that no one else is using, and as long as you keep using that technology and no one else is using it, then yes, then you will have a CAC advantage. But as soon as someone else gets ahold of that technology or that model and starts using it in the same way, then the market will start getting saturated again and your CAC will start going up.
So be aware of the CAC stack. Don't delude yourself into thinking that you might have a low CAC it just might be that you're playing at a lower game. And as you start getting more customers, if you can start comparing yourself with other companies that are in your industry with the amount of customers they have, let's say that your competitor pulled in 1,000 customers with the CAC of $3 and you pulled in 1000 customers with a CAC of $1 you know, then you might be able to say something, but until you have that kind of information just because you have a low CAC You might just be playing at a lower level and I will see you guys in the next episode.
Continue your journey with me on my other channels:
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