The CAC Crisis: Will 2022 Be Marketing’s 2008?
It’s never been easier to raise money for a B2B startup.
But it has never been harder to grow one.
Systemic headwinds across channels are pumping costs and slashing performance. B2B CACs rose 60% from 2014 to 2019, a trend that has since accelerated. Most startups primarily targeting SMB and mid-market customers in crowded spaces will struggle to keep LTVs above rising CACs because competition caps prices.
I’d imagine many startups are already underwater on most channels. And the forces we’ll discuss in this article will further metastasize. Eventually, CACs will rise so high relative to LTVs where raising more money to fuel growth will become untenable.
What happens next could harken back to 2008. Startups will miss their aggressive revenue targets and fail to grow into their high valuations. Layoffs could accelerate.
And like 2008, the causes would be systemic. A single bank did not cause the collapse. Rather, risks across the entire financial system compounded until the whole thing came crashing down. The growth marketing landscape is poised for a similar downfall.
No wonder my friend John Luttig at Founders Fund says that “every startup needs help with marketing right now.”
In this article, I will break down the largest risks threatening CAC stability, and then share growth marketing frameworks founders can use to come out on top.
Systemic CAC risks in the go-to-market system
“Ugh, Facebook has gotten a lot more expensive.”
“Why are all my damn emails going to Google’s promotional tab now?”
“Everything that worked last year just sucks now.”
I’ve heard all of the above when chatting with marketers and founders. These aren’t one-off issues; they’re symptoms of challenges putting most of the channel portfolio—from paid to outbound to organic search— at risk of crashing down.
Let’s look at five of the most worrying headwinds.
Systemic challenge 1: Demand is heating up for limited digital ad inventory
When evaluating incremental investment on a channel, startups assess whether the revenue they’d earn exceeds the cost. The revenue side of the equation is obvious—you price your product as high as the market will allow.
The costs of digital advertising are governed by the same supply and demand dynamics you learned in Econ 101. Several factors are inflating demand for limited ad inventory across channels, in turn inflating prices:
Low interest rates ultimately increase ad spend
Since 2008, the Federal Reserve and other central banks have kept interest rates near 0%. Awash in cash and seeking yield, funds are investing more money into companies. Bigger funding rounds, in turn, raise revenue targets for startups, increasing the pressure to bid for more customers on paid channels.
Record startup formation compounds and inflates CAC over time
Between 2,000 and 4,000 new U.S. startups that raise at least $250K are formed every year, according to Crunchbase data. As a result, the total number of companies vying for customers on paid channels adds up quickly, and increased demand-side competition raises CAC.
VCs get category FOMO and fund players that compete on the same channels
One company’s success is a signal for others to follow. Investors don’t want to miss out on a hot space so they fund new entrants. These competitors spend on the same channels.
De-globalization increases competition for domestic customers
Globalization opened new markets for early entrants. However, over time, homegrown competitors grew and made international expansion harder for American companies. Regulators (and consumers) increasingly favor domestic brands. A timely example of this is LinkedIn’s decision to pull out of China due to a “challenging environment”.
Internationalization headwinds will force American companies to capture a larger share of a smaller pie to hit their growth targets. This pressure will increase the amount of money companies bid on marketing channels to acquire incremental customers.
A prisoner’s dilemma on investment decisions can further inflate prices
This last demand driver is best explained with the example of bidding on your own brand on search engines. The optimal outcome for all companies is if no one bids on their own brand. Why pay money to acquire a customer that is already actively searching for you?
The problem, however, is a classic prisoner’s dilemma: if no one is bidding on their own brand, the right move for an individual company is to bid on a competitor’s brand to capture more customers. It would be crazy to let this opportunity slip by.
That’s why most companies bid on their own brand (and their competitors’) even though everyone’s costs rise without a proportional increase in conversion.
Systemic challenge 2: Digital advertising platforms are losing targeting power
We’ve talked about the demand for paid advertising.
All is not well with the supply, either.
Privacy-related changes will restrict targeting
Unfocused targeting hobbles performance. When Apple announced that iOS 14 would let users block ad tracking, advertisers worried performance would decline because ad platforms would get fewer signals about user behavior to inform granular targeting.
These concerns were warranted.
Only 5% of users decide to opt into ad tracking. Paid social CPMs are up 42% YoY. And Snap just experienced a 25% hit to its stock price because of this issue.
Increased automation will reduce advertiser control over targeting
Google and Facebook slowly but surely are giving advertisers less control over targeting, supposedly to level the playing field for inexperienced advertisers, but in reality to stave off regulatory scrutiny over targeting.
For example, Facebook is signaling that it may phase out Lookalike audiences, the most powerful targeting lever on the platform.
The backlash on engagement tactics will restrict inventory
The less time people spend on a given platform, the fewer available impressions there are. As platforms respond to public pressure to curtail their addictive nature, the supply of profitable impressions will contract.
Systemic challenge 3: Blended CACs will rise as organic and outbound degrade
Many startups (rightfully) respond to paid marketing headwinds by putting off performance marketing for as long as possible. And when they do tackle paid, they try to keep its revenue contribution at roughly a third to protect blended CAC.
But other channels are getting tougher too, putting the rest of the portfolio at risk.
Apple and Google are coming after email next
Email clients are getting better at keeping promotional emails out of the inbox and detecting spam. Startups will have to work harder just to ensure their outbound prospecting emails get delivered.
And after crippling ad tracking with iOS 14, Apple is following up by targeting email tracking with iOS 15. This tracking today informs the logic and signals the success or failure of many marketing campaigns.
SEO faces competition for search engine real estate
As Google gives more page space to ads and its own content, the screen real estate for organic search results is shrinking. Incumbents will have an edge when competing for fewer slots because they have more domain authority.
Bottom-up, product-led growth will face tool exhaustion
Product-led, bottom-up distribution as a go-to-market motion will grow more saturated as startups race to adopt it. This means getting enterprise-wide adoption of a bottom-up product will become more challenging as tool fatigue sets in and multiple companies vie for the same early adopters who will champion a product.
Systemic challenge 4: MarTech’s boom erodes new tactics
A common trend occurs when an internal team develops a playbook or new tool that unlocks growth, then productizes it as a standalone company. There were 25% more MarTech companies in 2020 than in 2019. Today there are over 8,000 MarTech companies—and of course, they all need to acquire customers.
New MarTech tools can certainly be helpful, but the explosion of companies reduces the efficacy of any given product for everyone. So you either have to settle for lower results or constantly search for the next tool by building in-house or buying more software.
For example, a couple of years ago, companies using audience enrichment tools to target their buyers on Facebook had a massive edge because they could get LinkedIn-level targeting for a fraction of LinkedIn's cost.
However, today, using an audience enrichment tool is table stakes for any B2B startup trying to crack Facebook. As more B2B companies target the same buyers on the same inventory, costs will rise and performance will fall.
Another example is the proliferation of lead database companies like Zoominfo. The more companies have access to leads' contact information, the more those leads are inundated with emails and cold calls—making them more likely to tune out the marginal outreach attempt.
Lead fatigue due to database proliferation will have a huge effect on sales outbound efforts in crowded categories.
Systemic challenge 5: Most B2B marketing teams hire the wrong people
Keith Rabois’ advice to hire for expertise when a role’s goal is to preserve value. Most startups hire as if growth marketing’s role is to mitigate downside value, not create outsized returns.
They index too heavily on expertise and hire conventional demand-generation teams that pursue conventional strategies, which yield conventional returns.
The problem is that we’re in an era where experts won’t have an edge. Conventional growth playbooks have gone stale and new tactics degrade in the blink of an eye.
Systemic solutions to systemic challenges
Systemic headwinds deserve a systemic response, yet common advice mistakenly focuses on cracking an individual channel and then scaling it.
Unlocking deep, asymmetric upside in a specific channel is critical, but achieving outsized returns from marketing actually starts with adopting a holistic approach to growth that shuns convention and searches across the go-to-market motion for upside.
At Rippling, Matt Epstein (CMO) Jonathan Griffiths (Director, Growth/Ops) saw this from day one. This is a core reason I joined in 2019, and two years later, we’ve doubled down and driven explosive revenue growth with strong unit economics.
Our go-to-market approach, when layered on top of our product, helped Rippling cut through the noise and scale to a $6.5b valuation in five years with strong CAC dynamics, despite competing in a crowded space.
We realized that most startups over-index on channel discovery and development because of the pressure to grow now: it's far easier to turn some knobs on a channel to unlock quick wins than think holistically about a systemic approach.
The problem is that it's hard to build a sustainable edge that compounds regardless of changes within a specific channel. So if you focus mainly on one channel and then that channel degrades, you're back at square one.
In this section, we’ll cover some approaches to growth marketing your startup can use to maximize the odds of success even during a widespread channel crisis.
Response 1: Hire atypical profiles into growth marketing roles
Success starts with the people on your team.
I’ve found that it is almost impossible to get returns from marketing investments that are higher than one standard deviation above the mean if you only hire traditional demand generation profiles. These hires have a place because they understand existing playbooks well and may think of new ones, but they often struggle to get massive, unconventional wins.
You’ll need to also hire people who can rigorously assess your funnels from first principles and find opportunities in places a traditional marketer would not think to look.
Some of our strongest hires at Rippling have come from engineering and finance backgrounds with no prior experience in marketing. They can assess a system and find new opportunities and manage complex initiatives that require significant attention to detail.
The critical thing to note when hiring people with quantitative backgrounds is that they also need to be creative at finding new levers to pull. I’ve found that giving candidates an assignment that tests equally for creativity and quantitative ability is the right way to screen for this.
People with product backgrounds and former founders could also be great fits.
Response 2: Spend an inordinate amount of time on building a targeting machine across several channels
Unique opportunities in B2B marketing usually come from superior audience identification, not the mastery of levers on a given channel. A robust targeting machine helps you get an advantage across the board.
Your focus should be programmatically identifying leads or accounts with a high expected value (whether because of their propensity to buy or LTV characteristics) and then reaching them across as many channels as possible.
Let’s take a look at OpenSea, for example. Until now, it had a near-monopoly on capturing NFTs’ 18,000+ YoY TAM growth. Coinbase’s entry into the NFT market, however, means OpenSea can no longer rely primarily on TAM growth.
OpenSea could invest solely in performance marketing, but Coinbase could copy its creative (and vice versa). OpenSea could (and likely should) buy billboards, but so could Coinbase. The point is that any move on a single channel will encounter competition.
The place OpenSea should look to for unique leverage is its targeting strategy. An incumbent will have a more difficult time replicating your targeting strategy than your tactical execution on a given channel because the mechanisms used to find audiences are less visible than, say, creative.
To build this targeting strategy, I would think through who is likely to have a high propensity to seek the value an NFT could provide. I would invest in the best ways to find these people, then target them across several channels.
Your ability to invest in a channel goes up if you’re confident you’re targeting people with a propensity to convert. Automation is also critical for unlocking additional ROI and scale; a company at OpenSea’s scale needs to unlock dozens of these plays without significantly increasing overhead.
Response 3: Focus on step-function gains
You don’t want to throw linear solutions at an exponential crisis.
Linear optimization will prove insufficient to the challenges at hand. It is often easily copyable and usually doesn’t produce outsized, defensible gains. Unfortunately, too much of the marketing advice I see online (e.g., test a different color button) focuses on this linear optimization.
Big wins come from an obsession with finding the global maximum. Can you identify a step in your growth equation then figure out how to multiply its efficiency and/or volume 10X? Why is it that a specific growth initiative usually doesn’t scale but suddenly becomes possible with a step-function change?
To find these opportunities, I recommend creating a model that covers the entire funnel and rolls up to your CAC payback. Then see what happens when you change significant inputs.
For example, factories used to focus on finding ways to make an existing workforce more efficient. Amazon certainly does this, but they’ve been able to unlock a step-function increase in margins by layering on increased automation and robotics.
What can be the Amazon value unlock for your startup?
It’s not always clear up front what will be a linear optimization. I’ve found this is especially true when it comes to your website. Jess Heilman, who runs website growth at Rippling, and I often debate whether an initiative is a linear test. She’s been able to unlock a massive upside in part by trying things that one of us thought were linear.
Response 4: Decentralize your MarTech stack
I recommend against over-centralizing your marketing stack.
It's better to use several vendors, ensuring that each one doesn't have the complete picture of your plans. If you’re using innovative growth tactics, vendors love to copy and resell your secrets—hurting your tactic’s lifespan.
One helpful heuristic to assess your company's marketing innovation is to evaluate its tech stack. If the company puts its eggs in only one or two vendors, it's likely just relying on the playbooks pioneered and productized by someone else. On the other hand, the most innovative companies have a weird stew of internal tools and external vendors stitched together with duct tape.
Conclusion: What can my startup do to solve this beyond growth marketing?
We’ve seen how systemic risks on growth marketing channels are inflating CACs and putting B2B distribution at risk. And we’ve also taken a look at growth marketing frameworks to use to come out on top.
But of course, some of the most important defenses will be found elsewhere.
One of these defenses is to not be a point solution. Parker Conrad’s vision of a compound startup is the right one to grow LTV. From day one, Rippling had several products to cross-sell customers. Compound startups that bundle other solutions will have a massive advantage as CAC inflation continues.
A second piece of advice is to make sure your customers have a great experience. Strong organic word of mouth will play a big role in helping keep your blended CAC healthy.
My final non-channel piece of advice is to get your positioning right. Positioning refers to establishing a frame of reference (we’ll call it a category) in the prospect’s mind and then describing your company relative to that category. In other words, you’re answering the questions: “What are we? Who are we for? And what differentiated value do we add?”
Too many teams chase the next growth hack without thinking about fundamentals like the value proposition your product unlocks and the value of your positioning. Getting this right is critical.
Buyers need a frame of reference to evaluate your product. This frame of reference tells buyers everything they need to know about what value your product should add, how they should buy it, who your competitors are, and what the pricing should be.
Buyers will position your product whether you want them to or not. It’s better to be intentional and make sure you guide them to the right answer. Get positioning right, and you’ll see a massive acceleration in conversion rates and sales volume.
Even if you nail your product and positioning, I urge you to not underestimate CAC inflation and be complacent with your demand generation strategy.
Like in 2008, a systemic crisis will require a response from every angle.
Thank you Caroline Coleman and John Luttig for your thoughtful feedback on this article.