Finance leaders have repudiated the growth-at-all-costs mentality and shifted their focus to low-CAC strategies, owing to pressure from boards who are pushing for lower burn and CFOs who are cutting costs in areas like marketing first. Reducing the burn vs maintaining growth rate is the core challenge that presents itself now that venture capital has become less easily accessible.
With the current rise of interest rates and inverse trend of declining funding, growth efficiency has never been more important. Business leaders are more cautious about their capital, especially if they’re operating at a loss, as most initially are. This is especially true for B2B businesses, which feature long enterprise sales cycles. That’s why it’s imperative to grow efficiently (to stanch the flow of resources into efforts that aren’t working), and fast (to realize ROI quickly). Growth can’t stop, especially if you’ve raised a series A-B and you need to prove scale and velocity.
The importance of low-CAC strategies
It would be great if you could rely on traditional organic, low-CAC growth like SEO to keep your burn rate low. However, these strategies typically take 6-12 months to deliver results. This might have even been possible back in 2021, when fundraising was much easier and more funding equaled more fuel to implement end-to-end core marketing strategies. But this is no longer possible in the current climate.
Considering that most efficient companies need only 5 months to recoup their CAC and reach payback, relying on traditional low-CAC strategies means your best competitors would outpace you by the time you’ll see your hard-earned results.
Traditional low-CAC strategies simply take too long-by solely relying on them, you’ll be placing your business at a disadvantage.
As a result, most startups successfully innovate on their product but fail to do the same with their marketing. Their marketing often mirrors their competition, involving the same channels, messaging, and stacks. This creates lack of differentiation, and in turn fails to create competitive moats. If you simply use the same tools and blueprint as your competitors, you’ll wind up with a similar CAC.
Ramp has taken a different approach, one focused on generating strong unit economics and decreasing CAC with scale. This approach heavily relies on our growth marketing team and its guiding principles. In this article, I’ll review some of the main challenges of scaling demand gen and the top three tactics your org can adopt to support successful low-CAC strategies.
The main challenges of scaling demand gen
Traditional demand generation has a linear relationship between volume and CAC. Startups face unique challenges when it comes to scaling demand generation. One of the key challenges is that startups typically begin by targeting a small pool of early adopters, who are willing to take a chance on an unproven product or service. This initial audience is often limited in size, and once the startup has exhausted this pool of potential customers, they need to expand their reach in order to continue growing.
However, expanding the reach of demand generation efforts is easier said than done. The strategies that worked during the early stages of a startup's growth may not be as effective once they reach a larger audience. This is similar to the concept of Crossing the Chasm in product adoption, where a startup must transition from targeting early adopters to targeting the mainstream market. The strategies that helped the startup initially cross the chasm may no longer be effective in reaching new customers at scale.
Once you go beyond your early adopters (to acquire more customers faster), the conversion rate often degrades. To achieve success beyond this initial audience, you have three options:
- You can pay up and subsequently have your unit economics degrade: The pro/con analysis here is clear. You will pay more to yield clear results, but you’ll be allocating valuable dollars towards these efforts.
- You can slow down: You can adopt more traditional forms of marketing strategies, like SEO and referral programs, which typically result in slower growth as these approaches are more delayed in gaining traction. As a startup, you don't have the luxury of time—you need tactics that provide faster returns to outcompete the competition.
- You can try something else.
At Ramp, we prefer option three: experiment with emerging strategies that, while risker, provide the opportunity for infinitely larger upside.
You want to find non-obvious strategies that competitors haven't tried so you can remain competitive. Generally, that comes by taking risks, testing frequently (with low-cost experiments so if they fail, you just move on), and in Ramp’s case, leveraging engineering talent and skills for marketing purposes. However, before you can start introducing these emerging strategies, it’s imperative that you set up an appropriate foundation for your business to adequately support them.
3 tactics your org needs to adopt to support emerging low-CAC strategies
Ramp’s approach focuses on generating strong unit economics and decreasing CAC with scale. This approach relies heavily on forming a growth team with the mandate to find demand generation opportunities that have a positive scaling effect (marginal CAC decrease with volume). Here are the three tactics that have helped Ramp gain an unfair advantage among our competition.
#1 Bring on marketers that operate as economists
I strongly believe in bringing on growth marketers who operate like economists, applying a rigorous scientific approach to their operating models on a case-by-case, campaign-by-campaign basis.
The ideal growth team setup to support these strategies is:
- A sales-like focus on revenue (no leads or signups KPIs)
- A marketing surface area (easier to move fast and take risks outside of core product)
- A product approach to working (sprints, PMs)
- Engineering resources & skills
This team is capable of independently shipping many top-of-funnel “products” whose goal is to drive one outcome: revenue. These folks let their data and process guide them. Because they navigate mostly blue oceans unchartered by competition, their conviction and budget are lower, as is their cost of failure. However, if success is achieved, the upside is 10x or higher.
This is markedly different from the approach seen in traditional marketing and product, where you come in with a very strong conviction of what feature you should ship or what campaign you should run and failure isn’t an option. This results in de-risking upfront, which costs you time and money. In growth, it's the opposite.
You want individuals who are tirelessly searching for small tweaks that can achieve outsized results. If you don’t have someone on your team with this mindset, who’s constantly iterating, testing fast, failing fast, and finding wins, you’ll be at a disadvantage.
#2 Constantly question and measure your experiments
With the right people on board, you now need to create an environment that builds tempo, incentivizes challenges, and encourages egoless learning. Most of the time, this starts by asking the right questions. For example:
- Problem: What problem are we solving? Why are we doing this?
- Hypothesis: What's our underlying belief? If we do this, what do we think will happen?
- Evidence: What’s the data supporting our hypothesis?
- Success: What outcomes and metrics are we optimizing for? What’s our current baseline?
- Resourcing: What are the resources needed in order to get minimum viable learnings?
- Prioritizing: What’s our sample size and run-time needed to run the experiment?
Two weeks later you should ask post-mortem questions such as:
- How accurate were our baselining, resourcing, and run-time estimations?
- What did we learn from our success or failure?
These questions are great for maintaining an angel mindset and a high appetite for risk, especially as the company scales.
The job of a growth team is to have that hypothesis approach. If they can't formulate the hypothesis of a baseline and an outcome, then it's no longer a growth experiment. Conversely if they are trying something they know will work, it isn’t really an experiment (and in that case, product/marketing should be in charge).
Staff dedicated engineers and PMs
Dedicated engineers and PMs who are focused on the marketing surface area are crucial for all of the above to work— they’re the team members that will help you stand out and execute differently from your competitors.
Funny enough, the reason why most companies don’t do that is also why it’ll help you outpace your competition. Having technical talent dedicated to growth is an organizational design advantage that most companies struggle to absorb.
Also, the growth team needs to make product, design, marketing, sales, and ops decisions in parallel, and very quickly. That requires team members to have a strong cross-functional skill set that is shared across members in a tight-knit manner.
I tend to hire former founders for both the Head of Growth or the Growth PM roles, the rationale being that I'm looking for people who are good at moving fast and finding signals of tactics that stick. Former founders tend to be pretty good at that. They have ample experience in pivoting a bunch of times towards success or failure.
#3 Make sure you create a structured experimentation framework
At Ramp, we take on risks like a series A startup that’s looking for product market fit and is desperately clinging to its survival. We apply early-stage, aggressive tactics at a late stage situation. While it’s an unorthodox approach for most other businesses of our size, we believe it allows us to move at a high velocity and test/iterate faster than our competition.
We perform two-week sprints to constrain the size of the experiments, ensuring that we can test as many tactics as possible. The focus is high-velocity-our teams ship anywhere between 10-30 experiments per sprint.
- Most companies adopt more conservative tactics as they grow
Having worked with over 30 companies, I can say with confidence that few of them are capable of leveraging the growth tactics as it is done at Ramp.
Most of them started strong with their experimentation framework and have seen noticeable improvements, but stop after the series A or B.. Why? Fear of risk and failure. These sentiments are understandable but you can’t have it both ways: you can’t operate conservatively but also desire rocket ship growth. To actually gain a leg up, it’s crucial to stick with your early stage framework. As soon as you start having meetings about whether you should try things, you're slowing down.
- The importance of maintaining the mindset of an angel investor
Specifically for CFOs, it’s important to keep the following in mind: Growth is about embracing the non-obvious things and taking risks. I like to compare it to angel investing. Angel investors take risks and expect that most of their companies are going to fail.
But sometimes you invest in the next Uber, and you’re paid back everything you’ve invested and more. Growth is the same: there’s a high failure rate but some experiments will pay back all of the other attempts.
Asymmetric risks have always been a part of Ramp’s playbook
To achieve asymmetric results, you need to take outsized risks. It’s unlikely that you’ll beat your competitors by sticking with the same playbook. These low-CAC strategies and growth team setup are just some examples of things our competitors haven't tried, which is exactly why they worked.
In 2023, startups need to grow efficiently and fast to realize ROI quickly. Low-CAC strategies have always been part of Ramp's competitive edge, and their growth team has been instrumental in finding demand generation opportunities that have a positive scaling effect. To succeed in growth marketing, you need to move fast, be willing to take risks by investing in new opportunities, and learn from failures.
Taking risks is like building muscle: you improve with time and repetition. By refining your risk appetite instead of lowering it as you scale your company, you’ll have a better understanding of which risks to take and when.