← The $100M Entrepreneur Podcast
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Most business owners believe marketing should immediately make money. If marketing buys valuable lifetime customers. Marketing is an investment, not an expense. If you put out $10 in marketing and it buys you back a customer with $20 in profit, that's an investment. So most business owners ask, how much is this marketing going to cost me? Where elite business owners ask, how much is this customer worth? There's a two completely different questions. One creates fear, one creates growth. One causes people to stop advertising. The other causes people to dominate markets. And today we're talking about possibly the biggest mindset shift in marketing and in business that needs to be made the difference between spending money on marketing and buying customers. Because once you understand how to buy customers profitably, your business changes forever. A lot of the times, like when the market downturns, people will say, oh, I've gotta cut back on my marketing. Oh, we've gotta reduce marketing. Where that's like, you know, I got a flat tire, maybe I should slash the other three tires. Just crazy. Marketing, by my definition, is buying lifetime customers. So it's the profitable buying of lifetime customers. And when you think about buying customers versus making a sale, you, it changes your mindset forever. So let's look at that myth in marketing and business where most business owners believe that marketing should immediately make money. And that's the myth. It can. It can do that and sometimes does. But you know these people, they run an ad, spend $1,000, maybe it generates say $800 and they conclude that their marketing doesn't work. That's generally the wrong conclusion. You're measuring the wrong thing. See, marketing isn't about generating just immediate sales. Marketing is about buying customers. And customers have lifetime value. Now I learned this first of all when I had a dog food business. When we would buy a customer, they'd get their first delivery of the dog food. Then six weeks later, they got another delivery. And six weeks later, on average, our customers stayed with us for about three years. Now here's what I had to learn. When I bought the customer, it was like, hang on, I've spent all this money. I feel like I'm making a loss. But when they came back that second time round, See, let's think about the Amazon lesson on this one. For years, Amazon barely made a profit. In fact, they didn't make any profit. Really. In fact, Wall street criticized them constantly. Why? Because Amazon understood something everyone else missed. Customer acquisition matters more than short term profit. Now of course, you got to be well capitalized to do it that way. Amazon wasn't optimizing for this quarter, they were optimizing. For the next 10, 20, 30 years, they were buying customers, millions of them, getting them to be subscribers to Amazon Prime. You know, the free deliveries, then the videos, then, then, then. Today we understand exactly why they did what they did. See, there's a difference between cost and investment. Let's imagine we use investing in real estate as an example. Imagine you buy a rental property and you spend 500 grand, right? Nobody says, oh, you lost $500,000. Why? Because you bought an asset. Because you bought something that will generate income and pay you back and be worth something when you sell it. See? Yet when people spend money on marketing, they say things like, oh, we spent $10,000, as if it's gone forever. The question isn't how much did you spend? The question is, what did you acquire? And if marketing buys valuable lifetime customers? Marketing is an investment, not an expense. If you put out $10 in marketing and it buys you back a customer with $20 in profit, that's an investment. Now, even if. Let's imagine I go back to my dog food business, my newspaper ads, $54 it cost to buy a customer. Now, we only made $38 in GP gross profit on that first sale. So 54 out and 38 in, huh? That's bad. Until you realize that our average customer came back for many years and we made over 800 in profit. So 54 out 800 in over three years. Great investment. So the lifetime value concept, this is where everything changes. Lifetime value, also known as ltv. When I first started writing about this, people were like, wow, that's incredible. You know, you buy customers. When I first wrote the book buying customers, now I 15 odd years ago, it changed people's mindset. One of the most important numbers in business is your ltv, your lifetime value. How much is a customer worth over their lifetime? Not on their first transaction, not this week, this month, but their lifetime of buying from you. So let's use another simple example of a coffee shop. Let's imagine someone buys one coffee, you know, $5 or $8 or $12, depending on the place you're going into, right? Most owners think I've made $5. Not technically correct. Yes, immediately you made $5. But wrong in lifetime value. Let's say they buy one coffee every weekday, 250 days a year for 10 years, right? What is that customer worth? And that's not even thinking about the fact they might give you referrals, bring other friends in, buy more than a coffee a day, some days a week, the customer isn't worth $5. In this case, they're worth 12 grand or $12,500. Not every customer is going to be like that. Some will come once and never come again. Others will come 10, 20 times a year. But we're looking at the average, the lifetime value of your average customer. See in this case that 12 and a half. One customer, one relationship with one habit. That's lifetime value. And businesses need to think more in this way when they're thinking of their marketing. If you, if I go back to learning this lesson, for me it really came down to me understanding that the job of marketing was to buy customers that would buy from me for the long term. Now if my business wasn't set up to do long term sales, then maybe I had to change my business, if that makes sense. So let's think about why most business owners undervalue customers. Most business owners only measure first transactions. Elite businesses obviously measure the lifetime value. That's why elite businesses can outspend everyone else because they understand the math. If a customer is worth $20,000 over their lifetime, spending $500, or should I say investing $500 to acquire them becomes easy. If it's 500 out for 20,000 in, you would be insane not to do that. So let's, I'll use action coach maybe as another example. Coaching someone buys someone. Well let's say someone just attends a webinar. Okay. Maybe they buy a fifteen hundred dollar program. Most people stop there like you do the webinar. It costs you your cost of getting someone to the webinar. Let's imagine it's $50. Someone buys a fifteen hundred dollar program and maybe it's one in every ten buys it. So it costs you $500 to get a fifteen hundred dollar sale. Most people will stop there. See, what if that person goes on to become a coaching client? What if they get onto a $36,000 a year coaching program cause they want elite level coaching. What if they stay for three years? What if they also then build some training for their team, attend some events? What if they refer me to two other businesses just like them? Suddenly that $1,500 customer with 500 marketing spend to get them to buy becomes a 50 or $100,000 in lifetime value. Maybe more if they give me more referrals. What if the referrals give me referrals? Does that make sense? See, that's why understanding lifetime value changes your marketing strategy. Well, let me give you another example. The ebook lesson. I learned this one years ago. Imagine selling an ebook for like $6, right? Someone buys the hard copy, it's $30, they get an ebook for six. And what if it cost me $13 to acquire the customer? So I'm putting out 13 and getting six in. I'm losing seven dollars every time. Most business owners would panic, they'd stop advertising immediately. But what if one out of every hundred buyers eventually purchased a franchise or a premium coaching service or a high ticket $10,000 workshop or my $25,000 billion dollar training? Suddenly that ebook wasn't the product. The customer is and was always the asset. When you view marketing as acquisition, as customer acquisition, you realize that the customer is the asset. I'm not selling to customers, I'm buying customers. Most business owners think, well, most business people even think that we sell products. Elite businesses think we acquire customers. Products are simply the mechanism, or services are simply the mechanism. Customers are the goal. Now, that subtle distinction changes everything about how you run a business. You're not in the business of selling things. You're in the business of buying customers. So that means marketing is math. Why? You've got to know your numbers. The reason most business owners struggle with marketing is simple. They don't know their numbers. They, they don't know their cost per lead. Like, it's like a foreign thing for them. You know, cpl, cost per acquisition, lifetime value conversion rates, retention rates. Knowing your numbers changes marketing forever. It makes it into that massive result for you. Because once you know your numbers, you can see that your marketing is an investment. Without numbers, marketing definitely feels risky. Okay, with numbers, marketing becomes predictable. I go back to my dog food business. We had every van we put on the road. We could get 60 customers to get into that van, if that makes sense. So 60 deliveries in the first week. Because first deliveries took a lot longer. It was 120 after that. But I knew I had to buy 60 customers every week once we put it on the road. See, that made my job as a marketer totally different. I'm not selling dog food. I'm buying customers. So. So let's look at the equation then, the customer acquisition equation. If we try and simplify it down. If a customer is worth 10,000 and it costs 1,000 to acquire them, would you buy 100? Of course you would. Would you buy 1,000? Absolutely. In fact, would you buy 10,000 of them? If you put out 1,000 and got back 10,000, you'd do it all day, every day. If you went to the bank and said, Here's 1,000, and they said, oh, here's 10,000 back. You'd keep giving them a thousand if you have the capacity, that is. Why? Because every customer creates profit. But it's all about your capacity, how much you can handle. That's why. One of the first marketing questions I ask a business is, how many new customers per week do you want week in, week out? And some say, oh, I want another 50. And I go, well, can you do 50 a week? And they're like, no, I can't do 50 a week. Great. How many can you do every single week? Know that number. I gotta buy four customers a week or I've gotta buy 10 customers a week. But know your exact numbers. I had a guy in the on the Internet. He said, brad, we sell on the Internet, we can have as many as we want. I said, so if a million people hit your website, you'd be fine? He went, no, we'd crash. I said, great, let's set a real number then. The average business owner fears spending money. Elite business owners fears missing out or missing the opportunity of buying a customer. The average owner asks, what if this doesn't work? The elite owner asks, what if it does work? Let's test, let's measure. See, they're two different mindsets. When you go out of it now, cash flow does matter. Let's be practical for a second. Buying customers only works if you can survive long enough, if the cash flow matters. If a customer's worth 20 grand, but it takes you two years to realize that value, you need enough cash flow to bridge the gap. Many businesses fail not only because they're unprofitable, but because they run out of cash. You got to know the difference. How fast will my marketing turn into income? Is a very important number to know. Days of sale. These are things that we try and measure when we're getting an elite business. So that brings us to the role of retention. Customer acquisition is only the, I guess, the first half of the equation. It's, you know, very important. But retention determines lifetime value. You'll know I've said this to you many times. Profit is in repeat business. Repeat business makes profit happen. The longer a customer stays, the more they buy, the more they trust, the more they refer others. That's massive. And the more valuable they become. Retention increases lifetime value. So higher lifetime value allows more marketing. More marketing creates more growth. And that's where I think that we have to get really clear on why there is more profit in retaining a customer than there is in just buying brand new customers. It costs money to Buy a customer, retaining a customer. You gotta put money, energy, and effort into that so that you keep that lifetime value growing. And that brings us to referrals. See, referrals change everything. They change the financial equation dramatically. See, let's make the math even a little more exciting. Imagine every customer refers to just one additional customer. What happens there? Lifetime value doubles. Imagine they refer two or three. Now, they might do them in a year or one or two years, but it doesn't matter how long it takes. What matters is that if you build referrals in your customer, lifetime value doubles or triples. Now, customer acquisition then becomes dramatically more profitable. And that's why referrals matter. Not just emotionally, referrals matter mathematically. So think of it like a. I guess a war chest analogy might be a simple way to think of it. Elite businesses build customer acquisition war chests. They know if we can profitably buy customers, we should buy as many as we possibly can. That's why market leaders dominate. They reinvent, they scale, they expand. See, your idea of building a war chest, all of these customers you buy that will get more and more profitable as you add more and more to it. It's like building layer on layer on layer on layer of customers that you've acquired. Once you've got them, once you've got them on a subscription or a membership or some form of repeat customer buying, every new one adds. See, elite business owners acquire customers. If I'm polite, their competitors hesitate. Their competitors back off. See, the biggest question I think of in marketing is not how much should I spend on marketing? It really comes back to how much can I profitably spend on acquiring a customer? Once you know that, See, once you know how many customers you need, you know how many conversations you need to do that. So you know how many conversations you need to generate. The better question is, how much can I invest to buy each customer? And then you work out, okay, number of customers needed by how much I can invest to buy a customer. And see, isn't that a better question, a more strategic question than what should my marketing budget be? It's really a growth question. How many do I want? How much do I need to invest to buy each one? That changes everything. So let me give you a list of questions that I want you to think about and ask yourself, what is my customer worth? Okay, how much is a customer worth to you? In fact, what's their lifetime value of a customer? If you don't know it, it's time to start doing some research through your numbers. How much Can I invest to acquire one? Not spend, obviously. How much can I invest to buy a customer? How long do my customers stay and what can I do to generate them staying longer? Next one, how many referrals does each customer bring me and what can I do to build more referrals? Because think about it this way. How much they spend each time, how many times they buy from you, how long they keep buying from you, how many referrals they generate. All of these are part of the lifetime value. See how much would growth accelerate if you knew all these numbers? Now, I want to just slow down for a second because there are some mistakes people make, common mistakes that I see in this area. First of all, measuring only the first sale profit, like just the money on the first sale, ignoring lifetime value. There's having no retention strategy and no referral strategies. These mistakes kill lifetime value. The fear of marketing spend, because it is a spend. If you don't know your numbers, know your numbers, it's not investment, lack of cash flow planning. If you're going to go out and acquire customers, you got to know what it costs to deliver and you got to know the timeframe from when you do the marketing to when you get paid. Okay? That's important. Not tracking your acquisition costs because cost of delivery is part of acquisition. In some cases, how many brochures you need to send out, what you need to do, salespeople time. See, the businesses that understand all of these numbers grow faster. The businesses that don't remain stuck. So your action challenge this week, calculate three numbers. Number one, lifetime value. Number two, cost per acquisition. Number three, referral value. Don't guess at these. Calculate. If you need some help, jump on actioncoach.com, chat with one of my coaches, bradshugars.com, either one. Because once you know these numbers, okay, your marketing decisions become dramatically easier. Your marketing decisions become investment decisions, not spending decisions. So the businesses that dominate markets aren't the ones that spend the least on marketing. They're the ones that understand exactly what a customer is worth. And once you know the value of a customer, marketing stops being an expense, it becomes an investment and investments scale.