The Money Printing Machine Investing in Advertising Ep 626

Summary Notes


In this insightful discussion, the host of the show outlines a three-step process for scaling paid advertising, drawing on his extensive experience with a daily ad spend of over $150,000 and a personal return of 36 to one. The first step emphasizes the critical importance of tracking ad spend to ensure a clear understanding of investment returns. The second step is about being prepared to lose money initially, as this is an inherent part of advertising, with the focus on identifying and scaling winning ads. The final step involves creating a 'print money' phase by ensuring a positive lifetime gross profit to customer acquisition cost (LTGP to CAC) ratio, ideally with a quick payback period to facilitate growth without cash flow constraints. The host stresses the necessity of continuous ad testing and creation to maintain a pipeline of successful campaigns, ultimately leading to sustainable business growth.

Summary Notes

Introduction to Paid Advertising and Business Scaling

  • Paid advertising is a high-risk, high-reward game where losses are more frequent than wins.
  • The key to success is to heavily invest in ads that prove to be successful.
  • The speaker is documenting their journey to build a billion-dollar business with, following the example of successful entrepreneurs like Bezos, Musk, and Buffett.
  • Sharing knowledge and experience is a central theme, aimed at helping others scale their businesses through effective advertising.

"And when you play in the big game of paid ads, expect to lose more times than you win. But when you win double, triple, quadruple, quintuple, 1 million fucking percent down on it and scale the hell out of it, because that's how you make it back."

This quote emphasizes the unpredictable nature of paid advertising and the importance of scaling up successful campaigns aggressively to compensate for the losses.

The Three-Step Process for Scaling Ads

  • The speaker outlines a three-step process used to scale ads in portfolio companies.
  • Emphasis is placed on meticulous tracking of ad spend and returns.
  • A personal achievement of a lifetime return of 36 to 1 in paid advertising is mentioned to establish credibility.
  • The process is designed to be educational and actionable for listeners.

"What I want to walk you through is kind of my three step process for how I've scaled ads in all of our portfolio companies, companies that I've owned majority of, outright or minority of."

This quote introduces the three-step process that the speaker will explain, which has been applied to various companies with different levels of ownership involvement.

Phase One: Tracking Money

  • Tracking ad spend and returns is crucial before investing any money in paid advertising.
  • Many people fail to track their advertising, which leads to ignorance of their campaign performance.
  • Using CRMs and software tools for tracking is recommended, with guidance available online.
  • Advertising platforms often provide free training on tracking because it encourages more ad spend.

"Phase one is that you have to track money, all right? And so the idea is that you don't spend a dollar before you know where the dollar was spent and be able to track that it came back from wherever you spent it."

This quote highlights the importance of tracking every dollar spent in advertising to ensure that the returns can be accurately measured and attributed.

Phase Two: The Lose Money Phase

  • The speaker prepares listeners to lose money initially when spending on ads.
  • Advertising is described as an investment with a payback period, where initial losses are expected before returns are realized.
  • The concept of a 'money printing machine' is used to illustrate the process of refining advertising until it becomes profitable.
  • The speaker attributes their wealth to successful advertising, despite the high frequency of losses.

"Phase two is my favorite phase is the lose money phase. So once you track, you're able to track your ads, what's the next actual thing you do? You spend money, and you're not going to immediately make money back with any advertising."

This quote explains that the second phase involves spending money on ads and being prepared for initial losses, with the understanding that this is a normal part of the advertising process.

"So imagine you've got this printing press, and you have to go buy pieces of the machine. It's like, okay, I got to go get ink. Okay, I got to go get some wheels. Oh, I got to get that paper. And then eventually you have this money printing machine."

The 'money printing machine' analogy describes the iterative process of building an effective advertising system by learning from initial mistakes and losses.

Human Behavior and Advertising Expectations

  • Human psychology plays a role in the perception of advertising success.
  • The speaker suggests that people often underestimate the scalability of their advertising because they focus on the quantity of failed attempts rather than the quality of the successful ones.
  • Expectations should be set that most ads will fail, but the few that succeed should be scaled significantly.

"And the interesting thing from a human behavior perspective is that when you advertise, you lose more times than you win in terms of quantity."

This quote reflects on the psychological aspect of advertising, acknowledging that losses are more common than wins and that this should be expected and accounted for in advertising strategies.

Scalability of Advertising

  • Mediocre advertising cannot scale effectively, while exceptional advertising has the potential to scale significantly.
  • Success in advertising is often a result of continuous testing and iteration.
  • The most successful advertisers on platforms like Facebook are those who split test extensively.
  • A key strategy is to identify winning ads through testing and then scale those ads aggressively.

"Mediocre advertising can't scale, but exceptional advertising can."

This quote emphasizes the distinction between average and outstanding advertising, with the latter having the ability to expand and reach larger audiences effectively.

"The top 0.1% of advertisers on Facebook. Split test. Eleven times more ad creative like success leaves clues."

This quote highlights that the most successful advertisers on Facebook are those who conduct numerous split tests to refine their ad creatives, suggesting that this practice is a significant contributor to their success.

The Pros vs. The Amateurs

  • Professional advertisers understand the importance of creating a variety of creative content to attract the right audience.
  • Winning in advertising is about persistence and learning from losses.
  • Unlike gambling, advertising allows skilled practitioners to "become the house" with enough expertise.

"That is the difference between the pros and the not pros."

The quote draws a line between professional advertisers who adopt a strategic approach and amateurs who may not understand the importance of creative diversity and testing in advertising.

"But when you win, you win big, and you will be able to win back all that you lost."

This quote underlines the high-risk, high-reward nature of advertising, where a single successful ad can compensate for multiple unsuccessful ones.

Investment and Return in Advertising

  • Advertisers should be willing to accept initial losses while searching for the "diamond in the rough."
  • Once a successful ad is identified, the focus should shift to maximizing its potential by increasing investment.
  • The lifecycle of an ad involves initial success followed by a period of diminishing returns as it fatigues and reaches a saturation point.

"Can I take ten grand and spend it on that ad and then make 20 back?"

This quote illustrates the concept of scaling a successful ad—investing more to increase returns, based on initial testing results.

"And then what happens is, over time, it will start going down."

The quote acknowledges the inevitable decline of an ad's effectiveness over time, necessitating the need for continuous creation of new ads.

Evolution of Advertising Strategy

  • Advertisers progress through phases: losing money initially, finding winning ads and scaling them, and eventually reaching a stable phase with multiple successful ads.
  • Top-tier advertisers stay ahead of the curve by continually creating and testing new ads.
  • Having a consistent ad creation and testing cadence is crucial for sustained success.

"The difference between the medium and the advanced advertisers is that they are ahead of that curve."

This quote differentiates between average and advanced advertisers, highlighting that the latter proactively develops new ads to maintain a portfolio of successful campaigns.

"If you make ads and you don't have an ad testing and creation cadence, meaning you're not doing it every day, every week, start, you'll make more money, I promise you."

The speaker stresses the importance of having a regular schedule for creating and testing ads to ensure continuous improvement and financial success.

Phases of Advertising Mastery

  • The journey of mastering advertising involves three phases: losing money, scaling winners, and the "print money" phase.
  • The ultimate goal is to reach a point where the return on investment from customers exceeds the acquisition cost.
  • Understanding the lifetime gross profit (LTGP) to customer acquisition cost (CAC) ratio is critical for evaluating a business's potential.

"And if not, keep enjoying the show, which then gets you into phase three, which is the print money phase."

This quote refers to the final phase of advertising mastery where the advertiser has fine-tuned their strategy to the point of consistent profitability.

"Fundamentally, if you're making more money back from customers than it costs you to get them, then you are printing money."

The quote simplifies the concept of successful advertising to a basic principle of earning more from customers than the cost of acquiring them, leading to sustainable profit.

Business Model and Cash Flow

  • Understanding the cost of acquiring a customer and the lifetime value they bring is crucial for business success.
  • Businesses operate on a simple principle of spending money (x) to make money (y), which is described as a "money printing machine."
  • The ratio of customer acquisition cost to lifetime value is the most important ratio in business.
  • Cash flow can become a constraint due to the time lag between spending on customer acquisition and receiving the revenue from that customer.
  • It's essential for small businesses, especially those without venture capital, to optimize their payback period to 30 days.
  • Achieving a quick payback period allows businesses to use interest-free credit effectively to scale without immediate cash flow issues.
  • The goal is to cover not just the cost of acquiring a customer but also the cost of delivering the product or service within the first 30 days.

"It's a money printing machine. That's all businesses are. Just a black box where you spend x and you get y."

This quote encapsulates the basic principle of business: investment for a return. The speaker is emphasizing the importance of knowing the input (cost) and the output (revenue) to understand the business's profitability.

"And so what you have to do is figure out a way to get your payback period down to 30 days, ideally."

The speaker suggests that businesses should aim to recover the cost of acquiring a customer within 30 days to maintain healthy cash flow and enable growth.

Customer Acquisition and Lifetime Value

  • John's hypothetical newsletter business is used as an example to illustrate the concept of customer lifetime value (CLV) and customer acquisition cost (CAC).
  • John makes a gross profit of $10 per month from a newsletter and retains customers for an average of 20 months, resulting in a $200 lifetime value.
  • If it costs John $50 to acquire a customer, the ratio of lifetime value to acquisition cost is 4 to 1, which is considered a good ratio for scalability in advertising.

"John makes $10 per month on his newsletter. And let's say that the average person stays for 20 months. So that would be $200 is what he makes on a customer lifetime gross profit."

This quote breaks down the calculation of customer lifetime value, which is a critical metric for evaluating the long-term profitability of a customer.

"If you are making more money over the lifetime gross profit by more than three to one than it costs you to get them... Then that is a good scalable advertising campaign."

The speaker highlights the importance of achieving a CLV to CAC ratio of at least 3 to 1 to ensure that advertising campaigns are profitable and scalable.

Overcoming Cash Flow Constraints

  • Small business owners must find ways to overcome cash flow constraints due to the delayed nature of returns on investment in customer acquisition.
  • One solution is to have customers prepay a percentage of the cost or find other tactical ways to manage cash flow.
  • The speaker introduces the concept of "client financed acquisition," where the revenue from initial customers funds the acquisition of additional customers.
  • This model can lead to exponential growth without the need for external investors, but it may introduce other constraints such as operational or talent limitations.

"Should he spend that money to do that deal every fucking day? He should do that, but he will run out of cash."

This quote acknowledges the dilemma of investing in profitable customer acquisition while managing the risk of running out of cash due to the time it takes to break even.

"What you have to cover in that first 30 days is two things. One, the cost to get the person cost to acquire. The second thing is the cost to deliver on the thing that you just sold."

The speaker outlines the two critical costs that need to be covered quickly to avoid cash flow issues: the cost of acquiring the customer and the cost of delivering the product or service.

Client Financed Acquisition

  • "Client financed acquisition" is a strategy where the initial revenue from customers is used to fund further growth, negating the need for external investment.
  • This approach was successfully utilized by Gym launch, which disrupted the gym market by moving away from free trials to a model where customers paid upfront.
  • Traditional free trial models in the gym industry led to cash flow issues due to the delay in converting free trials into paid memberships.
  • By having customers pay upfront, Gym launch was able to quickly recoup acquisition costs and reinvest in acquiring more customers.

"And then that is where you completely debottleneck the capital you have from your ability to grow acquisition."

This quote explains how the client financed acquisition model removes the financial bottleneck that restricts customer acquisition and business growth.

"When Gym launch took the entire gym market by storm, here's how it actually happened."

The speaker introduces a case study of Gym launch to illustrate the effectiveness of the client financed acquisition strategy in a real-world scenario.

Acquisition Model Innovation

  • The speaker discusses a successful strategy for acquiring customers in the gym industry.
  • They created a program that customers paid for upfront, which allowed them to make back the acquisition cost quickly.
  • This approach enabled gyms to reach full capacity without initial capital investment.

"So we were able to take over that marketplace by simply changing the acquisition model."

The quote explains the pivotal role of the innovative acquisition model in dominating the marketplace.

"And our cost to acquire a customer was one or $200. And so we would make back the cost to acquire that customer and the next customer with the $400 left over."

This quote breaks down the economics of the acquisition model, highlighting the profitability and sustainability of the strategy.

Scaling Advertising and Business Growth

  • The speaker advises to scale paid advertising last, after refining the product-market fit and sales process using less risky methods.
  • They emphasize the importance of having a solid cash flow from other advertising methods before investing in paid ads.
  • The speaker suggests that successful advertising is based on the LTGP (Lifetime Gross Profit) to CAC (Customer Acquisition Cost) ratio.

"I actually think about scaling paid ads last."

This quote underscores the speaker's belief in the importance of establishing a business foundation before scaling with paid advertising.

"But once you have all that stuff, you will sometimes reach a point where you want to scale faster and maybe required for whatever your business model is."

The speaker acknowledges that there comes a time when paid advertising is necessary for faster scaling, provided the business is ready.

  • Paid advertising is described as a high-risk, high-reward approach to scaling a business.
  • The speaker advises expecting losses at the beginning but to scale aggressively upon finding a winning formula.
  • They highlight the significance of providing more value to customers to enable charging more and making higher profits.

"When you play in the big game of paid ads, expect to lose more times than you win."

This quote sets realistic expectations for the initial phase of engaging in paid advertising.

"When you nail the LTGP to CAC ratio, all advertising becomes easy."

The speaker points out that mastering the balance between lifetime gross profit and customer acquisition costs simplifies the advertising process.

Business Focus: Value and Efficiency

  • The speaker stresses the importance of focusing on providing superior value to customers.
  • They suggest that businesses with a strong back end can succeed with even mediocre advertising.
  • A strong business model is more important than excellent advertising skills.

"Which is how do we provide more value to our customer than anyone else can, so that we can charge more and make more profit than anyone else can."

This quote emphasizes the business strategy of outcompeting others by maximizing customer value and profit margins.

"The back end informs the front end. It enables the front end."

The speaker illustrates how a strong back end (business operations and value proposition) supports and enhances the front end (advertising and customer acquisition).

The Importance of the Right Business Vehicle

  • The speaker observes that many skilled advertisers are attached to poor business models.
  • They suggest that these advertisers could achieve greater success with a better business vehicle.
  • The speaker encourages choosing business opportunities wisely to maximize the potential of one's skills.

"Some of the best advertisers in the world are attached to really shitty businesses because they've forced to get really good at advertising."

This quote reflects on the mismatch between advertising talent and business quality, implying that skill is sometimes wasted on subpar business models.

"If you got into a much more legit vehicle, you could spend way more and flex those skills you have in a much bigger way."

The speaker advises that selecting a strong business model allows advertisers to leverage their skills more effectively and with larger budgets.

The Process of Mastering Paid Ads

  • The speaker outlines a process for mastering paid ads, which includes tracking, expecting losses, and enhancing profitability.
  • They mention the importance of reducing the payback period to scale quickly.
  • The speaker describes the potential for unlimited scaling once the paid ads strategy is optimized.

"If you know the process I got to track, I got to expect to lose. And then once I make more money than it costs me to make it, can I enhance it and can I shorten the payback period?"

This quote provides a concise summary of the steps involved in mastering the paid advertising process for business scaling.

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