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- [00:01]
Ralph Burns
Our friends over at Appsumo started with one simple idea. The tools you need to grow your business shouldn't put you out of business. That's why they work directly with developers to get exclusive discounts of 80 to 90% off software, saving entrepreneurs like you over half of a billion dollars since 2010. Some of the biggest names in tech like Mailchimp, Zapier, Dropbox all got their start on AppSumo. With a rotating selection of hundreds of tools, the ones that you're using anyway and probably paying too much for, you'll find all the software you need to.
- [00:40]
Amanda Powell
Make your life easier in 2020.
- [00:41]
Ralph Burns
5. Plus, with a 60 day money back guarantee, you can try any tool risk free. Oh my God, What a deal. AppSumo rarely offers discounts, but they are going to offer a deal here for you. The perpetual traffic listener because prices are already so low, but we got the biggest discount we could possibly get from them anywhere. You get 13% off your first order with the code TRAFFIC13. These guys have been saving entrepreneurs like you and marketing people like you hundreds of millions of dollars since 2010. Don't miss out right now because they don't offer discounts like this. Head on over to appsumo.com, enter the code traffic13 and get 13% off your first purchase@appsumo.com hey, it's Ralph here. Let me tell you about a lifestyle brand that we recently worked with where they grew their revenue by 4.49.8% year over year and hit eight figures in top line revenue for the very first time in their history and they are now on track for 25 million in revenue in 2025. We are so excited to be working with this company and the reason why is they started using Tier 11 data suite about a year ago and re reduced their unattributed traffic by 90%. That's right. They're unattributed direct unknown traffic that probably frustrates the hell out of you. Over in GA4 or one of those other crappy attribution tools, we reduced that unattributed traffic by 90%, uncovered $850,000 in hidden revenue and scaled their ad spend by over 3x. These results are not magic. The results of clean, accurate data and a system designed for today's privacy world where everybody is trying to block your data. If you want to see these kinds of results for your business, reach out and let's make it happen over@tiereleven.com apply and discover how tier 11 data suite can finally, allow you to scale your business, acquiring new customers at a cost you can afford. Head on over to tier11.com apply our friends over at AppSumo started with one simple idea. The tools you need to grow your business shouldn't put out of business. That's why they work directly with developers to get exclusive discounts of 80 to 90% off software saving entrepreneurs like you over half of a billion dollars since 2010. Some of the biggest names in tech like Mailchimp, Zapier, Dropbox all got their start on AppSumo. With a rotating selection of hundreds of tools, the ones that you're using anyway and probably paying too much for, you'll find all the software you need to make your life easier in 2025. Plus, with a 60 day money back guarantee, you can try any tool risk free.
- [03:39]
Amanda Powell
Oh my God, What a deal.
- [03:41]
Ralph Burns
AppSumo rarely offers discounts, but they are going to offer a deal here for you. The perpetual Traffic listener Because prices are already so low, but we got the biggest discount we could possibly get from them anywhere. You get 13% off your first order with the code TRAFFIC13. These guys have been saving entrepreneurs like you and marketing people like you hundreds of millions of dollars since 2010. Don't miss out right now because they don't offer discounts like this. Head on over to appsumo.com enter the code traffic13 and get 13% off your first purchase@appsumo.com hey, it's Ralph here. Let me tell you about a lifestyle brand that we recently worked with where they grew their revenue by 49.8% year over year and hit eight figures in top line revenue for the very first time in their history and they are now on track for 25 million in revenue in 2025. We are so excited to be working with this company and the reason why is they started using Tier 11 data suite about a year ago and re reduced their unattributed traffic by 90%. That's right. They're unattributed direct unknown traffic that probably frustrates the hell out of you. Over in GA4 or one of those other crappy attribution tool, we reduced that unattributed traffic by 90%, uncovered $850,000 in hidden revenue and scaled their ad spend by over 3x. These results are not magic. The results of clean, accurate data and a system designed for today's privacy world where everybody is trying to block your data. If you want to see these kinds of results for your business, reach out and let's make it happen over@tier11.com apply and discover how Tier 11 data suite can finally allow you to scale your business, acquiring new customers at a cost you can afford. Head on over to tiereleven.com apply.
- [05:44]
Unknown
You're listening to Perpetual Traffic.
- [05:48]
Amanda Powell
Hello and welcome to the Perpetual Traffic Podcast. This is your host, Ralph Burns, and this is episode 299. And I'm alongside my awesome co host from Austin, Texas, Amanda Powell. And Amanda has been asking me this thing for the last month or so, which really bothered me that we haven't talked about it here on Professional Traffic ever. Maybe back in episode 106 we did a bit way back when. But the point is, a lot of people have this question when they come to tier 11. And Amanda, this is a question that you're being asked now with your new job over at Boss Babe. What is it that is stuck in your craw for the Perpetual Traffic listener?
- [06:26]
Unknown
So I'm actually glad that Rafi wanted to do this episode because I have been so curious around. Obviously my whole world is surrounded by like, organic content right now. So I have not been in the paid media space, but during the product launch that we've been working on over the past month, we've obviously been leveraging paid media, just not in my department. And I am so curious on not just paid media, but how much does it typically take to even acquire a customer through the right channels when you're looking for your clients at tier 11, what really goes into it? Because at Digital marketer Molly historically actually built out a calculator on customer acquisition and how much you should be able to pay. That obviously is not my area of expertise. So is it still the same? Has it changed? Like, has the number of, like, what you should, you know, as a business owner, is there like a specific target that you should hit on, like, the cost of a customer? What is the cost of a customer, Ralph?
- [07:34]
Amanda Powell
Yeah, that's a great question. And I think the way that I look at it is I don't necessarily look at it as advertising based. I look at it as what's my marketing department spending? And that could be like, I talk, I call that the Marketing Selling General and Administrative. The msga.
- [07:51]
Unknown
Sorry, say that again.
- [07:52]
Amanda Powell
The Marketing Selling General and Administrative. So like on a, on a profit and loss sheet, on a P and L sheet, like, I look at all our expenses, I look at our cost of goods sold, which for us is employees, people. But then we have a marketing line item which is typically under, like, selling general administrative like, there's cogs and there's SG&A. I look at marketing sailing, general and administrative, if I can say that quite correctly, MSG and a.
- [08:20]
Unknown
You're speaking gibberish to me, Ralph.
- [08:22]
Amanda Powell
That is like you're a marketing cost, for example, for Boss Babe.
- [08:26]
Unknown
Yeah.
- [08:27]
Amanda Powell
Okay, so let's say you spend $100,000 a year on SEO or on content marketing. Like, that's part of your acquisition cost. Like that is a cost that is associated with eventually part of your profitability, but also, like, how much you can pay to acquire a customer. So I don't necessarily look at as just advertising. Is advertising a big chunk of that? Absolutely. And I think if we go through it step by step, you'll see how I think about it from a CEO's perspective. And even though I run an ad agency, it's not just all, like, what we're spending on Google and Facebook and YouTube, it's everything that goes along with it. Because that's a cost center that we're investing in order to create value later on for, you know, acquiring new customers that we can then help grow and scale their businesses.
- [09:17]
Unknown
This is fascinating to me because I think it's not just, like you just said, it's not just ad dollars, but it's also, you know, people dollars to acquire a customer, because I need people in order to market my product. So how much am I paying for a person to then pay to then acquire the customer? I feel like you don't really think about that, but also that you don't think about not just the people side of things, of, like, you know, even if it's not costing you up front, like, what is it costing you to send to your list? And this is the wrong use of the word, but, like, tire your list every time that you send an email. So, like, what is that cost in terms of, you know, making sure that you don't exhaust your prospects and all of that? I am very excited to dive into this.
- [10:06]
Amanda Powell
Yeah, that's a tougher one to manage. But I think, you know, through this conversation, we can certainly get a ballpark on it. So I think maybe the best way to look at it is, you know, how much can you pay to acquire a customer? When I say pay to acquire a customer, I'm not talking about a CPA or a cost per acquisition on Facebook. I'm talking about, like, what is your marketing expense? Like, for you at Boss Babe or for you at Digital Marketer? You were part of the marketing department. You are a marketing expense. So I Would look at you, I would put you in a separate line item under my marketing stuff, not under cost of goods sold. Which for us is, you know, it's people like those are the people that fulfill. Those are the people that buy media, Those are people that create our creatives, do our dev, you know, our customer success, all that stuff. So I put them in a separate bucket. But we're a service based business. So my cogs are different than a guy who's running an E commerce business versus a digital business that's only digital. Just like digital marketer does with some, you know, live events and that sort of thing. So I think it really your product mix is going to determine how much you can acquire a customer for, but also based upon your intended profitability as well.
- [11:17]
Unknown
So it sounds like that's the first step was like you start to separate like what are the different buckets. So it sounds like bucket one. Step one is okay, figure out your buckets number one. So like what are your big obviously people. Obviously, you know, budget and then where does it go from there?
- [11:36]
Amanda Powell
Yeah, so you can look at it any number of ways. So you can reverse engineer it by figuring out what your costs are and what your profitability is and then figure out what your CPA or what your customer acquisition costs should be. Or you can do it like front ways figuring out what your lifetime value is. So let's go through what you asked, which is okay, let's look at overall, what are my expenses. So that starts with the big conversation of like what is your customer lifetime value?
- [12:08]
Unknown
Yes, I love talking about this.
- [12:10]
Amanda Powell
That's a big part of it. So all right, we're talking about customer acquisition cost. But what is a good customer acquisition cost depends on this number. So this is we refer to as clv. So we're going to use a lot of acronyms here. First off, customer acquisition cost is cac.
- [12:29]
Unknown
You have no idea how long it took me to learn these terms when I think I just finished learning them by the time I went to boss babe. I think it takes so long to learn marketing acronyms, but we won't even get into that. Let's continue.
- [12:40]
Amanda Powell
So true though. But as a new hire, like if you talk to your boss in these terms, you will like be running that company like within like the next year.
- [12:49]
Unknown
No, seriously, pro tip for anyone getting hired at tier 11.
- [12:52]
Amanda Powell
Absolutely. If you feel figure out, all right, I got to figure out what your costs are and all this sort of stuff. So we increase our customer lifetime value. But a CEO would be like, holy crap. Like, this is a dream employee. Because that's what you like. If you're keeping your eye on that, you're probably a pretty good, you know, entrepreneur, because that is the thing that drives everything else. Yeah, and the finances drive everything else. Like we joke about at Tier 11, the first email I open and the first channel I open on Slack is always from my finance department because without that, nothing matters. So having said that, you need to know your customer lifetime value or your CLV to know your cac, which is your customer acquisition cost. So how do you figure out your customer lifetime value? So really easy, the easy way to do it. And it's what we tell a lot of our businesses that we work with, that we don't really know their back end, we don't really know what their books look like. We just say, all right, let's take an average of all your products and let's say they've got 10 products and the average price point is 25 bucks. Okay, just multiply that by anywhere between like two to 10. So let's say times five. Let's say start off there. So your customer lifetime value, just like back of the napkin. Like, this is probably not very accurate. 125 bucks, maybe 150 bucks, that kind of thing. You can start with a number like that, but that's an okay place to start. It's better to actually go a little bit deeper and go into your CRM, for example. So if you are a business and you have customers, or let's say we're going to use in this example a business that has customers and we just want to figure out what they can pay to acquire a new customer. Let's say you go back into your CRM for the last 3, 6, or maybe 12 months. 12 months is probably the best. And you get all your active customers and get that number. So let's say, you know, you, you have a thousand customers in the last year. These are new customers. They're not duplicate customers. But these are customers who may have bought once, maybe bought twice, maybe bought 10 times. So we'll break this down into individual models for E Commerce, for service, and then for digital products. But just use this sort of an example to start off with. So you've got a thousand customers, and let's say to keep things really easy, you've got a million in sales. Like, this is a typical kind of person that we would talk to at tier 11. They're not quite maybe at the point where they could hire us, but they want to get to that next level. So I'm speaking to a lot of businesses, probably just by mentioning this. So if you're around seven figures or maybe less high, six figures, figure out how many customers you have, figure out what your revenue is, and just simply divide your customers into the number and that then gives you your customer lifetime value or your CLV for the last 12 months. Maybe you know your business, you know, it's typically, it's a three month life cycle for a business. Maybe it's six months, maybe it's 12, maybe it's 24, maybe it's 36 months. You know, for us, for a customer, it's sometimes upwards of five years. But the point is, if you start off with a year, you're at least starting at the right spot. So in that case, you've got a million dollars in sales. All right, you got a thousand customers. What is your customer lifetime value?
- [16:13]
Unknown
A thousand.
- [16:14]
Amanda Powell
A thousand genius.
- [16:15]
Unknown
I'm a math genius.
- [16:17]
Amanda Powell
Amazing. So that's your customer lifetime value. Now that is a basic way of doing it, but it's a very easy way of doing it. And you can have your financial person, your CFO, or just look into your books, look into your back end for Shopify, you know, whatever it happens to be, or your CRM. That's typically where we will do it. We'll actually do this through. We have two metrics. We know what our lifetime customer value is, but we also know what our average revenue per month is per customer too. So you can break this down into all kinds of different metrics. But anyway, if you understand what your customer lifetime value is, that's the start. So take your sales for last year, take your number of customers, divide them, and then you get your clv. And that's where you start with this whole exercise. So now that you've determined what your customer lifetime value is, you also have to think to yourself, and this is something that a lot of people don't think about. Whether this is step two or step one B, I think it's really important is how long does it take to earn that thousand dollars?
- [17:29]
Unknown
Yeah, that's my question. So when you're doing that from the get go, you're looking at it for a year. But you had even said some customers take longer to acquire than some. Customer retention is longer than others. So how do you take that into account?
- [17:47]
Amanda Powell
That's where you have to do a little bit of a guesswork. You could probably look at it, how long have these customers been paying us, for example? So for us let's say we have half a dozen who are five years, and then we have some who are brand new or just new customers. So maybe they're a month, and then you've got some others that are a year or so. You can look at all those figures, figure it out by months maybe, and just take an average. So five times 12 is 60. So we'd have five people at 60, and then we'd have 20 at 12, and then maybe we have, you know, 10 at three months. That is your average. The point is like, that's how long they're actually with you. But the real case is, like, if you have that customer lifetime value, what is the average? So for us, I think the average is probably about six months is my guess. Anywhere between six to 12 months, if I looked at it that way. I think if you're running a digital products business and you're doing a continuity program, might be anywhere between three to nine months, might be 12 months. Take that average and figure that into it.
- [18:56]
Unknown
Is that a healthy average based on like a running a marketing agency and doing marketing services or any kind of like digital marketing service, like six to nine months? That's generally a pretty healthy average, I'd say.
- [19:10]
Amanda Powell
I'd say it's a. That's a pretty good average. It's gonna depend really on the business itself. And I think there's the business model. Yeah, we can go down, you know, individual rabbit holes for a lot of different types of customers. But the point is, like, are you making money and how fast are you getting that money back? But I look at it in three different ways. So if you are, how long does it take to earn that entire clv? If you want to earn it within one to seven days, you probably have the least amount of cash on board in order to make that up. So one to seven days. So that is somebody who is immediately profitable on day one. All right, I acquire a customer for, you know, whatever my cost is, and I'm profitable and we'll get into profitability next. But that's a business that is very unleveraged. So those are the people that come to us and say, hey, I want a 5x roas on day one on all my ad spend. You know, it does happen sometimes. The ones who actually have cash in the bank and, and pay to acquire a customer or pay more to acquire a customer are the ones who ultimately win. Like we talk about all the time. So fast is, you know, one to seven days. You need. You probably have the least amount of cash because you're, you need that cash for operations maybe between eight days and 30 days. That's about medium, that's pretty good. Now I know digital marketer basically breaks even on, you know, their marketing spend in their first 30 days is my understanding. So that's fairly healthy. So if you can acquire a customer and you start making money on them after day 30, pretty good. You need a little bit more cash obviously on hand because you have to front that cost depending on how you're leveraging your credit and everything else. But for those who have a slow win back between 30 and 180 days. For us, tier 11 is in this category. So we'll acquire a customer, it will break even or probably go a little bit negative on the first 30 days and then we start becoming profitable on day 60 to 90 thereabouts. And I think for a service based.
- [21:22]
Unknown
Business that is, that makes more sense to me because you need those 30 days to ramp up even and get a customer settled. That makes complete sense.
- [21:30]
Amanda Powell
Absolutely. And for us, like we have cash on board, like we are not going to go if we don't make money on day one after we acquire a customer, we're not going to go out of business. So we know that. So for those longer timeframes, you typically will need at least that amount of time in cash to cover all your expenses, cover all your, you know, selling general administrative, your cogs, all this sort of stuff that we'll go through here in just a second. So I think it's important to remember that customer lifetime value is, is related to how fast that money actually comes in.
- [22:04]
Ralph Burns
Hey, it's Ralph here. Let me tell you about a lifestyle brand that we recently worked with where they grew their revenue by 49.8% year over year and hit eight figures in top line revenue for the very first time in their history. And they are now on track for 25 million in revenue in 2025. We are so excited to be working with this company. And the reason why is they started using tier 11 data suite about a year ago. It re reduced their unattributed traffic by 90%. That's right. They're unattributed direct unknown traffic that probably frustrates the hell out of you over in GA4 or one of those other crappy attribution tools. We reduced that unattributed traffic by 90%, uncovered $850,000 in hidden revenue and scaled their ad spend by over 3x. These results are not magic. The results of clean, accurate data and a system Designed for today's privacy world where everybody is trying to block your data. If you want to see these kinds of results for your business, reach out and let's make it Happen. Over at Tiereleven.com apply and discover how Tier 11 data suite can finally allow you to scale your business acquiring new customers at a cost you can afford. Head on over to tier11.com forward/apply.
- [23:27]
Amanda Powell
So that is customer lifetime value. That's the most important metric that you need to figure out first and foremost. Now, what can you pay to acquire a customer? So we want to figure out our CAC here. And there's two ways of doing this. There's the basic way, and then there's the true way. So the price you want to pay to acquire a new customer is customer acquisition cost. And I think with most people, and like you said here, Amanda, is that you think about this as advertising costs primarily, but it's actually not advertising costs. There's really two basic ways in which you can calculate this. Through marketing campaign costs and then by total customers acquired. That would then be your customer acquisition cost. But what you really want to do is you want to add in your overall marketing costs, like your team and all the other things that go along with it, and that's probably a larger number. So let me sort of back this out for you. So let's say you spent $100,000 this past year on Facebook ads and you acquired a thousand customers. So pretty basic. All right, I've spent that on Facebook. I'm not factoring in any other costs, but just my advertising costs. But I acquired a thousand customers, so my customer acquisition cost in that case is $100. Simple. 100,000 divided by 1,000 equals 100. But your true customer acquisition cost is a little bit different because most companies have additional costs in addition to marketing campaign costs. So this might be wages of the marketing staff. For example, like your salary. Amanda, obviously, maybe you have a designer, maybe you have content marketing people, maybe you have writers, maybe you have videographers. Maybe you've got some software that you need in order to run your email marketing system system. Maybe you've got an agency that does certain parts of your marketing in one way, shape, or form. So a lot of this is like for us, it's like our marketing director and our sales guy and our admins that go along with that. So for us, our marketing staff is part of this. Our sales staff is part of this. That means sales support staff, it means designers, it means people who help us out with our content. Marketing, it means our marketing director's salary. So all of that is factored in as well, because that's part of your marketing cost. It's not just campaign cost. What you in Facebook, what you spent last month, let's say in this example, you're spending just for round figures. You're spending $100,000 on your advertising campaigns, but you're spending, if you add everything up over the entire year, you're spending $100,000 on campaign costs, but you're spending $100,000 additionally on all these other costs, your customer acquisition cost is going to be different as a result. So if you acquire 1,000 customers, your costs are now no longer just $100,000. It's $200,000, $100,000 for your marketing campaigns, your advertising, and 100,000 for all your marketing expenses. So your customer acquisition cost in this case is now $200. So if you look at customer lifetime value, CLV and CAC, they're the two biggest metrics. And the most important metrics for you to figure out the next step is $200. Is that a good number? So the next thing you need to do is you need to figure out, okay, you've got $1,000 customer lifetime value. Now you got to figure out all your expenses. You've already figured out what your current cost to acquire a customer is. In this example, it's $200. But out of that thousand, we have other costs, right? You're running a business. You have other things that go along with running a business. It's not just your marketing expense. You have to pay yourself. You have to have a building and all these other sorts of things. You're virtual. You save money there. But the point is you have to figure out what your costs are. So first thing you want to figure out is your refund rate. A lot of people don't think about this. So this is one of those things that you're going to take away. These are now the expenses that are going to mount up to figure out whether our CAC of 200 is good or not. So let's say, just for the sake of argument, we have a 10% refund rate, probably conservative, relatively speaking. So that is $100 off our thousand dollar CLV. So now we're looking at 900. Now you want to think about, okay, what's my cost of goods sold? So whether you're E commerce, whether you're digital, whether you're a service, this is going to vary. And we can even go through individual models that Will explain where the good cost of goods sold might be in your business. But the point is cogs is one of three things. It's either if you're an E commerce business, it's your manufacturing costs, your shipping costs, your storage costs, the cut, the raw cost of actually, you know, acquiring or building that product that you then sell. So cogs is pretty specific there. Digital is less. So if you're a digital marketing business, you have your servers and your email, maybe that's covered under marketing costs. But digital products are beautiful because they really don't have a whole lot of cost of goods sold. So it's one of the beauties in the model. In a services business like us, cogs for us is personnel. So people who fulfill on the ads, on the design, all that sort of stuff. So let's say in this hypothetical model you've got a refund rate of 10%. Let's say your cogs is well be a digital product. For example, our COGS is 10%. So now you've gone from $1,000 customer lifetime value down to 800. Next is your overhead. So this is another expense that you have to figure out. So this is, let's say you're a digital company or an E commerce company. Overhead here is probably going to be your payroll. In a services based business, payroll might be part of cost of goods sold. So we're moving the expenses around. But the point is overhead also includes accounting, your legal, travel, entertainment, as long as it's not marketing related. So let's say in our hypothetical example here, 30% of our customer lifetime value is spent on overhead. So now we're down to $500. Okay, so we've got $300 of overhead, $100 of refund, $100 of cost of goods sold. Now you want to figure out the next step which is your desired profitability. So part of this whole thing is actually just to turn a profit as a business, right? If you don't turn a profit, you're losing money, you won't survive as a business. So 20 to 50% of customer lifetime value is a reasonable percentage for profitability. Probably higher for digital products, upwards of 50% e commerce maybe 10 to 20%. Maybe in the service based business it's 30 to 50%. So in our model here, let's just use 20% or $200. So now we're down to $300 and that's all we got left. And that is your tolerable cost to acquire a customer is what's left over after all those expenses. So in our case, we figured out to start off that we were our customer acquisition cost was $200. Right. Just hypothetically, but in actuality, based upon this model, I can pay upwards of $300 to acquire a customer. And that's really how you figure it out. One of the parts that people never really factor in is desired profitability. You have to put in profitability as part of this whole equation. So taking a step back, let's look at it again, because a lot of numbers here, a lot of acronyms. We determined that our customer lifetime value is $1,000. Okay? We determined our refund rate is $100 or 10%. We determined our cost of goods sold was $100 or 10%. We've determined that our overhead was $300 or 30%. And we determined that our desired profitability in this case is $200 or 20%. Which leaves us, if you do all that math, 1,000 minus 100, minus 300 minus 200 comes out with the magic number of $300. And that is what this hypothetical business can pay up to in order to acquire a customer. So that's really how you want to look at this, because you can pay less or pay half, but probably what you're doing is you're probably giving up sales on the front end that you could be getting if you expanded your customer acquisition cost to the full 300. So let's look at it from this perspective. If it's, you know, if your customer lifetime value to your CAC ratio is 1 to 1 or less than 1 to 1, that's very bad. But if it's 1 to 1 and then profitable on day 30, pretty good. But if you're 2 to 1, 3 to 1, or even 4 to 1, you're in a very good profitability standpoint. But I think the sweet spot is, really is right around where our model is here is about three to one. My customer lifetime value is $1,000. What I can pay to acquire customers, about $300. And that's going to allow me to really scale and grow because I know the finances are taking care of themselves. And I'm also paying as much as I possibly can remember he or she was willing and able to acquire a customer for more money, ends up winning the game. And that's really where you should be if you're at that three to one range. Seems like that's about the sweet spot, you know, looking at thousands of businesses every single year here at tier 11. If you can figure out what your Customer acquisition cost is, and it's one third of your lifetime value, you're in a pretty good spot as a business, all things being equal. So in our hypothetical example here, we used 30, we used 30% of our lifetime value, our customer lifetime value. That's about right. If it was 33%, that'd probably be what more businesses are looking at now. A lot of businesses want less than that. They hire agencies like us to get it down to 10 or 20 or $15. The point is that if you know your numbers, you can scale by having the ability to pay more to acquire a customer. And that's the key to scale, is that when you're a hundred thousand dollar business, Amanda, you might be at a 50% net profit, which is great. You know, you might be making 50k off that hundred k. Well, if you're a million dollar business, you probably aren't making a 50% profit on that million dollars like you have to. As you grow, your costs expand. You might actually get maybe a 25% profit at the end of the day. But as a million dollar business versus $100,000 business, if you're at a 25% margin, you're making $250,000 in net profit. As a hundred thousand dollar business at a 50% profit, you're only making 50,000. So you're making 5x in real dollars. And this is what a lot of businesses really miss. But that is the key to scale. As you grow. And we've done it here, as we scale and grow, we add more personnel, our margins start to shrink, you know, to maintain competitiveness in the market. That's just the way that it was. And when I explain those numbers, those aren't too inaccurate. From our life cycle as a business, we were 100k business, we're probably making about a 50% net. I was keeping 50k but I wanted to grow it to a million million plus. And then we accepted less percentage of profit. But it's a larger dollar figure which then drives that cash flow, drives the business forward. So in summary, the big equation, the big takeaway that you should remember as a business owner here is customer lifetime value divided by customer acquisition cost, which we refer to as the CLV CAC ratio should be around 3, should be. There's going to be differences based upon your business, but in all actuality that's fairly healthy. If you're higher than that, if you're a four or five, you should spend more on marketing. If you're less than that, you should figure out ways to increase your conversions, reduce your costs in some way, shape or form. The point is three is a good way to go and I love the number three. Amanda anyway just because it's a good business number. Things come in threes. Good things come in threes. The point is like if you can do that, figure out customer lifetime value, divide it by your customer acquisition costs and it comes out to a number that equals in and around three, you're in a pretty good spot. So that is in essence how much you can pay to acquire a new customer and also starts with CLV and cac. And we'll leave all the references and all the goodies for this show inside the show notes over@digitalmarketer.com podcast this has been episode 299 until next week. See ya. You've been listening to Perpetual Traffic.
- [37:01]
Unknown
For more information and to get the recent sources mentioned in this episode, visit digitalmarketer.com podcast thank you for listening.
- [37:28]
Amanda Powell
SA.