Money Marketing Ratios Ep 248

Summary Notes


In the discussion, the speakers focus on the critical metrics for successful marketing and business growth. The primary speaker, who shares insights on investment and partnership strategies, emphasizes the importance of understanding three key financial metrics: Customer Acquisition Cost (CAC), Lifetime Value (LTV) defined as gross profit over a customer's lifespan, and 30-day cash, which reflects the ability to cover CAC within a month, ideally using credit lines for interest-free capital. The speaker advocates for an LTV to CAC ratio of at least 3:1 to ensure profitability and a 30-day cash to CAC ratio of at least 1:1 to facilitate growth without immediate out-of-pocket expenses. The conversation includes a call to action for audience support through ratings and reviews to help spread valuable entrepreneurial knowledge.

Summary Notes

Understanding Marketing Metrics

  • Marketing metrics can be overwhelming with various numbers and acronyms.
  • It is crucial to identify which metrics are most important for evaluating business performance.
  • Three key numbers are often used to assess the health and potential of a business venture.

"What's going on, everyone? If you've ever struggled to figure out all the different numbers in marketing and figure out what's important, what's not important, what's good, what's bad, and you just can't get your stuff to convert or you can't make, you can't make sense of all this stuff, then this video is for you."

This quote highlights the confusion that can arise when trying to understand the plethora of marketing metrics available and underscores the importance of the video in clarifying which metrics matter.

The Purpose of the Podcast

  • The podcast aims to help listeners gain customers, increase customer value, and retain them.
  • It shares lessons learned from failures and successes in marketing.

"Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe."

This quote outlines the podcast's objectives, which are to educate listeners on customer acquisition, maximization of customer value, and customer retention, all while sharing real-world experiences.

Key Performance Indicators (KPIs) in Marketing

  • There are numerous KPIs in marketing, such as CPL (Cost Per Lead), CPC (Cost Per Click), and CTRs (Click-Through Rates).
  • Understanding and distilling essential KPIs is crucial for evaluating business opportunities.

"So when I got into market, there were so many different numbers, KPIs, CPL, CPC, like ctRs. I had no idea. My head was spinning. I was trying to figure it out. And over time, it's kind of like you start to distill down what are the big buckets of things that matter."

This quote reflects the speaker's initial confusion with marketing metrics and their journey towards identifying the most significant KPIs for business evaluation.

Cost of Customer Acquisition (CAC)

  • CAC is the total cost incurred to acquire a new customer.
  • It includes all associated costs such as sales commissions, ad spend, marketing team expenses, and relevant software costs.

"So the first number is what my cost of acquisition is, which I call CAC. That's not, I call it, that's what people call it, right. Cost of acquisition or CAC. Right. So how much does it cost me to acquire a customer?"

This quote introduces CAC as a key metric and clarifies that it encompasses all costs related to acquiring a customer, not just the speaker's personal interpretation.

Lifetime Value (LTV) Defined by Gross Profit

  • LTV for the speaker is defined by the total gross profit obtained from a customer over their lifespan, not just total revenue.
  • Gross profit is the revenue minus the cost of goods sold (COGS).

"Number two is LTV. Now, I define this a little bit differently because I think it's important. So LTV is not the total revenue that I'm going to get over the lifespan of a customer, but for me, it's the total gross profit that I'm going to get over the lifespan of a customer."

This quote emphasizes the speaker's unique definition of LTV, focusing on gross profit rather than total revenue to gauge the true value derived from a customer.

Example of Calculating LTV

  • The speaker uses a food selling business as an example to explain LTV calculation.
  • Even if total revenue from a customer is high, the actual LTV is based on the gross profit margin.

"So let me give you a simple example. So if I were selling meals, for example, or selling food, and my cost of delivering food, let's say, was $9, all right? And I know that someone's going to order $700 a month of food and it cost me $9 and I'm selling it for ten, all right? That means I only have a 10% margin gross profit, right? Gross profit on the meal sold. And so $700 of food over the lifespan of a customer might sound like a huge LTV, but the reality is it's actually only 70, which is what I'm going to make on that customer, right?"

This quote provides a practical example to illustrate how LTV should be calculated based on gross profit margins, highlighting that high revenue does not necessarily equate to high LTV if the profit margins are low.

Understanding Gross Margin

  • Gross margin is critical for making informed business decisions.
  • The margin is what should guide the financial strategy of a business.
  • It's essential to know the profitability per unit of product or service sold.

"And that's why it's so important to understand the gross margin of your business, right? Because this is where all of your decisions should be based off of."

This quote emphasizes the importance of understanding gross margins in business, as it is the foundation for decision-making. It highlights the necessity of knowing how much profit is made on each sale after costs are accounted for.

Customer Acquisition Cost (CAC) vs. Profit

  • High customer acquisition costs can lead to losses if the profit margin is low.
  • Spending $200 to acquire a customer is not viable if the profit is only $70 on a $700 sale.
  • It is not just the revenue but the profit after the cost of acquisition that matters.

"If I were doing marketing for food, for example, and my marketing was like, hey, man, we're spending $200 to acquire a customer who's going to pay us $700, I would be like, that's horrible. Because we only make $70 on the 700, which means that we're spending 200 to make 70."

This quote explains the disparity between customer acquisition costs and the actual profit made from a customer. It highlights the inefficiency and potential loss when the cost to acquire a customer exceeds the profit derived from their purchase.

30 Day Cash and Payback Period

  • 30 day cash is a metric used to measure the time it takes to recoup customer acquisition costs.
  • Traditional businesses use the payback period concept.
  • The idea is to use credit lines to cover initial costs and repay within 30 days interest-free.
  • Achieving a 30-day cash value equal to CAC allows for growth without using one's own capital.

"I use 30 day cash for this reason. I think that virtually every business can gain access to a credit line, which means a credit card or an Amex or even a bank can loan you whatever, where over 30 days they can use that money and then pay it back virtually interest free."

This quote outlines the strategy of using short-term credit lines to fund customer acquisition, with the aim of repaying the borrowed amount within 30 days to avoid interest. It is a technique to manage cash flow effectively and sustain business growth.

LTV to CAC Ratio

  • The Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio is a key performance indicator.
  • Aiming for an LTV to CAC ratio of greater than three to one is ideal.
  • This ratio ensures that the value generated from a customer is significantly higher than the cost to acquire them.

"Three to one is the number that I am looking for, which means that I need to be able to generate m"

This incomplete quote suggests that the speaker aims for an LTV to CAC ratio of at least three to one, indicating the business should make at least three times the amount spent on acquiring a customer. This is a target for efficient marketing and sustainable business growth.

Podcast Promotion and Listener Support

  • Podcast does not run ads or sell products.
  • The host requests help to spread the word about the podcast.
  • The aim is to assist more entrepreneurs in making money and improving their businesses.
  • Listeners are asked to rate, review, and share the podcast.
  • Leaving a review is emphasized as a quick and impactful way to support the podcast.

Real quick, guys, you guys already know that I don't run any ads on this, and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the word so we can help more entrepreneurs make more money, feed their families, make better products, and have better experiences for their employees and customers.

This quote highlights the podcast's ad-free and product-free approach, with the host seeking listener support to promote the podcast for the benefit of entrepreneurs.

It'll take you 10 seconds or one type of the thumb. It would mean the absolute world to me. And more importantly, it could change the world for someone else.

The host stresses the ease and significance of leaving a review, emphasizing its potential impact on others.

Understanding Gross Profit and Customer Acquisition Cost (CAC)

  • Gross profit on a service is used as a key financial metric.
  • The example given uses an 80% gross profit margin.
  • Lifetime customer spend is considered when calculating gross profit.
  • The cost of customer acquisition must be less than a third of the gross profit to ensure profitability.

All right, so that means that, let's say my gross profit on a service that I sell is 80%.

Speaker A introduces the concept of gross profit margin as a foundational financial metric.

That's how much they're going to spend with me over the lifetime, which means $800 is what I am going to use as my number.

Speaker A explains how to calculate gross profit from the lifetime value of a customer.

Now, if $800 is what I make, then I have to, three to one, be able to acquire customers for less than $265, $66, right? So my cost of acquisition has to be less than $266.

Speaker A discusses the importance of maintaining a customer acquisition cost that is less than a third of the gross profit to ensure a healthy profit margin.

LTV to CAC Ratio and 30 Day Cash to CAC Ratio

  • The LTV (Lifetime Value) to CAC ratio is crucial for business growth.
  • A ratio of three to one is targeted for sufficient profit.
  • The 30 day cash to CAC ratio indicates the ability to break even on customer acquisition quickly.
  • A ratio greater than one is ideal to finance customer acquisition using other people's money.

That's the total thing. Now, that's the first relationship that I'm going to look at. The next relationship that I'm going to look at is the 30 day cash requirement compared to my CAC.

Speaker A introduces a second financial relationship crucial for business analysis: the 30 day cash to CAC ratio.

And so using the example that we just had, if $260 is what it has to be under, right, for me to get three to one, then let's say that if I can get my 30 day cash to be greater than 260, then it means that in the first 30 days, I'm breaking even in my acquisition for free.

Speaker A explains how a 30 day cash amount greater than the CAC results in breaking even on acquisition costs within the first month.

And then I'm still going to collect the other 500 and whatever dollars that's remaining from this process. And so those are the two biggest relationships that I'm looking at. What's my LTV to CAC ratio? And what's my 30 day cash to CAC ratio?

Speaker A concludes by reiterating the importance of both the LTV to CAC ratio and the 30 day cash to CAC ratio in evaluating business profitability and growth potential.

Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

  • CAC is the initial cost to acquire a customer.
  • The importance of knowing the CAC for a business.
  • Understanding the negative initial investment when acquiring a customer.
  • LTV represents the total revenue a business can expect from a single customer over time.
  • The focus on gross profit, not total revenue, when calculating LTV.
  • The concept of upselling to increase customer value over time.
  • The significance of reaching a break-even point on customer acquisition costs.
  • The goal of having the 30-day cash at least three times greater than the CAC for a viable business.

"Let's say I pay $200 in CAC, all right? So I'm now negative $200."

This quote explains that when a customer is acquired, there is an initial negative financial impact equal to the CAC.

"What this means is that now I've covered my cost of acquisition, and then at the end of this point, I'm going to continue to sell them or they'll continue to buy."

The speaker highlights the importance of covering the CAC to reach a point where future sales to the customer are essentially profit.

"The three numbers that you need to always know when you're marketing is going to be your CAC. It's going to be your LTV."

This quote emphasizes the critical metrics in marketing: CAC and LTV, highlighting their importance for assessing the financial health of customer acquisition strategies.

Marketing Metrics and Business Viability

  • The critical role of marketing metrics in making data-driven decisions.
  • The necessity of empirical, quantitative analysis in marketing.
  • The importance of meeting specific financial thresholds (e.g., breaking even within 30 days).
  • Strategies for improving the 30-day cash metric.
  • The concept of using upsells, special offers, ancillary products, affiliate relations, and referrals to increase revenue.
  • The ability to spend more on customer acquisition if the 30-day cash is high.
  • The impact of the 30-day cash on the ability to widen the acquisition net.

"And you need to break even on 30 day cash to CAC."

This quote stresses the importance of reaching a break-even point within 30 days of acquiring a customer.

"And you want this to be at least three times greater than your cost of acquisition for you to have a viable business."

The quote sets a benchmark for business viability, suggesting that the 30-day cash should be at least three times the CAC.

"Can we give them some sort of special offer in their first week or two?"

This quote suggests one of several strategies to increase the 30-day cash metric, which is critical for enhancing customer profitability.

"The reason this is important is that if I can make this really, really big, then it means I can spend more to acquire on customers, which means I can even open up further my acquisition net and still make more money."

The speaker explains that a higher 30-day cash allows for more aggressive customer acquisition spending, which can lead to expanded market reach and increased profitability.

Conclusion and Application

  • Summarizing the importance of understanding and applying CAC and LTV in business.
  • Encouraging businesses to use these metrics for more informed decision-making.
  • The potential for fixing issues identified by these metrics through various strategies.
  • The overall message to use these principles to improve business practices and profitability.
  • The emphasis on the practical application of these concepts for business growth.

"So anyways, I hope that was valuable for you."

The speaker concludes by expressing a hope that the information provided will be of value to the listener.

"This is how I think through these things and I hope you do too."

The speaker shares their thought process and encourages the listener to adopt a similar analytical approach to their business decisions.

"Hope this makes sense for your business."

The closing remark is an expression of hope that the listener can apply the concepts discussed to their own business for better outcomes.

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