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- [00:01]
A
Hey, folks, Ralph here with something that could seriously upgrade your Top of Funnel ad game. If you've been a PT listener for any period of time, you know that we talk about Top of Funnel all the time and how challenging it is for you to get quality Top of Funnel clients or leads or customers and then convert them typically at Bottom of Funnel. Well, TV advertising is one of those areas that we haven't discussed here on PT all that much. But our friends over at Ad Critter have figured this stuff out. They do connected TV ads so you can be everywhere without spending millions on super bowl ads. But they pair it with display retargeting. So you're hitting the audiences with a complete approach. You reach them, then you remind them and then you collect the revenue. It's a strategy designed to deliver and let me tell you, it really works. We're testing this at tier 11 and so far the results have been very impressive. Now with Ad Critter, creating custom audiences are so easy. You don't need to reformat files, you don't need to mess around with complex spreadsheets. You just upload any file in any format and you're ready to go. And the match rate is awesome. They make it easy to connect with the right people, the actual people that have interacted with your ads in the past and then allow them to naturally flow through your funnel so you can convert them at Bottom of funnel. Now, the folks at AdCritter, we twisted their arm to get us a great deal for you, the PT listener. They are offering a special deal for y'all, and that is you can get a $500 campaign credit, meaning $500 in free money to test out the platform or dollar for dollar matching on any TV campaign, up to five grand. Imagine the impact of that match spend five grand. The they'll add another five grand in display. That's a huge opportunity here. Now it's only offered to you, the PT listener. Head over to AdCritter.com PT and check it out. 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 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. 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 AppSum. Enter the code TRAFFIC13. Get 13% off your first purchase at AppSumo.com you're listening to Perpetual Traffic. Hello and welcome to the Perpetual Traffic podcast. This is your host, Ralph Burns. I'm the founder and CEO of Tier 11 alongside my amazing co host Lauren.
- [03:46]
B
E. Patrul, the founder of Mongoose Media.
- [03:49]
A
So glad you joined us here today. Today we are going to talk math. We just lost 99% of the audience. See the, see the, like the ratings just go, you know, just like right off a cliff. Yeah, yeah, absolutely. It's like, you know, March of 2000 when the Internet bubble like burst. No, this math is actually good math. This is the kind of ma that we talk about things that are relevant and we're seeing on a daily basis. And this is one of the most important, if not the most important in my opinion metric in marketing, especially in digital marketing, because a lot of the platforms that you're spending money on for media are, as we've said many times before, are going to give you what you want, which is roas, the appearance of actually getting new customers, great performance, when in fact the true measure of whether or not you're growing your business or not is how much money you have in the bank, how many new customers you've acquired and at what cost you have acquired those customers. And that is the purpose of today's show, is to talk about that metric. I was googling this this past week, like how to determine your ncac, which is new cost to acquire a customer or new customer acquisition cost, however you want to do it. There's not really a whole lot out there. It's how do you determine it in retrospect, like after you've already spent money. But how do you actually determine it is really complex and it's not an easy question to answer in today's presentation. We're actually going to talk about this and I have a feeling we're probably going to be a two parter here. We're going to get into it and I'd love to get your thoughts on it as to how you calculate it or what, what success metrics you use in order to scale up your clients as well as your individual businesses. For us it's NCAC and that's what we're going to be talking about here today. Thoughts?
- [05:51]
B
Comments for those that are wary of the math, this is the math that makes you money. This is the math that matters. So if you are still listening, good job. If you ditched early on, well you're enjoying fake numbers and that's only going to last you so long. So sorry about it. Sorry, not sorry but no. Everything you're talking about makes so much sense because when people come to us and want to scale, we've seen when we audit accounts campaigns that were scaled because of the appearance of it working really well and then when you look at it from a longer timeframe or you bring in another outside party tool like a third party tool, like a wicked reports or something to that effect, you're like oh no.
- [06:29]
A
Yeah, everything isn't as it appears to be. Yeah. So this was brought about by we have a large 8 figure business in the e commerce space. Hundreds of SKUs, lower priced products sort of on the front end. We've had a real challenge that we just keep asking like what's your ncac? What's your ncac? What's our goal? What makes you successful? How much can you pay to acquire a customer? Can you pay more than X amount that we're getting right now or less? Because roas and if you look inside all the metrics, inside all the ad platforms, ROAS is going to be mostly based upon warm traffic. That's not why they hired us. They hired us to get new customers for their product and get them to buy over and over and over again, get them to buy more and more frequently. There's three ways you can grow your business. Get more customers, get them to buy more frequently and get them to buy more stuff when they buy it. Those are the only three that I know of. The point is the first one is the most challenging one because once you actually have them in your ecosystem, you have email, they now know who you are, you have some level of brand awareness. So as I've said a gazillion times, my team used to zoo on me for this. You gotta crack the code On Cold.
- [07:42]
B
Trap, did you just say zoo on you? Were they like making monkey tiger noises? Like what does zoo on you mean?
- [07:47]
A
Like yeah, they would make monkey noises. They would. I'd be, yeah. Every time I would say gotta crack the code on Cold trap, we actually had a meme of me saying it inside Slack. That's how many times I used to say it. So I'm bringing that back and hopefully I'll get zood on for it this time because that means they're actually paying attention and understanding. So. But this is math. It's not that complex, the math. It's just addition and subtraction really. At the end of the day there is a certain element of the business owner making a distinction and making a judgment call as to how much they are willing and able to pay to acquire a customer. Make sense?
- [08:26]
B
Yeah. And I think Dan Kennedy said it best of whoever is willing to pay the most will win every time.
- [08:31]
A
That's right.
- [08:32]
B
It's like knowing how much you're willing to pay to acquire a new customer, knowing what your average order value is going to be and then knowing the lifetime value of that is going to be mission critical for you to know what you're willing to pay the first time. Because if you're willing to pay $75 the first time in your lifetime value of 60, you have a loss of $15 without even factoring in cogs. So that doesn't work.
- [08:53]
A
That doesn't work. So we're going to get into that right here. Hey, so before we get into today's show, you can get the download for these slides over@perpetual traffic.com NCAC I highly recommend that you watch this over on our YouTube channel, which is perpetualtraffic.com YouTube but you can get the download of the slides for free@perpetualtraffic.com NCAC so I highly recommend that you watch this over on our YouTube channel@perpetualtraffic.com YouTube if you don't know what that is already, please subscribe. We've got a ton of videos over there, especially when we have John Moran on. We do a lot of screen sharing. So make sure that you do subscribe to that. So this is how to calculate your new customer acquisition cost, otherwise known as ncac. And this is for an E commerce business. We're just going to use this. I did not use like a digital products business. I didn't use a service based business. E commerce is just so straightforward when it comes to this and I think there's a lot of factors Here we will comment on digital products and service based businesses as we're going through this here. But just for purity and for simplicity, we started really with E Commerce. All right, so the first thing is what is new customer acquisition cost or ncac? It's the total cost of acquiring a new customer, obviously. Why is it important? Understanding NCAC is essential for making informed marketing decisions. If you don't know what your NCAC is, you can never really truly scale and you have to be able to find what the NCAC is and we've had many shows here on how to determine that. And in the ad platforms there is a certain level of the ability to know which campaigns specifically which ad sets which ads are actually getting new traffic or traffic that has already been on your site even with exclusions. Have you found the exclusions improving? Getting worse? Like what's your sense over on Meta?
- [10:52]
B
Lauren, as much as I like wish exclusions were better, the reality is that with the algorithm doing everything they can to find your customers, they're going into your audiences that are have been excluded. And the reason that we have seen this is because I'll use an E commerce example. We know who our customer lists are and we import them in from Klaviyo and then we'll be able to track back an existing customer who bought from a retargeting campaign that excluded customers. And I'm like okay, cool, that didn't work. So anyways, the exclusions are good as a reference point, but they're not something to be 100% reliant on. Meta right now just in full transparency.
- [11:29]
A
I mean there is a dropdown menu inside Ads Manager where you can actually look for new and returning. However I would take those with a grain of salt. I mean you really do want to focus on obviously cold traffic are the people that have never seen your stuff before. Obviously use exclusions as much as you possibly can. It's not a perfect solution however. You can get upwards of 40, 50, 60% cold traffic specifically if you do certain types of strategies which we've talked about here in the past. We're not going to get into sort of the ad side of it quite as much, but that is a problem. It's like how do you actually find those new customers? That's a whole challenge unto itself.
- [12:06]
B
We should do that as a separate episode. If people want that we should actually say like I know that we're like figuring Spotify out and like with how they do all these comments now. I mean of course we obviously have our telegram group which is like blowing up. Lately I've been seeing a lot of really good stuff from the Google side and people helping out a lot. But if that was something ways that we penetrate new audiences for brands that feel like they're tapped out for their campaigns, I would say that if people want that, I'm willing to share my. I'll spill my secrets, Ralph, if you spill yours.
- [12:37]
A
Yeah, absolutely. Let's do that as a show.
- [12:40]
B
But like someone has to ask for it.
- [12:42]
A
Yeah, well, request it, ladies and gentlemen. Who are you listening out there? So before you can do that, you need to know this stuff though. So this is a five step formula. Very simple, but not simplistic by any stretch. So the first step is three ways to determine what your customer is worth. So actually it's, I shouldn't say this three ways. It's actually five ways but we only included four here. So three plus a bonus. So this is the most important thing. So CLTV or ltv, we know what that is. That's lifetime value. The question is what is lifetime value for you and your business? And that is a big question that we're going to face here is what's your look back period? How do you actually go back in time and determine whether or not Your LTV is 3 months, 6 months, 12 months, the entire time that you've ever been in business? That's the big question. And that's sort of a business question which we'll sort of get to in just a second. So the first way to figure this out is, this is the easy way. If you have a data analyst, just ask them to figure it out. It's pretty easy peasy lemon squeezy. This is a simple, simple way of doing it. If you've got a data analyst, great. I'm going to assume that you probably don't and you're going to have to calculate it on your own. So like I said, there's a lot of different ways to do this. You can certainly look this up. We'll leave some links in the show notes for this as well. Two things you need to know for me, this is how I figure it out. And we just actually did a live with John Moran. He figures it out a completely different way. But they're both right. So two things I look for is how many customers bought your products, how many unique customers. Now if you go back in your Shopify database, let's use a 12 months look back period. So let's just use that as in our example here. That's what we Use that could be a whole show. It's like when you actually determine this, what is your look back period. And I think in most cases 12 months is good, but it also sort of depends on how many times they buy from you, what type of product you have. For example, a 12 month look back period probably isn't very helpful if you're manufacturing, I don't know, baseball gloves and you have a huge surge of buyers in February, March and April when the baseball season begins. And then you really sort of have a drop off the end of the year and then they buy again. You see another surge might be buyers coming back, buying a new glove, maybe getting a different glove, maybe they outgrew their previous glove. So it's going to depend. Let's say you're a supplement company and you sell a recurring CPG product which let's say it's a protein powder that's going to be very different. So you buy the protein powder once. Obviously we have a customer that their average lifetime value is. Once they get the customer customer they buy seven times on average. Pretty good. So their NCAC it would is higher, all things being equal than maybe a supplement company that only purchases two or three times. We've had clients that have done that. They've had a really hard time scaling up their spend. So it depends on your product in so many different ways. So calculating on your own is a couple of different steps here. So how many customers bought your products, you can go back and do Shopify and you can look for this and then you figure out how much revenue you generated over that period of time and you basically just divide the numbers. So total revenue divided by unique customers equals ltv. And some people call this CLTV ltv. This is a marketing performance indicator of course, which you can get over@perpetualtraffic.com MPI if you haven't gotten it already and it goes into this even further. But calculating it on your own, that's a simple, simple way of doing it. The third way or actually here's our example here. So we have an example of a million dollar business million rev 2000 unique customers through Shopify. We went back through it. So we figured out okay, their LTV over a 12 month look back period. Like I said, it's going to depend on your business here. We're just using 12 months as an example. Their LTV is $1,000 and that's the example that we're going to use throughout the whole presentation here today. The next one is estimate it. I don't Highly recommend this, but I have seen this especially with businesses that just don't know yet. Okay. Starter businesses, lower ad spend. If you can't do number two, it's okay. A good bench to start is anywhere between two and eight times the price of your initial conversion value. So let's say your AOV for example. Sticking with our previous example, the company's first conversion value is about $250. And there's a client actually I modeled this after. They're much larger than a million dollars in revenue, but their first conversion value like for NCAT customers is about 250. It's about anywhere between 200 and 270. So we're just using 250 as a round figure here. So high value E commerce in this particular case, yours could be 25, it could be 50. Just figure that out. So as an example here, a good benchmark might be actually to start anywhere between 500 and $2,000 for your CLTV. Like I said, this is an estimate. So let's just use somewhere in between there two and eight is about four. So we're using $1,000 customer lifetime value. So that's the estimate method. Obviously when we actually went through it and determined this for this, this customer, it was $1,000 or thereabouts in customer lifetime value over a 12 month period. So pretty good business here. The fourth number, this is sort of the cheat code. This is actually an app that you can sign up for, get the free trial, determine it inside your Shopify store. If you've got a Shopify store and you don your LTV is you don't know ncac, you don't know any of the stuff that we're talking about here. This app called by the Numbers, it's by the numbers app.com, which should be affiliates because it's a tremendous program. Sort of got a little cheat code in there. You just tie it into your Shopify store and it calculates all of this for you and you can figure this out really quickly. So you can figure out how many times your average customer buys when they buy, how much do they buy. Obviously that's aov. And then obviously lifetime value is a multiplication of how many times they buy in a year and what their average order value. And then you can obviously you can do a lot of different notations and so forth. This is like I said, you can buy it or you can get it for free, determine it and then cancel it. I've seen clients do the same thing. So I'm going to stop There for right now before we go into step two, everything I'm saying so far making sense. Do you look at it the same way? How do you sort of determine it when we just sort of talk about ltv?
- [19:11]
B
So can you actually go back a picture, a screenshot just for those that are listening to the screen of buy the numbers. Just because if you're not watching on YouTube and say you're running and you're just viewing the screen, I wanted to just go through first and explain some of the slides or the images that you're showing. So if you go back to the by the numbers.
- [19:29]
A
Yep.
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B
So I just wanted to show on here for those that aren't watching the screen like to show a little bit of some of this that's coming up is you're able to see some examples of this number of the integrations you have synced. So Here you've got Claydio and TikTok. You can see 3400 lifetime value average over 116,000 orders. You've got best customers group, a loyalty group of 8,500 of those customers. Then you've also got some graphs here that are showing your dormant ask risk and deeper understandings of information on the customers. Just this was really impressive Ralph and I just wanted for anyone that was not watching on YouTube when you're explaining the by the numbers component, if you have a chance, switch over. If not, there's a lot of information that can be made available and there's no affiliate commission whatsoever. But this is if you don't know a great place to start. The only thing that changes from our side of where we go is for us the 12 month period is shorter period than we would look at for a lifetime value customer. But that depends on the price point of the products. So again you talked about like the recurring side of supplements 100%. I actually would keep it at a six month period depending on what is your average subscription size. But then when you talk about the glove example, I wanted to introduce a third example such as like a single purchase one time big buy like a mattress.
- [20:55]
A
Yeah.
- [20:56]
B
When you bring in those, your look back period has to be like 7 to 12 years. And if you're a newer E commerce brand you may not have that data available to you. So that number two example you showed of that gut, we actually always start there because when we're in conversations we want to ask the owner if they don't know it, what do you think? And they're not often that far off from what we can find Within Shopify. If you collect, if you connect your analytics and if you're using UTMs, you're actually gonna be able to see a lot more inside of it then if you have to bring in a lot of these third party things, but you said you would do almost eight times. So your repeat purchase rate is different. Other ways that we like to look at it is, I've said before, our email lists are set up into three people. There's a subscriber side, they bought from you once and they bought from you more than one side. So what we'll actually try to do is look at who bought from you more than once and then we'll look at that in a 12 month period before looking at just everyone in a 12 month period. Because we want to isolate the best part of your customers. Because that's the lifetime value of someone that you're winning with. Because if you have someone that's bought from you once and they didn't buy from you again, that's where marketing and sales comes in. Because you're earning their loyalty, you earned their first buy, but now you have to earn their loyalty. When you're looking at someone who's bought from you more than once, you've established your loyalty and you've got them, it's yours to lose their repeat purchase. But that's why I like looking at lifetime value of those who bought from you more than once. Because that's the aspirational side that you could be looking at. Which since we talked about 10x is better than 2x. Now that I'm like actively in this book and super into the Michelangelo side of it, it's if you want to work towards that, I'm just bringing the principles of that book and that's where we would look at it. Because that's the lifetime value that we actually care about. Because when we have done it blended, pulling in subscribers, single time purchasers, sometimes people look at data that's from five years ago and your brand was in a completely different position then and you're diluting that data.
- [22:56]
A
Yeah, that's why the look back period is really, is challenging. I don't think there's a right answer per se here. I mean, you know, for a supplement company that, you know, in this case like I went high on the 8x because I, I think of one example of that, that one supplement company which is, you know, tens of millions of dollars valued at hundreds of millions of dollars. The point is, is they're so good at the recharge element which Is basically is the recurring revenue component of it. And they also have Amazon completely dialed in that it's like a really smart business. So they're upwards of like 8x potentially. But then again you bring up a great example of like a mattress company. Like I remember when all those mattress companies were coming up out of the blue like purple and we bought one. She's I forget what it is like ghost or something like that ghost bed. Like I'm like how are they figuring this out? And a lot of them disappeared because they had no idea that this was a one time purchase and that was it. The venture capital money went right out the window. They had no idea of this stuff. And it's amazing to me how few people really, really dissect this and think about it. And then at the end of the day, like you said, sometimes it is sort of a gut feel. It's a bit of a guess. And chances are why I put this in as option three here is that if you know your business well enough, you're not going to be too far off from this. Maybe it's 3x your AOV and you say it's 4x in actuality. So I think there's a big degree of some subjectivity here, but at the very least, at least you're looking at because this is one of the most important metrics for scale. Hey, just as a reminder, there's a lot of information here today, so make sure that you do download a free copy of today's slide presentation over at perpetualtraffic.com forward/ncac. That is perpetualtraffic.com forward/fcac.
- [24:51]
B
So on that with the supplement side or any that has a recurring subscription model like Beauty. Yeah, right. All day long.
- [25:00]
A
All day long, yeah.
- [25:01]
B
I would look at what is your average retention period for that subscription. So if it is four months, double that and look at that period. If your average subscription period is four months, double that and make that your eight month look back period. And then if you're in a seasonal space, you're in the weddings or the baby space. You have to look at what is the timeline. If you're in the baby space and you have a product that goes until talking, then you're looking at two years, you know, the lifetime of your relationship with that customer because once they've aged out of your products, they're moving into a different space. And similarly if you're in like the wedding or time sensitive space, you're probably looking at nine months to a year and a half and that way you're just trying to take in the whole customer cycle because there might be repeat purchases within that period. But look at the time of when they can buy from you. That was just the one other caveat I did.
- [25:51]
A
It's great. I mean we've got a couple of wedding brands right now that are Shopify based. That's why by the numbers is so good. This one, just like this will get it so accurate. Especially if you have like we've got a wedding company that sells through E commerce and also does wedding planning and they've been in business for 10 years. So they've got a tremendous amount of data. They know these numbers so well and I believe they actually do use by the numbers, you know, to calculate this. But I mean like this is a great app here, especially if you're in the E Comm space. So it's sort of the easy button. It's the cheat codes to a certain degree. But then again you've got to really think about your business and what is a logical look back period based upon how your business operates. So that's sort of step number one is figuring out that cltv, not everybody who buys wants to keep your stuff. So this is something that I see a lot of people forgetting and it's an important step. So you got to subtract refunds and cancellations and you sort of look industry wide. We're just going to use sort of a round figure here. This might be less or more for you, it might be insignificant or it might be fairly significant. We once had a client that was about 25% on refunds just because there was, especially on the second purchase they had a forced continuity that we didn't know about. And they were also selling through a lot of affiliates and those affiliates were doing forced continuity, I think.
- [27:25]
B
Such a high refund. Yeah, huge stripe account. I mean I bet you they had a lot of chargebacks too.
- [27:31]
A
Yeah, yeah. Oh absolutely. Yeah, chargeback big time. So that was a huge number. So like that's sort of on the extreme. I think, you know, for our purposes here we're talking about a company that's a million dollar company, pretty good. You know, their LTV is $1,000. So we're just going to use a convert conservative benchmark for this. If you don't know what this is once, once again by the numbers, we'll figure this out inside Shopify. You can figure this out very, very quickly. We're going to use 10% as a conservative benchmark. So now that you actually have This a lot of people call this Net LTV or nltv which is let's say in step number one we figured out the LTV for this e Commerce client. $1,000 10% of that. Now you're down to 900. So your 900 CLTV or actually 900 net LTV and LTV and you might sort of hear it that way as well. So a lot of things right there that I think just an important step. The slower this number is obviously the better. So makes sense so far everything makes sense.
- [28:37]
B
I just ask you then on the refunds, cancellations a question that will get asked where I can't wait to hear what your reply specifically. But where do you fit on shipping.
- [28:47]
A
And shipping insurance that is going to be covered next because Stay tuned, stay tuned. Subtract, subtract, subtract. See I knew I didn't do these slides here. Of course. Subtract, subtract. Make sure you subtract cost of goods sold. Cost of goods sold. Which we do include shipping costs in that. So you can put that as a separate line item. Some people do list that out and they also put in processing fees here we're just going to lump all that into cost of goods sold. Actually by the way, I asked my.
- [29:23]
B
We do too. And people are like can we take out shipping? I'm like no, because they're, it's still for the consumer. They're paying for shipping and you have the ability to remove shipping as a discount and then you have all the ability to also make money on shipping because they're shipping and handling. So depending on how you do that it we roll it up, up. But I know that other people don't want to include it. I just think that it gets too lost in the minutiae that you're missing the bigger picture. So I was like, please say you also include shipping. I would say the only thing I would potentially take out is if you're doing shipping insurance because that's not money in your pocket. That's actually going to another third party solution. So a lot of brands will partner with like an aftership kind of company where they're just making that guarantee. So I do not include shipping insurance, but I'll include shipping all day long. Shipping and handling.
- [30:16]
A
Yes, yeah, yeah, for sure. Because it's a cost that's associated with the delivery of the goods. So if we look at I don't think we actually have the definition of cost of goods sold here, but that is basically what cost of goods sold is. So subtract Amounts cost to actually manufacture and deliver your goods. So shipping and handling, manufacture and deliver, shipping and handling are part of that. So yes, shipping specifically handling can be a profit center. You might be able to even make back some of your shipping costs in the handling portion. All right, so cost of goods sold. So if you're manufacturing, I think there's an important part to this too. So if you're a digital products company, this is where digital products and software to a certain degree, man, great business models. I know software and digital products have their downsides for sure. However, your cost of goods sold are going to be very little by comparison to the physical products company. So.
- [31:10]
B
And you don't have perishable products.
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A
Yeah.
- [31:12]
B
So you don't have to toss inventory. Toss inventory expiration or it went bad because of poor storage. I think there was like one client of ours, their three PL damaged. They had like too much lighting exposure and it ruined their entire beverage supply. So.
- [31:28]
A
Oh, geez.
- [31:29]
B
Yeah, it happens. It happens. They have insurance. That's what it's for.
- [31:32]
A
Yeah. All right, so if you're manufacturing goods, cogs. So we do a definition of cogs here. Labor is the cost of labor to manufacture the goods. The materials, the physical costs of the materials as well as utility costs. What it actually costs you from a power water if applicable, are also included in cogs. And don't forget to include the cost of shipping. So see, there you go. Laura and E. Petrillo right there all together. So the people that are on your manufacturing line, the people that are actually doing it, if you're outsourcing this to a third party, those are all your cogs. And storage is also like warehousing costs, that is part of it as well. So cost of goods sold for E Commerce and for physical products, you can see the advantages now for digital products, which are basically ones and zeros and hosting costs. So that there's definitely advantages and disadvantages here. But the point is, is that this is sort of your next step minus your cost of goods. Sol. And so what I used here for our calculations is sort of the industry wide average. This was variable. So we used a 40% of LTV, which is I think a bit high. We have customers where it's anywhere from 10% COGS to 40. 50%. 50 is about the highest. Which basically means you're 2 to 1. That's really high.
- [32:56]
B
There's no margin for marketing, there's no margin for profit.
- [32:59]
A
There's not a whole lot sweating it up.
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B
But to have have 90% margin after COGS. That means they're manufacturing at high volume.
- [33:07]
A
Yep.
- [33:08]
B
And they've been doing this for a while. We've had clients that like their COGS is $8 and they're selling products at the 90 price range. It's amazing. There's lots of flexibility for coupons, there's flexibility for marketing and there's flexibility for profit. A lot of brands will try to make their price point without considering their margin. So yeah, if you're at 50%, like woof, it's tough.
- [33:29]
A
That's tough.
- [33:30]
B
40%'S high target to me should be 30%. Like you really wanted to be like 15 to 30%. If you, the lower you can get it, the more you're winning. But you have to make sure that you're offering at a price that's fair. And if you're selling at a price that's superior than your market, you better have reasons why you're justifying this being the most expensive glass, which you absolutely can do. That's what luxury branding is about. But if you're doing for the first time, we say 15 to 30% is what you're targeting. So I agree. 40% is high.
- [34:01]
A
40% is high. In our example here though, we're using a very high for a relatively small business. It's a million dollar business. We're just using this as round numbers here. Okay. There's no actual example. We can actually do this for an actual example at some point in time. But a million dollar business, Your LTV is $1,000 take away refunds and you're at 900. So that's a fairly good LTV for a million dollar business. Like I said before, the point is, is that 40% cogs a bit on the high side. But I also wanted to make this example here a little bit more instructive so that people can really sort of look at things and make sure that they are doing the math. And I think your cost of goods sold. There's a lot of folks and a lot of businesses that we've discussed this very concept with is they underestimate their cogs because they don't factor in warehouse time all the time. Cost of shipping. Just like what you said, storage, like the storage. Storage.
- [35:03]
B
Even if you're storing it in your house.
- [35:05]
A
Yeah.
- [35:05]
B
I will say like if you don't factor in that space, the reason why some people are like, oh, I'm doing out of my garage, I don't have to bash like you have to factor that in because when you scale you will have that Cost creep up on you and you're gonna do the wrong thing. We worked with a beauty brand. They literally went through this and they were bankrupt within two years because they expanded and bought a million dollar distribution center where they could do all the manufacturing in a kitchen that they owned. When they went from doing it in their own home and they had no accountability or accounting for that increase of cogs. So they scaled incorrectly the wrong way. So count it. Even if you're doing, you need to put it what that cost would be if you were using a 3 PL or some sort of storage facility. Because the other way is you have to factor of like what does that mean to your mental health, to the relationships. If you're sharing a home and you have all your inventory in one single spot and you're not factoring in the cogs of like maybe your kids are helping you do shipping, maybe your partner's helping you all those other things. If you don't factor them in, it's going to hurt you really hard when you try to scale and you're not going to understand what the biggest disruption.
- [36:15]
A
Yeah, 100%. And you bring up some good examples here which we're going to talk about. I'll reference that in future slides here. But cost of goods sold, people are sort of fixated on cogs because then they get gross profit. And in this particular case is if we do the calculation once again we're using a year look back period which may or may not be applicable for you. We're using a 10% refunds and cancellations. And then our cogs in this particular case are $360 if I'm not mistaken, at 40%. 40% of 900. So you get $540 left and that is your gross profit. So a lot of people, a lot of businesses will say okay, well my GP is 540 so my NCAC is probably in and around that number which we're going to get to in other slides. That is probably the easiest way to go out of business very, very, very fast. But this is gross profit. And I believe this is the question that when I first did this on the show years ago, I actually did include SG&A and that's basically overhead on this episode.
- [37:26]
B
Talking about the NCAC lead magnet and like whether you got it or whatever that kind of component is, you have to come on the thing and then we can go through their NCAC number specifically with them first we'll automatically get it and then we can randomly choose another person to get a second half hour and then we can go through their NCAC number specifically with them them and then help make sure that they understand it personally.
- [37:47]
A
Good. All right, done. All right, so the first person to comment on Spotify just to summarize here gets the checklist obviously but they also get a free 30 minute consultation with Lauren and myself to help you determine your NCAC or talk about whatever you want to talk about. So really appreciate you all listening here today. Wherever you listen to podcasts make sure that you do leave review and a rating and a comment of course, especially on today's episode. And all of the resources that we mentioned are over@perpetualtraffic.com so on behalf of my amazing co host Lauren E. Petrulo.
- [38:23]
B
Who will also be talking to you on one of two calls because the first person guarantee gets it and another.
- [38:27]
A
Person will also get it till next show. See ya. You've been listening to Perpetual Traffic.
- [38:38]
B
It.