Loading summary
Transcript59 lines
- [00:00]
Nick Miller
Foreign.
- [00:03]
Ralph Burns
You're listening to Perpetual Traffic. Hello and welcome to the Perpetual Traffic podcast. This is your host, Ralph burns, founder and CEO of Tier11. Not alongside my amazing co host, Lauren E. Petrulo. She is on a beach somewhere again. No, actually she's at a conference again, traveling. So in her place, not quite as good a hair I would say. Neither one of us really for that matter. Like the glowing blonde locks of Lauren Petrullo. Two guys that have receding hairlines or shaved heads. We have the replacement today, but not only replacement for Lauren, but somebody that we've been pumping up here quite a bit over the course of the last couple of months. I don't know if your ego is just like been just blowing up sort of spontaneously from all the mentions on Perpetual Traffic, but yeah, well, I'm sort of the hype man here anyway, so I'm not really known for like chunking people down with a couple notches. But anyway, if you already guessed the voice that has been on this show now three times, which I totally forgot the first two by the way, we have head of Traffic at Tier 11, Nick Miller, the best guitar player I know by the way, like puts everyone that I know. It's a shame because you were at one point in time like a professional guitar player. Like you got paid to play guitar and you are absolutely like, you are so lights out. Good. It's unbelievable.
- [01:33]
Nick Miller
That was my life for a long time and got into marketing through music, believe it or not, it was a segue from music, you know, and discovering the power of meta ads from promoting my band's music and my music and thought, wow, I really like this. I want to maybe try it with some non music businesses. And there we go. Fast forward. And then I discovered Perpetual Traffic as a longtime listener, third time co host or at least third time this is first time co host, but that's true. Third time guest.
- [02:06]
Ralph Burns
You know you used to listen to this show, now you're on the show. Like this is very cool. So I would love to have you back on as a regular guest. But I guess I am your boss technically, so I can say I need you on, but I really would like to have you on so we can bring more of the these types of shows to the Perpetual Traffic audience. Because we have been talking about you and your calculator, the NCAT calculator for quite some time now and we've been giving it away. Which by the way, Nick is going to do a screen share today. So there's two URLs that you should make note of first off, check us out over on our YouTube channel so you can see this actually happening, how we use the NCAT calculator. And if you don't know what NCAC is and you've been listening to this show, well, shame on you because it's NCAC new cost to acquire a customer. It's everything. It's the most important metric for us, for our clients here at tier 11, makes everything go around. The point is, is watch this over on our YouTube channel@perpetualtraffic.com YouTube make sure you subscribe. And then of course, you can get the calculator over@tier11.com NCAC so if that isn't enough buildup and enough big ego, I've called you like, you know, brilliant media buyer, you know, guitarist, the inventor of the Inca calculator. I don't know, I got to work on my hype man skills, I guess. But tell us about, like, the evolution of this thing because we had been batting this around for a while, you and I, and then obviously with some of the other folks inside tier 11. Talk to us about that just a bit.
- [03:37]
Nick Miller
Yeah, of course. And it's hard to believe a calculator could be something so exciting that it is.
- [03:43]
Ralph Burns
It's something that we're just nerds anyway, though, really.
- [03:47]
Nick Miller
Yeah, exactly. But talking to the evolution and the reason that it's exciting is that as we've gone through the shift, and this is coming from a recovering Roas addict, and we know we have quite a lot of content talking about this, the evolution from roas, you know, I think we always knew that we're doing what we're doing to actually have an impact, positive impact on our clients, businesses. And look, for a long time in platform, ROAS was a reliable way to measure that. But, you know, as the years progressed, we got omnichannel, there was a divergence and ROAS became less and less of a reliable metric to use for building a business. And so I think there's been enough content to cover that. So as we, you know, working with John, with you, and just our overall strategy, what are the most reliable metrics that we can start focusing on to really have that clarity, have that confidence that we're using that paid media investment that we're entrusted with to create more profit for our customers, to really help them profitably scale? And one of the main, probably the main leading indicator that you've mentioned was ncac. So great, okay, let's start focusing on that. Some clients, we ask them what is the profitable number for you to acquire a customer? And some clients are like well it's $50 or it's $80. Other clients are like no idea. We think it's this. Okay. You know, are you sure? And these clients. And again coming from recovering ROAS addiction, these clients needed our help to work through their numbers to identify what this is. So we started building models. I started tinkering away and the first prototype of the calculator we're about to share was way too complicated. Was all on one sheet. You took a look at it, nowhere near as pretty as it is now. And I've got to actually give credit to our marketing and sales team for making this look much better than my version. But the functionality is still the same. That's the most important thing. And another important point, this one here is primarily for E commerce. So identifying ncac if you're selling digital products, it's very similar or you're a service lead generation business. There's just some nuances there which later versions for digital info products and for lead gen are coming. But this one we're going to share today is primarily intended for E commerce. Just going through that process and going through where the name for this is actually unit economics. And going through this process of identifying the unit economics based around customers and using historical data from your business where you can make confident estimations as to if you acquire a customer at a certain cost, what does that mean? What is that likely going to mean for you in three months time, six months time, 12 months time, what is that going to mean for your revenue? But more importantly what's that actually going to mean for your profitability? So the key to making this work was to really break it out into a sequence. As the sequence to this it's actually quite simple. First step is what's your average ltv? How much do customers spend on average over a period of time? For this calculator we've used 12 months. The next step is to identify your costs of sales. So these are your costs and expenses that are going to move with your sales volume. If you doubled your sales tomorrow, what expenses would also rise based on that other expenses, your direct costs, we call them opex or we call them cost overheads. And those costs if your sales double overnight, those are the costs that wouldn't change even identifying those breaking down those costs of sales. I mean you've got cost of goods sold, costs of delivery, your shipping costs, you've got cost transaction, transaction fees, pick fees with your three pl but that's for another sheet. This sheet here is going to assume that you've done your calculations and you've identified what your cost of sales are. And your opex, that's actually optional. You can include your opex so you can see what impact that's going to have on the estimations or you can actually leave that blank just to see what's going to be the impact of acquiring customers. And. And when you go through the sheet, this will be more clear.
- [08:38]
Ralph Burns
Yeah, absolutely. So that's sort of a high level overview of it and there's a lot of factors here. And we're doing an entire video series on this called the Chalkboard series, which are over on the tier 11 YouTube. By the time this goes live, there's probably going to be even more on there which talks about really all of this stuff. And this is something that we've reiterated a number of times because you said something that was super important is that when we used to start with clients and we had asked them that question, like, how much are you willing and able to pay to acquire a customer? Or better yet in maybe some cases like what are you willing and able to pay to acquire a lead that then turns into a customer? So then you need like that conversion metric between leads and actual converting to sales. It's all marketing really is math at the end of the day. Like it's not driven by math. Like the things that you do day in and day outside Ads Manager or the Google McC isn't math, but it is math. It's based upon math. And the thing that was why are we getting to this point where clients are like, yeah, you guys are doing a great job but we're going out of business or not that that ever happened, but it's like we're not making much profit here or it's not as profitable as we thought it was going to be. It came back to this question and we realized this probably about a year and a half ago and now it's integrated into our process. And I'm not saying like it is the only way, but what we find is that without it you are flying blind. So that's why it's so important. And so many businesses don't know how to calculate it because they don't know. They probably don't have a calculator to figure this sort of stuff out. There are some that do. I was on two calls just today. Literally I asked them that question. We were just on a group call and I talked about this. They knew exactly how much they could pay, they knew, like, 50 bucks, you know, or I can pay 150 for a lead, provided that I have a 3% close rate. Great. Okay, so that averages out to 3,000, $2,500 per sale. Point is like, if they don't know it, that's what today's show is for. Or if you do know it, double check it against the NCAC calculator. But that was the big discovery, I think, that we all had. It was like the light bulb went over our heads and John Moran was right in the center of this whole thing. And we're all like, why haven't we been doing this all along? Because every business needs to know it.
- [10:55]
Nick Miller
And I think that's the key. That for those who have not approached their unit economics in this way to identify a profitable cost per acquiring a new customer, it's a feeling of clarity and confidence that you may have never experienced before in what you're getting from your paid meter investment. So as we know, the ad platforms are designed to make us spend more money. They have their own internal reporting metrics such as roas. And again, enough content. We've covered that. But identifying your profitable cost per acquisition will give you that clarity and confidence. If you haven't done this before, that again, you maybe never experienced before.
- [11:41]
Ralph Burns
All right, well, let's stop talking about it. Let's just show it with an actual example. So Nick is going to share his screen here. Like I said before, if you are, you know, you're walking the dog or you're on the treadmill or when you listen to this on your iPhone or your mobile device, definitely check us out over on the YouTube channel. So you can actually see this being done over@perpetratorffic.com YouTube and also the calculator. Check it out. Tier11.com NCAC it's completely free. Nick's put in like 100 hours onto this thing debating our CFO over, like, what goes where. And he's got like this, you know, very prestigious British accent. So he has lots to say about everything that we've talking about here. So he used to work, like, here's a cool thing, though. He's sort of a pain in the ass when it came to this, quite honestly. I love Adrian, but, you know, he was like, well, you know, there's so many different variables. He used to work at kpmg. Like, he's like a cfo nerd of nerds. He does all our acquisitions here. Like, he. He knows this finance stuff inside. Now we got his Blessing. So we know it's not crap, we know we're not making it up. Like we actually have an adult in the room as opposed to me. And you're just like, yeah, just get it out there.
- [12:56]
Nick Miller
Adrian, I mean, that's the thing. I mean, he's brilliant. He's like, well, if you spend 100k on paid media today, that's not going to be like spending 100k in 2 years time because of inflation. And maybe you're better off taking a, you know, a business loan with a balloon payment at this interest level and writing and like, it's just, you know, it's absolutely brilliant and annoying at the.
- [13:18]
Ralph Burns
Same time because we just wanted to get something out anyway. We're giving Adrian a lot of crap here, but he deserves it.
- [13:26]
Nick Miller
And this calculator is intentionally simple, it's functional and it's an effective estimation tool. There are four tabs which are separated by the four steps you need to take. So we're going to go through each of the four steps today, each of these tabs and end up on the most important one, which is the estimations tab where you are going to be able to see the estimate of the impact the paid media spend will have on your net profit or net loss if you're acquiring customers at too high cost and based on the NCAC target that's been identified. So let's go first of all to step one, which is the ltv. How much do customers spend with you? How much of their money do they spend buying your products over time? Then we have these six cells here where ftov, this is average first time order value. And then we have the average amount spent by month three, month six, month nine and month 12. Where can you get these numbers from? If you're on Shopify, these are going to be in your customer cohort analysis where they're going to have the month 0, month 3, month 6, all the way up to month 12. For today's example, we're going to be using the Tier 11 data suite which is also another source where you can get your LTV numbers if you are set up on the data suite. So this is an actual tier 11 client where we have our new customer cohort set up here. As you can see, we've got cohorts by month, but the data suite will actually average these out to average customer value at day zero, which is first time order. We have month three, month six, month nine and month 12. So I've taken these and entered these into the LTV values here.
- [15:24]
Ralph Burns
I love that graphic, too. So that's the Interface of Tier 11 data suite. If somebody does not have Tier 11 data suite, where do they get that LTV number? And we'll explain, like, why we're using LTV in just a second here. But for those of you who don't know what it is, it's lifetime value of a customer. But here it's very clear. We see it flattening out in and around month six or six or seven, which is kind of what you're looking for. But, like, if they don't know that, like, do you know, like, let's use Shopify as an example. I always say, just go in the back end of your Shopify, you should be able to find this, no problem. But it's in your CRM. You should be able to figure this out fairly quick.
- [16:02]
Nick Miller
Exactly, yeah. And if for whatever reason you're not on Shopify, you're on other platform there, as long as you have lists, you know your database of customers and you have their first order date and their last order date, there's ways to crunch this in spreadsheets. It's obviously more involved, but much easier if, yeah, you're on Shopify or in a tier 11 data suite, which will do this for you, too.
- [16:25]
Ralph Burns
All right, so LTV first step. Let's just talk about that. Like, why do you use LTV to start? Like, what's the rationale? Because we're sort of assuming people understand that to begin with. Why is LTV such an important first step in determining ncag?
- [16:39]
Nick Miller
It's the basis for everything else to have that estimation based on historical patents with your customers, on average, how much they're going to spend. Because before you can identify, you know, the revenue from every customer, how much out of that revenue can you spend on paid media? Okay, it can't be all of it because you're going to pay your vendors to buy your products and you're going to have other costs involved, too. So starting with LTV gives us that top line, you know, breaking down the average revenue per customer over time. That's our starting point.
- [17:17]
Ralph Burns
Cool.
- [17:17]
Nick Miller
Now what are we going to do with that revenue and work out how much we can afford to pay for new customers. So that's why we start with ltv, because I found if you start with the costs, the cogs, or you start with the other steps, you've got to go back and get the ltv. Anyway, so we went through this several times. As I mentioned, the original sheet started with the cogs, and it was in all these different sections and I was like hang on, hang on. This sequence isn't right.
- [17:45]
Ralph Burns
That doesn't make sense. Yeah. So we start with ltv. Makes a whole lot of sense. You know for a lot of people they don't realize like that's I've seen a lot of ways to do this and a lot of times it does not start with ltv. But from our standpoint it's like why wouldn't it. It makes a whole lot of sense. The question is your look back period. So I have a question for you on that. Like we did a look back period of 12 months on this particular client. But also you know, at about six to nine months that LTV starts to flatten out a little bit. Why did you use 12 months here as opposed to either six or nine in this example? Because that's a big, big question. We get. How long should I look back? I say it always depends but like what's your answer there?
- [18:27]
Nick Miller
Yeah, and this is where you know the average order frequency is going to vary and play a big part in this. So some businesses, you know, you may have your customers buy, you know, once a year and in this case it might look something like this. You might have a very small, this might plateau out in month three. And you know, that's okay. You know, some products, some businesses are set up, you know, to not have as much recurring revenue. It just means you have to be profitable on the first time order. You're not going to be able to afford a higher end CAC and rely on that repeat customer business or even acquire customers at a loss. You're going to have to get that first time profitability. So in this case here there's still, this is not a huge amount of returning repeat customer or order frequency. However in the later stages we'll see that this is still very powerful in the way this compounds MER over time.
- [19:28]
Ralph Burns
So how it compounds.
- [19:30]
Nick Miller
Right, yeah.
- [19:31]
Ralph Burns
And profit at the end of the day. Right. So for those of you who are listening who aren't seeing this, it really is like your first time order value was $99 month three, it goes up to 104, 107, 116 months, 12 at around 122. So there is an escalation over time for LTV but basically it's in and around like the 120 mark now based upon risk of the client. Like a lot of clients will say well I want my money back sooner so I want a lower ncac so I'm profitable on Month one, because we actually factor in. There's another way of doing this, which I'm sure you're going to exemplify here in today's show is factoring in what your desired profit margin is. So, so just because you're paying whatever our calculation is, the lower that number is, the better off you're going to be from a profitability standpoint. But also that might limit your scale. So there's always this kind of balancing act and we'll get into that. But like one of the examples that we used on a show just previously, we'll leave links in the show notes, is that they have customers that stay with them for five, six, seven, eight years. And that just compounds their. So where do I stop? Like, should it be three months, six months, 12 months? Should it be three years? Well, that's a decision that you, the business owner, have to make. I would err on the side of shorter rather than longer, just being a little bit more conservative. But in general, I think a 12 month look back like this, an analysis like this gives you a pretty good idea of where that LTV kind of levels off. Is that safe to assume?
- [21:03]
Nick Miller
Yeah, yeah, that's exactly right.
- [21:05]
Ralph Burns
So we take LTV and then step number two. We got that?
- [21:10]
Nick Miller
Yeah, yeah. And another reason just to answer why starting with ltv, another way I like to think about this is when you look at the PNL statement, there's always that top line revenue at the top. And you can think about this as like top line ltv. So now we're going to go down through the line items and go into the costs. So going to step two is where we're going to enter our costs. And first of all, we have a percentage setting here from direct costs from sales. So these are the costs we talked about earlier where if we doubled sales tomorrow, these are the costs which would move with that sales volume. The second variable here, the second cell here, these are the direct cost from overheads, which is a set numerical value, which is a set amount, which again, all things being equal on average, how much does it cost to keep the business running? If sales stopped tomorrow for whatever reason and you had to keep the business running, how much would it cost to, you know, payroll, keeping storage, whatever, the offices, everything that you know, is just the opex to run the business. So for this example, I'm actually going to set this to zero because then we can come back and see the impact on this estimation. So for now I'm actually just going to set that to zero with this client We've identified that their total direct costs, on average their gross margin basically 62%. So their direct cost from cost of sales are 38%. Just flip that around and this is a gotcha. That can be quite common. I've seen it's quite common to only enter costs of goods sold here and underestimate the other costs involved, such as shipping, cost of transactions, et cetera. It's quite common to add another 12 to 15% to the overall costs. So make sure here you're going through and breaking down all those costs associated with when you actually sell a product. When you actually have an order come in, have all of them put into this percentage. So in this case we're at 38%.
- [23:22]
Ralph Burns
So COGS really is like this is what gets your gross profitability. So cost of sales, cost of goods sold, it's all basically the same thing. It's a variable number with volume. The more you sell, the more of this you have. The less you sell, the less. So it's completely elastic with revenue as opposed to inelastic, which is sort of like opex, which always stays the same until a certain point. If you sell too much, then you have to buy a new warehouse and you got to get new leases and all these other. We're going to set that stuff aside. This is what Adrian, our CFO would always sort of nitpick on. But like that's one of the questions like warehousing and storage. Do you include that in your cost of sales in your cogs? Because the more stuff I sell, the more warehouse, I actually will need more warehouse space. All these other sorts of things like and then the labor that's involved with doing the pick and pack. And then maybe somebody who is on assembly line, like their wages, like where do you sort of begin and end, at least in your mind, where it sort of starts to creep into opex as opposed to just cost of sales or cogs.
- [24:27]
Nick Miller
Really, really great question. And that's, I mean it's going to vary with each individual business. I would err on the side of, you know, if it's not going to change drastically with sales volume, for example, a new warehouse, that's going to be a one time event. So that may mean that instead of 40,000amonth, you know, if you've expanded by a great amount, you may be adding an extra 15,000. And that would mean that at some point your OPEX is going to go from 40,000 to say 55,000. It's going to be an extra expense added to those Operating expenses, you hire, you make a new hire. And this is where it gets really interesting with marketing too. Because if you hire an SEO, if you hire an SEO company to do your SEO, that's usually a fixed monthly retainer and that's not going to move with more sales volume. And so you'd actually put that particular marketing expense could go in your OPEX because it's more set. So this is where these direct costs, it's going to be very much related to more sales. Those costs are going to rise with that and fall if there's less sales. That's where you want to break these apart. But it's a great question and it's going to depend on the business and you may decide, well, email marketing, for example, do we spend more on email marketing if our sales rise? Maybe not. So even email marketing might go in here. Agency fees, you know, likely to appear in the opex. So yeah, that's my take on that.
- [26:00]
Ralph Burns
So there is some gray area there. Like for example, we could probably do a whole show on media efficiency ratio or marketing efficiency ratio. A lot of people say media efficiency ratio or marketing efficiency ratio. I look at it like marketing. I will lump in all of my staff into our MER at tier 11. Like that's a hardcore way of doing it. But like here it really is a judgment call whether or not you put something into COGS or whether you it into opex. I think, you know, every accountant would argue on that point like one way or the other. Like 3pls obviously is, you know, that's a fulfillment cost. You know all these things like just think about it as it's a variable cost that rises and falls with sales. Just plain and simple. And that's really a good way of looking at.
- [26:46]
Nick Miller
Exactly. Yeah. So that's step two. You've got your direct cost from cost of sales and then optional for now we're leaving this blank. But that's where you can put in your direct costs from overheads. So let's move to step three where we're going to get a preliminary NCAC target. The only two variables we need to enter here are paid media spend. At the moment, this is on average how much this particular client is spending on their paid media. I'm going to leave this at zero for now. This is actually not where this is going to end up.
- [27:19]
Ralph Burns
Okay, for those of you who are listening though, Nick's talking about the third step here, which is paid media spend. He's got 150,000 in monthly spend, which is about average for this client and then your desired profit margin, you just have a zero. You can enter whatever you want. Any of the blue spaces that are inside the NCAC calculator, which of course you can get@tier11.com NCAC are where you would enter your own numbers where you would actually pull this data from.
- [27:46]
Nick Miller
So that's right. Yeah.
- [27:48]
Ralph Burns
I have people who are walking their dogs complain about this sometimes, Nick, so I'm explaining it this way and I will interrupt you occasionally. So anyway, go ahead, you're doing great.
- [27:59]
Nick Miller
So apolog. Apologies those who walking your dogs. You know, I can relate. I listen to a lot of content while I'm walking my dog and walking my six month old baby pushing me in the stroller. So I'll attempt to be much descriptive as I can be. All right, so here we have now in this cell here, this is our max allowable ncac. If we were to take all of the profit from every new order, if we were to take all of that gross profit and redeploy that only to paid marketing and that was our cost for acquiring a new customer. In this case it would be $61 because we're taking the first time order value of $99 and we're taking out this 38% cost of sales which is going to be going to buying the products and paying for the transaction cost, et cetera, et cetera. And we're not worrying about the overhead cost for now. Now keeping in mind too that this is based on averages. So some customers are going to spend more for their first order, some are going to spend less. But we're taking historical data and starting, you know, using it this average as a starting point, the cells over here, this is where it gets super, super interesting. You'll see these numbers. At month zero we're not making any profit.
- [29:22]
Ralph Burns
This is gross profitability. So it's sales minus cost of goods sold or cost of sales equals gross profit.
- [29:28]
Nick Miller
We're taking that $61 from these new orders and we're going to redeploy that into our paid media to acquire more customers. It means we wouldn't take any gross profit in month zero. So we're at zero here at month one. And there is sometimes a case for this. If you have very strong repeat average.
- [29:46]
Ralph Burns
Order frequency 100% and in highly competitive spaces where you're bidding out a very hefty competitor, we see this happen all the time. They might actually go negative their first month.
- [29:58]
Nick Miller
What we have here is lifetime contribution margin in contrast to if you think about that P and L statement, the top line revenue. Now we have the lifetime profit contribution on average per customer and we see here this still it doesn't look like a lot, but on the next page when we get to estimates, we'll see how this compounds over time. So this is by month three, that $3, that gross profit that you're getting from a new customer, you don't have to pay for that anymore. There's no paid media spend involved to acquire that customer. So this is where over time as we're going to see this returning customer revenue starts to compound. Now I just want to pause there if there's any questions about this particular before we go into the estimates.
- [30:47]
Ralph Burns
I think a super important part to this is exactly what you said. You don't have to pay anymore because you've already paid to acquire that customer. This is where the ad platforms might really screw you because if you use Advantage plus and Performance Max just on those two platforms, obviously on Meta and Google, they're going to go out and find customers who you've already sold to. And we know that to be true. No matter what, whether it's Meta, whether it's Google, whether it's TikTok, I don't care what it is. They're always going to include people who have potentially bought from you before and or familiar with your brand. However, what you really need is you need a tool that teases out those new customers, the ones who have never bought from you before. And sometimes that's a very low percentage. Like we've done tons of tier 11 lives where John goes through this and it's only 38% or maybe 40% or 20% new customers. He's like, like, that's okay, I understand, because my NCAC is the thing I care about the most. But just keep in mind that if you're using, you know, the ad platforms to make these determinations, you might be led astray because you're paying double, triple, quadruple sometimes to acquire the same customer over and over again. And that makes your media very inefficient.
- [32:02]
Nick Miller
Yeah, there may be a whole other episode on retention strategy and life cycle marketing. And this is again is a conversation hot topic right now. My take is paid media is primarily for acquisition. That's where you're going to get your best bang for your buck. And trying to run ads to, you know, get the people who've already bought from you to buy more. Just because of seeing the ads, there's probably better ways to get them to buy more. So in this case, as you mentioned, this lifetime contribution margin, this repeat revenue is the customers are coming back and we're allocating our paid media spend to acquisition. So in this case we haven't baked in any additional profit. So at month one we're at zero profit. So I'm now going to go to step four where we're going to be able to see impact, what that looks like for profitability and the potential impact from the top line and bottom line for this client.
- [33:03]
Ralph Burns
So just to pause there for a second, so you're saying you're breaking even, but in actuality you're actually at a business wise because you're still paying your opex, like your opex, your salaries, your rent, your, you know, your management layer, your attorney's fees, like all that stuff that you have to pay out, like you're not actually breaking even. So hence the reason for step number four here. And not to overly simplify it, but yes, like you do need to figure out like what is your desire to profitability and make it realistic to a certain degree especially. And then once you know that, then you can work on all the other sorts of things which will have you back on the show about like how do you increase average order value, how do you increase ltv? Like there's so many different factors here. We're really just focusing in on cost to acquire that first customer the first time. What can you pay for that? And that's what this calculator is all about.
- [33:57]
Nick Miller
100%. Yeah. All right, drumroll. Let's go to our estimate screen. Here we go. So assume our paid media spend will be flat in this row here, 150k per month. And this is what the revenue is going to look like only from these new customers that we're paying for. So that's a key distinction here. But as we can see for this particular client, it's actually new revenue.
- [34:26]
Ralph Burns
New revenue, not all revenue. Got it.
- [34:29]
Nick Miller
So our new revenue from our new customers we acquired would be this number here. I'm not including any returning revenue, existing returning revenue. So again, this is only from those new customers. But here we have our direct cost from cost of sales and our paid media spend.
- [34:46]
Ralph Burns
So for those of you listening, it's $241,000 a new revenue thereabouts, 935. And then direct cost of sales is 91,935. Okay. And then your ad spend is 150k. So at that point, like you are paying to acquire a customer for zero gross profit. So you're breaking even gross profitability even though you're probably at a loss because of your opex.
- [35:12]
Nick Miller
We can see here that month one, we're at zero net profit based on this investment in acquiring new customers. Month two, we're starting to see some returning revenue coming in and it's a small number to start with, but then this starts to compound over time on average. So by the time we're, you know, getting to month six, month seven, month eight, if we've been acquiring these customers at $61, you'll see our end MER stays the same. So that's going to stay at a set 1.6. But our MER starts to compound over time. And this media efficiency ratio, and this is the power of when you're acquiring customers at a profitable cost, then this MER starts to compound over time. What can happen when you're only looking at MER and you're not looking at new versus returning revenue is you can start to chase MER by pulling back on ad spend and your MER goes up. But then you're acquiring less customers. So that can turn into a cycle where over time you're acquiring less customers. And what does that mean over time there's less repeat revenue coming in.
- [36:28]
Ralph Burns
This compounding effect is the beauty of knowing these numbers. And we're looking at zero gross profitability here. And still you are starting to make profit at that $150k spend. Like it's not significant, but it's like $3,700 month 2, all the way to 34k at month 12. Very conservative. But keep in mind we are not factoring in any profit margin at all here. So this is a really sort of a harsher model. But still you can see the compounding effect of those new customers as they buy more from you over time.
- [37:01]
Nick Miller
So now what I'm going to do, I'm going to go back and add in a $30,000 opex cost. Let's make it 40,000. And now we can see the impact that has on the estimates. And as you can see, if opex was at 40k then acquiring customers at $61 is in the long term. I mean yes, that this profitable, but it's going to be too much of a length of time to make sense for this business. So this would actually from that paid media investment, there'd actually be a $277,000 loss because every month where going into the hole and take into consideration there is likely going to be existing returning revenue that would push this into net profitability. However, it's still not the ideal scenario. We'd be basically asking the client, okay, if we acquire a customs at $61, this is what it's going to look like. Can you afford to, you know, do you have the cash Runway, do you have the reserves to shoulder a $40,000 loss in month one, 36,000 in lost two, do you have enough repeat customer revenue to cover this? Because it looks like this is not going to be profitable until next year sometime and they're going to be like this is not going to help us grow it the way we want to. So here's where this client we've actually want to bake in 15% up front into every new customer acquired from that revenue. So this is the ideal scenario because if you're profitable on first time acquisition, then you're immediately able to redeploy that profit into other areas of your business while still then using that profit to go and acquire more customers. We can see here with this opex, this is looking much, much better. And this is going to add 361,000 in net profit to their bottom line by the end of the year. And if they keep acquiring customers at maximum $47 because we'll always want to get this as low as possible, this will allow them to scale profitably and then the marketing is not going to be the bottleneck to the scale. And this is where confidently is NCAC. Are we acquiring customers at $47? Yes. Great. Okay, maybe we can now afford to scale even 5% per month. And now, you know, that's just what the net profit estimate looks like by.
- [39:41]
Ralph Burns
The end of the year, which is almost $600,000. If you actually add in your growth rate of 5% like you're adding more ad spend, you're hitting that NCAC number. You're also factoring in OPEX here. And then it compounds even more depending on how fast you scale. So you can really start to see these numbers taking off as soon as you sort of put in the different variables in the blue section inside the NCAT calculator here. Let me ask you this question. The 15% that you came to and this is the question that because the average E Commerce store is anywhere between 10 and 15% I believe based on Shopify statistics. So it's about 12% or so. How did you arrive at 15%? Is this something that you got from the client? Like how does somebody determine what should I want from a profit standpoint? Because Everybody wants like 90% profitability, but it's like that ain't happening.
- [40:33]
Nick Miller
You know, you have to look at where has your ncac, where is it right now? And you know, and that's where for example, you might find your NCAC is much higher than you know, you thought. In this case it was $90. It's like, oh, okay, well that's a big delta from where it needs to be. Because the beauty of this is you can identify your profitable acquisition target as though you'd never even heard of meta or Google Ads. This can be done without even opening up the ad platforms and it's going to be based on what your business needs. So that's where you need to compare at what cost have we been acquiring customers? And that's where going into the analysis like we do here, we look at okay, are we overspending on Google brand because ROAS looks good. In some cases we talk to clients who are on Amazon ads and Amazon ROAS in Amazon always looks fantastic and just as often there is overspend because of that. It's like we need to spend more on Amazon because the ROAS is so high. So you identify these areas of overspend. We usually see underspend in meta because as you scale in paid social and meta ads usually looks worse in platform. Now with the data suite it can help to mitigate that with the technology we have to strengthen the attribution signals. But even then your attributed NCAC in the data suite may be higher than your target. But as long as your global NCAC is on point then you're good to scale. And this is where the analysis of the traffic mix and going into what's it looked like historically and what does it need to be? And that's the most important thing. What does the business need? And okay, you know, some cases you might find, well, whoa, it may not be possible to only tweak the ads to get the NCAC where it needs to be. That's what else in the business then can be adjusted. Do you need to increase the aov? There's different levers to increase ltv. So then you can afford that higher end cac. But this is a process and what I love about starting here is it identifies what the target needs to be and then you're able to see how close you are to that right now.
- [42:46]
Ralph Burns
Right. So one of the questions that we oftentimes will see is you're calculating sort of company or global NCAC here. What if I focused on my most profitable product? Maybe I have a product that is 75% gross profitability or 80%, you know, we've seen clients used to have a client years and years, they were 5% COGS on their product. Like $100 product cost them $5 to make it like that's great. That was in the supplement space. The point is, is that that's kind of rare. The bigger point is, okay, well your most profitable products it would make stand to reason, especially if they're your best sellers, you want to sell that stuff first as like your first sale instead of looking at global ncac. So how do you kind of channel that and how do you sort of decide when you're making the media decisions?
- [43:40]
Nick Miller
This is where starting here with a global NCAG is a starting point. Within that global ncac, when you look at your product portfolio, there are going to be products that are more profitable for you. And when you look at those products on average, when they are the first product purchased will usually there's going to be some products which result in more repeat purchases. So this is where you use a portfolio management approach to segment identify, say you know, your top 10 to 20% of products and in a lot of cases, as you mentioned, they're going to be generating most of the revenue. Take that approach to your customers. There's going to be your top 10 to 20% of customers who spend more, who buy more, who really are your most valuable customers. And that's more where you want to adjust your marketing message. But for the product portfolios, yes, this is where you want to identify why is that NCAC profitable? Why is your LTV the way that it is? And as you do that analysis, you'll see it's going to make sense to focus more spend on certain products. You can actually duplicate these sheets, this calculator, if you have different product categories that are quite different, that have different customers. So you can actually then do this NCAC target per category. So this is a starting point and it's a very useful starting point. And some businesses this, you know, will be enough of a starting point to set that as a target and keep going as long as, you know, we're always watching the products which are the top sellers and we're looking for changes there. You know, we track first time order value. If first time order value changes significantly, we know that's a signal that oh, people are buying something different or if AOV changes in general. So this is the tip of the iceberg. But if you get this right, it just has a domino effect of everything else that happens afterwards. And that's like I was talking about that confidence and feeling of Clarity that may have, you know, not been there before. Can start by doing something like this.
- [45:52]
Ralph Burns
Yeah, no, I think the calculator here is killer. Especially you can vary it based upon your business and once again you can get this over@tier11.com NCAC and there's protected fields in this. If somebody downloads it, a lot of people are like, I don't want to touch any calculator because I'm going to screw it up. Like no, there's protected fields and it's pretty clear like how to actually use those.
- [46:15]
Nick Miller
I'm just going to do something here which is quite cool to show. But what this is is I've set the additional desired profit margin per new customer to a negative to minus 20%. So this is where if this business was acquiring customers at $81 then we could see that they're losing money. You know, they're paying too much and on every new customer acquired they're losing money and not in a way that's profitable because they don't have enough returning volume to make up for that. Now what I'm also going to do, I'm just going to put in some exist. I'm going to put in 200,000 returning revenue. Existing returning revenue. Okay, so that's what we haven't added until now. But you'll see that the mer here is 2.6. So what can happen is in order to chase MER, we can start reducing ad spend. So I've got, you know, minus 10% reducing ad spend. This is pretty extreme. But you can see that MER actually starts to increase when you do that. However, we've got less new customer revenue too. So this is this cycle that can be set in place where overall MER can be improved by reducing spend. And great, you know, we've got our ad spend efficient again, but it gets hidden so much that that sets in motion this compounding spiral where you've just started to slowly kill your new customer acquisition. And we see that and then we hear, you know, exact words from one of our clients who as well, you know, we've never actually looked at new verse returning revenue before. We've just looked at overall MER versus ad spend. So this is where I forget how I did it, but I was actually able to do this the other day which showed MER increasing but then starting to decrease as well as ad spend decreased. I forget the exact settings I put in here, but it is a phenomenon that happens and it's like that short term hit of MER because the returning revenue starts to prop that up but then that hides the declining new customer acquisition and the declining end mer. And oh, it's like over time, sometimes we have clients coming to us where that's been happening for three years and we need to fix this immediately. And then it's like, yep, we can turn this around, but we've got to build back up through acquisition or some other levers. We can't run ads to the people that bought from you three months ago and just get them to buy more because we would ran ads to them.
- [48:53]
Ralph Burns
Right. It's super interesting. What we see a lot too is when a client comes and we do an audit, we see just a lot of retargeting going on. They just continually cycling through the same clients over and over again or customers over and over again. And that's usually at like a 10 to $30,000 a month ad spend. It's like once you prove yourself past that point and you start to go profitable, we've sort of realized that that's sort of a nice benchmark. But in most cases, like most meta ad accounts are just churning through the same people and you know, the frequency is super, super high.
- [49:29]
Nick Miller
Yeah. The cost per new view. And this is where the platform metrics like cost per click can mask what's happening with what you just mentioned. Because, you know, cost per click, lower cost per click, higher CTR in general. You know, a media buyer would say, okay, this creative is working well. It's got a higher ctr, it's got a lower CPC with the data suite sometimes. We've checked some of those creatives and we've seen the cost per new Visit is over $10 and the new visit percentage on the account in general is less than 20% sometimes and decreasing over time. So you think what your conversion rate would have to be, which I love this metric in the new visits to customer to new customer conversion rate, it's just, you know, such cool developments happening there. I'll wait till that loads. But you know, imagine the conversion rate you'd have to have if you were paying $10 every time to get a new customer to your site. And you think about, on average a good conversion rate is 3%. So doing the maths here, the conversion rate would just have to be astronomical. And these are some of the hidden bottlenecks to scale that we uncover. So here we have a pretty healthy ECPNV. We have $1.80 here, which is not bad at all.
- [50:47]
Ralph Burns
Yeah. Which is effective cost per new visit, which is a metric, which is another MPI that is performance indicator that you get inside Data suite. Well, we will leave all of that for the next time you come on. Hopefully we're going to schedule this out in maybe a couple of weeks. We're using this as a base, our NCAT calculator as a base. Then how do you actually use it to make really data driven decision? Everybody says they make data driven decisions, but they actually don't because they're using data that's faulty or erroneous. So it's actual data derived decisions. That's sort of the next phase of this. But the foundational concept here is figure out what you can afford or willing to pay to acquire a customer with a profitability that works for you. And you start there and you start it over at getting the ncac calculator@tier11.com NCAC so we're going to have you back on and go through this a little bit more, especially how this all integrates into Data Suite and how people can do it without Data Suite too. I think that's super important to be able to look into your Shopify or your CRM and determine a lot of these numbers. We've given you a really high overview here, but at least it's a starting point for you so that you can be on the path to scale. And like we say, like these are business metrics that matter to produce growth that actually really scales. And that's the key ingredient here. If you don't have this, then you really are not able to grow as an organization. You can't do it profitably unless you're like completely flying blind. And the NCAT calculator certainly helps with that. So super appreciate you coming on. I know you're a busy guy, you're managing a massive team at tier 11 and super appreciate you putting all this together. Nick Miller, of course. And we didn't even talk guitar here barely today, so we'll have to talk about that next time. But anyway, so make sure that you do leave a rating and review wherever you listen to podcasts if you like today's show, we're also on Spotify. Leave a comment over there. All the links that we talked about here today are going to be in the show notes over@perpetualtraffic.com and if you did listen to the audio version and you need some visuals, head on over to our YouTube channel, which is perpetualtropic.com YouTube so thank you so much Nick Miller, head of all things traffic at tier 11 for coming on to Perpetual Traffic. And until next show, everyone see you. You've been listening to Perpetual Traffic.
- [53:13]
Nick Miller
It.