A trilemma is a situation where you can only choose any two good things from three options. I developed this trilemma on Twitter and after a bit of questioning, I adjusted it to this final form.
It really goes to the heart of scaling a Direct to Consumer business.
Let’s start where most DTC businesses would start by optimizing for Customer Acquisition Cost (CAC) and Lifetime Value (LTV). This is relatively easy in the early days as you can almost certainly some sources of good customers.
These good customers might be people who do a particular very relevant Google search or they might be people who read a particular publication.
The problem is when you need to scale the business and increase the volume. At that point you will need to either starting spending more (increase the CAC) or start recruiting less high quality customers (decrease the LTV).
The most obvious next step is to optimize for CAC and Volume. This is what most scaling DTC businesses do. The classic way to keep CAC low while spending more is to increase discounting.
Discounting is a good idea, particularly on that first order. It is a general rule that the bigger the discount the lower the CAC will be but also the lower quality the customer will be – they will tend to have lower LTV’s.
There’s not a fixed rule but I’ve generally found that smaller discounts below 30% tend not to be enough to have a very big impact. Discounts from 30% to 50% seem to be a bit of a sweet spot which causes CAC to fall while still getting serious customers. But discounts much over 50% tend to result in very price sensitive customers or people who are less serious about the product and are unlikely to be worth much in the longer term.
Having gone done the path of focusing on CAC and Volume most ecommerce businesses end up with our last pair of options which is LTV and Volume. This is usually where you want to be.
At this point you simply accept than in order to recruit more customers (increase volume) you must pay a higher acquisition cost. All of your efficient channels have a certain capacity, so as your budget increases you will need to choose steadily less efficient channels.
You know that there are hacks (such as excessive discounting) which you could use to fight this rise in CAC but only at the expense of LTV. So you simply suck it up and pay more to recruit your customers.
Generally, you will be building an ever more successful repeat business selling to your existing customers and you will be enjoy economies of scale in product, shipping and customer service so all of that should balance out the increased unit CAC’s.