Business Owners: You NEED to Know This
Summary
TLDRThis transcript emphasizes the critical importance of understanding the LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio for business growth. The speaker shares insights on how optimizing this ratio can lead to significant profits and scale. They discuss the difference between gross profit and revenue, the economic fundamentals of business, and provide examples of how businesses like Starbucks leveraged this ratio for massive growth. The speaker also offers strategies to improve both LTV and CAC, highlighting the need for operational efficiency and effective marketing to ensure business success.
Takeaways
- 📈 The LTV/CAC ratio is critical for business growth, determining profitability and scalability.
- 🔢 Lifetime Value (LTV) should be understood as Lifetime Gross Profit, not just revenue, to reflect true profitability.
- 💰 The difference between perceived LTV and actual LTV can lead to miscalculations in business strategy and profitability.
- 🚀 High LTV/CAC ratios can lead to rapid business growth and wealth creation, as seen in the speaker's own experience.
- ✅ Understanding and optimizing the LTV/CAC ratio can provide a competitive advantage in the market.
- 🤑 Businesses with a high LTV/CAC ratio can afford to spend more on customer acquisition, potentially outpacing competitors.
- 📉 The cost of acquiring customers (CAC) can increase as a business grows and targets colder audiences, necessitating a strong LTV to offset.
- 🛠 Operational efficiency can significantly impact the LTV/CAC ratio, with streamlined processes potentially increasing profitability.
- 💡 The speaker emphasizes the importance of 'money math' for business owners, as it can reveal insights not immediately apparent.
- 📚 Learning the language of business, including understanding metrics like LTV and CAC, is essential for strategic decision-making.
- 🛑 A business with a poor understanding of its LTV/CAC dynamics may struggle to scale or could be operating at a loss without realizing it.
Q & A
What is the key ratio discussed in the script for growing a successful business?
-The key ratio discussed is the LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio, which is crucial for making better business decisions, predicting scalability, and profitability.
What is the difference between Lifetime Value (LTV) and Lifetime Gross Profit?
-Lifetime Value often refers to the total revenue a customer generates, but Lifetime Gross Profit specifically subtracts the cost of delivering the service or product from that revenue, giving a clearer picture of the actual profit.
Why is understanding the LTV to CAC ratio important for business growth?
-Understanding the LTV to CAC ratio is important because it indicates how much opportunity a business has for growth, helps predict the scale of advertising, and determines profitability and customer acquisition potential.
What does the speaker mean by 'cracking the LTV to CAC ratio'?
-Cracking the LTV to CAC ratio means maximizing this number to the point where the business can generate significant returns on its investments, essentially having a 'license to print money' for as long as possible.
How does the speaker describe the relationship between LTV and CAC?
-The relationship between LTV and CAC is described as the fundamental economic unit of a business that propels growth and predicts the potential scale of the business. It's about how much it costs to make more money.
What is an example of a business that has successfully maximized the LTV to CAC ratio?
-Starbucks is given as an example of a business that has successfully maximized the LTV to CAC ratio, growing to a large scale with a high number of locations and a strong customer base.
What are the two levers mentioned at the end of the script that can be adjusted to move the LTV to CAC ratio into the stratosphere?
-The script does not explicitly mention the two levers but implies that they are related to maximizing the LTV (through increasing customer lifetime value) and minimizing the CAC (through more efficient customer acquisition strategies).
How can a business owner identify if their business has a strong LTV to CAC ratio?
-A business owner can identify a strong LTV to CAC ratio by calculating the lifetime gross profit from customers and comparing it to the cost of acquiring those customers. A high ratio indicates strong profitability and growth potential.
What is the significance of the LTV to CAC ratio in the context of competition and market saturation?
-A high LTV to CAC ratio allows a business to outspend its competition in advertising and customer acquisition, potentially leading to a monopoly. It also enables a business to enter new markets and scale even when customer acquisition costs increase.
How can a business owner use the LTV to CAC ratio to make strategic decisions about their product offerings?
-A business owner can use the LTV to CAC ratio to determine which products or services have the highest return on investment. They can then focus on promoting and improving those offerings, or stack additional products to increase overall LTV.
What are some strategies to improve the LTV to CAC ratio?
-Strategies to improve the LTV to CAC ratio include increasing the price of products, decreasing the cost of goods sold, cross-selling and upselling, improving advertising efficiency, optimizing the conversion rate, and focusing on high-margin products or services.
Outlines
💰 Mastering the LTV to CAC Ratio for Business Growth
The speaker emphasizes the importance of understanding the Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio for scaling a business. They explain that maximizing this ratio can lead to significant business growth and wealth creation. The LTV is clarified as Lifetime Gross Profit, not just revenue, and the CAC is the cost of acquiring a customer. The speaker shares their experience of scaling to a $100 million net worth by leveraging this ratio and provides insights on how to identify and utilize the two key levers to maximize it.
📈 Understanding the Fundamentals of LTV and CAC
This paragraph delves deeper into the specifics of calculating LTV and CAC. The speaker illustrates the difference between perceived LTV and actual Lifetime Gross Profit by considering the cost of goods or services. They also discuss the concept of hard costs and how they relate to CAC. The importance of understanding the relationship between these metrics is highlighted as it forms the basis for predicting business growth and profitability. An example of a Facebook ads agency is used to demonstrate the consequences of miscalculating these metrics.
🚀 Scaling Business with High LTV to CAC Ratio
The speaker discusses how businesses can scale effectively by maintaining a high LTV to CAC ratio. They use Starbucks as an example to show how a strong ratio can lead to massive growth. The paragraph also touches on the importance of operational efficiency and how it can impact the ratio. The speaker encourages business owners to focus on the metrics that matter and to understand the return on investment for every customer acquired.
🤔 Common Misconceptions and the Importance of Data
The speaker addresses common misconceptions about LTV and CAC, particularly among service-based businesses. They explain the importance of factoring in the cost of goods sold and the cost of delivery when calculating LTV. The paragraph also highlights the need for business owners to have a clear understanding of their LTV to CAC ratio, using a hair salon owner's situation as an example to illustrate how to optimize the business model based on these metrics.
🛠️ Leveraging LTV to CAC for Strategic Business Decisions
This paragraph focuses on how to use the LTV to CAC ratio to make strategic business decisions. The speaker suggests identifying the most profitable products or services with the highest LTV to CAC ratio and using them as the primary focus for marketing efforts. They also discuss the concept of stacking products to increase overall LTV, providing a detailed example of how a hair salon owner could optimize her business offerings.
🔍 Optimizing LTV and Reducing CAC for Business Growth
The speaker provides strategies for improving the LTV to CAC ratio by either increasing LTV or decreasing CAC. They discuss various methods to increase LTV, such as raising prices, improving product quality, and cross-selling. For reducing CAC, they emphasize the importance of advertising efficiency, offer optimization, and conversion rate improvements. The paragraph concludes with a call to action for business owners to analyze and apply these principles to their operations.
📚 The Language of Business and the Power of LTV to CAC
In the final paragraph, the speaker underscores the importance of understanding the LTV to CAC ratio as the fundamental language of business. They argue that mastery of this concept is essential for any business owner looking to grow their enterprise. The speaker encourages re-watching the video for a deeper understanding and invites viewers to consider how the principles discussed can be applied to their own businesses.
Mindmap
Keywords
💡LTV (Lifetime Value)
💡CAC (Customer Acquisition Cost)
💡LTV to CAC Ratio
💡Churn Rate
💡Gross Profit
💡Scaling
💡Advertising Efficiency
💡Fixed Costs
💡Variable Costs
💡Cross-Selling and Upselling
💡Operational Efficiency
Highlights
Understanding the LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio is crucial for business growth and decision-making.
LTV should be calculated as Lifetime Gross Profit, not just the total revenue from a customer.
CAC includes all costs associated with acquiring a customer, such as advertising and payroll for sales and marketing teams.
A high LTV to CAC ratio indicates a scalable and profitable business model.
Business growth can be accelerated by maximizing the LTV to CAC ratio, allowing for reinvestment and scaling of advertising.
Improving LTV can be achieved through increasing the price, reducing cost of goods, or increasing the number of purchases.
Decreasing CAC involves improving the efficiency of the customer acquisition funnel, such as through better advertising or conversion optimization.
The speaker emphasizes the importance of mastering the LTV to CAC ratio for exponential business growth.
An example of a business with a flawed LTV to CAC ratio is given, illustrating the importance of understanding cost structures.
The concept of operational efficiency and its impact on the LTV to CAC ratio is discussed.
Strategies for improving LTV include cross-selling, upselling, and increasing the price or quality of products or services.
Ways to decrease CAC involve optimizing advertising, refining offers, and improving the customer acquisition funnel.
The video provides a framework for analyzing and growing a business using the LTV to CAC ratio.
A case study of Starbucks is used to demonstrate the power of a strong LTV to CAC ratio in scaling a business.
The importance of knowing the LTV to CAC ratio for various business decisions, such as choosing which products to advertise, is highlighted.
The video concludes with a call to action for business owners to implement the principles discussed to grow their businesses faster.
Transcripts
I want to talk to you about a formula
better stated a ratio that you need to
absolutely know like the back of your
hand if you want to grow a big ass
business and if you understand this
number you'll be able to make better
decisions you'll be able to predict how
far you can scale your advertising how
profitable you're going to be how many
customers you can get and a number of
other factors that are all derived from
this one number in the business I
cracked $100 million net worth at age 31
all of the huge growth in money came
from times when this number was
maximized and most businesses kind of
putter along at a mediocre version of
this number but when you really knock it
out of the park you can absolutely have
a license to print money for as long as
you possibly can and at the very end I'm
going to tell you the two levers you can
crank to move this number into the
stratosphere so what is the number well
the number is actually a ratio between
two different numbers and these numbers
have multiple metrics that create those
numbers so it's an incredibly densely
packed number and it describes so many
things that happen within the business
and it will tell you how much
opportunity you have which is why it's
so exciting for me the first number of
this ratio is LTV so lifetime value now
in common speak people say lifetime
value but what they really mean is
Lifetime gross profit and so let me
explain the difference most people say
lifetime value and they think okay well
somebody pays me $1,000 a month for five
months that means their lifetime value
is $5,000 no that's not the lifetime
value you have to take out the cost of
delivering on whatever service or good
you have and then you have the lifetime
gross profit because that is the profit
that you'll be able to reinvest in
growing the business or that you'll be
able to take out as a business owner on
the other hand you have hard costs which
is the CAC to get that customer to pay
you the money and so if you think about
relationship between these two metrics
it's really how much it costs you to
make more money and so you spend money
to acquire a customer or time which
still costs money to make more money and
this is the fundamental economic unit of
the business that propels the business
and predicts how big it can get if I see
a small business at at 100 to1 LTV toac
ratio and they a reliable way of getting
customers then I know that this thing's
get scale to the absolute Moon because I
can get so inefficient I can be on Tenth
is efficient on my advertising and still
have 10 to1 Returns and so people get
obsessed in the stock market about 5%
10% per year returns whereas the reason
that businesses can create
disproportionate wealth in very
accelerated time periods is because you
can put $1 in and get $100 back tomorrow
there's nothing else that does this and
that's why mastering the LTV toac ratio
has been something that I've obsessed
with my entire life as as a business
owner as an entrepreneur and now as an
investor so let me tell you what it
looks like when it's done wrong so I had
a Facebook ads agency come up to me and
say hey we're crushing it we're getting
five to one return on our ads meaning
cost us $1 to make five and so it costs
us $2,000 to get a customer and they're
worth $10,000 to us and they're like but
we're losing money every month rather
than jump immediately into payroll and
try to figure out what the costs are I
said well break down your LTV metrics
forming and again I'll use LTV because
that's what common speak is in business
world I say lifetime gross profit
because I think it's more specific so
break down your LT lgp for me and he
said okay it's $2,000 a month for our
service and the average person's day is
5 months and I was like okay in other
words they had 20% churn so you take the
price divide it by churn which is 20%
equals $10,000 so there two different
ways of explaining it five months on
average is $2,000 Time 5 is 10 or $2,000
divided by 20% turn is also 10 you have
to know this stuff I know people don't
like money math but I swear to God if
you can't do this division you will
literally never make money okay back to
it from the $2,000 a month I was like so
what do they pay an ad spend he like oh
no we wrap it into that I was like okay
here we go what are you spending per
month for them in ad spend they're like
well we we budget $1,000 a month I was
like okay so $2,000 becomes $1,000 left
over I was like okay do you have a super
efficient delivery model and they're
like yeah every account gets you know a
a a representative I was like okay well
how many accounts can a representative
handle they're like well we used to do
10 but they can't really handle that so
we have them do five accounts I was like
okay well what do you pay those reps and
they're like well $5,000 a month each
and I was like okay $5,000 a month each
divided by five accounts means $11,000
per account so $1,000 went to ad spend
$11,000 went to
management 0 left over and I was like so
what you guys have figured out is a way
to take $2,000 and turn it into
zero and they looked at me like I had
you know killed their mother uh but the
point is this is an extreme example but
a lot of businesses have this situation
where they have have a cost of goods
they have some cost of service that's
that's added on top and they take it as
though it's Revenue when it's really you
have to look at the gross profit what's
left over after you deliver the goods
now to be clear there are fixed costs in
a business meaning you've got rent
you've got some people that have nothing
to do with delivery you don't Factor
those into gross profit because if you
sell an additional unit that additional
unit that additional gross profit goes
to you that you can either reinvest in
the business or just pocket as a
business owner which who doesn't like
that and so fundamentally this is LTB
this is how much money you make from the
customer for real not your wink wink
stripe screenshot and if you're a
business owner and you like learning
this language of business and want to
understand more deeply the many other
metrics that exist in the business to
that you can pull on The Leverage that
accelerate the value you have we just
started a workshop div Vision at
acquisition. comom for companies that we
don't own if you want to see if you
qualify you can fly out to Vegas we
spend a whole day with the company and
our our teams there and we show you all
the things that we would do if we bought
your business tomorrow to grow it so if
that sounds interesting you can go to
acquisition. comom hit the scale button
and if you qualify our team will reach
out the CAC is actually very simple to
understand it's just how much it cost
you to get the customer and all you have
to do here is just look historically you
say okay over the last 30 days I spent
this much on my marketing payroll I
spent this much on my media the
advertising dollars I spent and I spent
this much on my sales team in
commissions you add all that up and then
you divide that by how many customers
you got so if you spent $10,000 in ads
and you spent $10,000 in payroll between
sales and marketing your cost is 20,000
and if you had 20 customers then it'd be
a th000 bucks a customer that would be
your CAC and so then you look at that
CAC which now is very clear a lot of
people can understand their CAC quickly
where they get messed up as their LTB
but once you have these two metrics you
can understand the fundamental economic
unit of the business which is when I put
$1 in here I get this much juice on the
back end back to me so let me talk about
what it looks like when it's done right
and this is where you start printing
money so I'm going to give you an
extreme example that some of you guys
may or may not have heard of so there's
this little company called Starbucks
that has little coffee business you
might have heard of them they got 38,000
locations you want to know how were able
to grow to that scale without
franchising to grow now they do have a
tiny little bit of franchising but the
vast vast vast majority of the stores
are corporate owned and so something
that has cost that much Capital opening
up you got all these new stores you got
these build outs you got marketing
budgets for these local locations how
are they able to do that and do it
privately they made a lot of money every
time they put a dollar into their
economic machine so let me tell you how
much money they make every customer that
comes into Starbucks the lifetime value
how much money they make from a customer
is
$4,99 and that is gotten $5 macchiato at
a time $6 frappuccinos at a time and
that means that they keep customers for
years and years and years and years it
turns out that when you boil hot water
and you sell for six bucks you make a
lot of money and one of the crazy things
about a business like Starbucks is that
the cost you acquire customer for a
local food business is typically very
small now I don't know their CAC and I
probably could look into their public
data and try figure out how many
customers they have but I'll tell you
that I had a personal experience
marketing for a Cookie Company years ago
I ran ads locally for them to have a
free cookie with a beverage the average
lead cost was under a dollar and we got
one out of 10 leads in the door and so
it cost us 10 bucks to get somebody in
the door if you have a $14,000 lifetime
value and it costs you $10 to get
somebody to walk in the door you make a
lot of money and so that wasn't a 5 to1
a 10:1 even a 100 to1 return that was a
14
100 to one return and that is how you
build something that is absolutely
massive so once you get into business
whether you're at a million or 3 million
or 10 million whatever it is a year that
you're at you start to run into this
wall becomes more costly to get
customers because you're reaching out to
colder and colder audiences you're going
to new channels to find them and it just
simply costs you more and so the only
way to continue to scale obviously you
can make your ads better you can make
your offers better but the other way to
scale is to be able to afford to Simply
acquire customers for more expensive and
so let's say that Starbucks cost car
customer went from $10 to $50 well
boohoo still really really good the
point is is that if you have a massive
LTV toac ratio your cat can double or
triple and you're still printing money
and so that allows you to enter new
marketing channels New Media channels
colder audiences and outspend your
competition and so this is in some ways
an ethical competitive mode there's two
ways to have a monopoly one way is that
you have a way to under cut everybody in
the marketplace so they can't survive
and then eventually put everyone out of
business because you have enough Capital
to do so another way of having a
monopoly that is legal is that you can
literally just outspend people to get
customers and so most advertising
marketplaces are based on an auction so
they auction for attention and the
highest bidder is the one who wins the
eyeball they win the click and so if you
in the purchase of the eyeball or of the
click you can outspend 100% of your
competition then you can ethically take
all of their money and all of their
customers the reason this is so
important as a business owner is that if
you don't know these metrics you might
be able to get to a million two million
maybe $3 million a year but you're not
going to be able to scale be on that
because you're not going to have a
consistent way to spend money on the
front end and then know how much you're
recouping and at what time and so I had
a business owner who actually was a
business coach ironically uh who was
doing three million bucks a year and I
said well what's your LTV to C creation
he's like I don't know and I was like
how are you doing this right and I say
this with love it just said know your
data so that you can scale your company
I just kept repeating he just kept
asking me questions I was like you have
to know your data so that you can scale
your company that's it and these two
data points are so simple to get and yet
so few businesses do it and this is not
a testament to the fact that you can see
see despite it it's a testament to the
fact that that's why so few businesses
make money I mean shoot only one out of
every 250 businesses gets to $10 million
a year and getting to $10 million a year
you just have to follow fundamental
business and know that I make $10 for
every $1 put in I want to run this
machine as many times as I can can so
let me break down a couple of these comp
sets for you so you've got the lcgp and
you've got CAC all right cac's the easy
one just whatever your cost is on a
monthly basis divided by number of
customers you can look at this on a
monthly basis you can look at a weekly
basis and if you really want an accurate
metric look at over a year just say how
much did I spend over this entire year
in payroll for marketing total in ad
spend total whatever and you divide it
by number of customers it's back of
napkin but honestly that takes out a lot
of the volatility of campaigns good
sales guys or bad sales days whatever
and it gives you a number it's realistic
this is actually how much it costs me to
get a customer now on the lifetime gross
profit side there's a few more numbers
so you have your price most people know
what that is and then you have to
subtract that your cost of goods sold
all right now in a physical product
business if I'm selling books let's say
it cost me $10 to print and Chip a book
if I sell the book for $20 then my gross
profit is 10 bucks most people in the
physical product space tend to get this
pretty quickly what's interesting is
that the service based guys don't get it
at all and so for some reason they think
okay well I have you know Five Guys on
payroll that do all of my delivery all
of the customers I get is just all
profit it's like no you have to take out
the fact that you've got five guys on
payroll and you've got 20 customers and
you take that payroll and you divide it
by 20 and that's what your cost of
delivery is which means that the cost of
deliver may change as you get more
customers but you can model out what it
looks like at scale so if you know that
every five you need to hire another guy
then you either going each guy is's
going to max out at this and you know
that that's going to be your fixed
amount of cost to deliver your service
and so the service guys tend to get this
more mixed up than the physical product
once now once we know what our gross
profit is which is just the price minus
that cost then it says how many times do
I get this and so that's a function of
either the number of purchases they make
or the number of months they stay the
number of months they stay you can take
the inverse of that which is what
percentage of people leave and you can
divide that and you can get it as a
hypothetical metric and so I'll give you
an example a lot of business owners who
are younger or starting out are like
okay well I've only been in business for
six months and so I don't know what my
LTV is because people are still coming
in and we're still growing you can
actually still get a hypothe I on this
which is you just simply say I had 10
customers last month of the 10 that I
started the month with 30 days later how
many of those 10 are still with me if
nine are with you then you have 10%
churn and so you divide your price by
10% and that gives you your LTV which is
the same as multiplying by 10 which
means the average duration they stay is
10 months and that's why they call it
lifetime gross profit and so once you
understand this this gives you an
enormous amount of power to do a number
of things so number one is I had a
business the other day that came to me
and was saying hey I have two front ends
for my business I it was a hair salon uh
girl and so she was able to teach other
hair stylists how to make extensions I
think she was charging $2,000 or
something like that to teach them how to
do extensions and then she also had like
a business coaching thing where she
helped them grow their business and she
said I just you know I'm running ads for
both of them I don't know how I should
structure my business and I was like
okay well what's the LTV to cek she had
done her homework and so she said well
this one we make 34 to1 meaning her cost
to get somebody who wanted to learn how
to get hert exensions or how to put hair
extensions in it cost her like 30 or 40
bucks whatever the math is there on a
$2,000 sale and so she had a $2,000 sale
and so she was getting 30 to1 on that
and so it cost her 67 bucks to get a
customer who's going to pay her $22,000
for a digital product so the rest of
that's gross margin wow what a great LTV
to CAC right on the flip side she had
her business coaching thing which she
had something close to like 7 to one and
so that thing was $115,000 and it cost
her whatever it was $2,000 to get the
sale and so she's like well I like these
customers a lot but there you know
there's fewer of them uh and they cost
more to acquire and she says so what
should I do because these obviously
stack up fast you know you get 10 sales
150 Grand in a month it's not bad right
and she's like I got to sell so many
more of these and so I asked her these
questions I said well are there more of
these people that just want the hair
thing than these people and she said yes
I said is there a percentage of these
people that also buy this thing and she
saides said great and so what we need to
do is you stop advertising this and then
you make this the front end for this and
this becomes the back end and so then
all of your focus after you acquire the
customer is to ascend these people into
this thing which means your cost to
customer here becomes zero and then we
can tack on 20% of this price to the
total LTV here and so this is how you
start stacking LTV the point is is let's
say she got 20% of people to do the
$115,000 thing so that means that that
$2,000 becomes a $5,000 LV so let me
break that down so $2,000 guaranteed
because every person who buys gets that
now we multiply 20% the number of them
that buys the $15,000 thing which is 20%
time 15,000 $3,000 and you add that to
the front end so means one out of five
pays an extra 15 great so that means on
average make $5,000 so that took her LTV
to CAC from 30 to1 to 75 to1 that means
that she can Market even more
aggressively and she can mark it to the
biggest H many of you have one or two or
three different products or offer on the
front end and you're trying to figure
out what's the thing I should advertise
look at the LTV to CAC and then start
with the thing that has the best LTV
toac ratio and then stack behind it
everything else and then that further
increases your ratio of how much you can
spend to get the customer to make more
money so many business owners ask me
questions that they can solve with math
like this is an opinion thing this isn't
like well I talked to three mentors and
one guy gave me this advice and like
this is a math problem which is why you
have to learn it and so if you have a
stronger LTV to CAC the exception here
is if the Tam is Tiny your total
addressable Market the number of heads
that you can sell but most of you who
are listening to this aren't even close
to saturating your Market you're like
I've sold 100 customers and my market is
1 million people okay you don't need to
worry about saturation yet and so
fundamentally if you've got something
that has an ocean of customers and you
have a crazy amount of what you put in
versus what you get out you do as much
of that as you possibly can and then you
stack the other things behind it to
further increase your leverage the last
consideration that I'll bring up which
is already factored into LTV is the
operational efficiency so let me explain
I had a business that we were looking at
acquiring it was a chain of glass repair
all right and they specifically focused
on glass work for residential and so
they had a number of different customers
that they worked with they had high-end
you know Million Dollar Plus Homes that
would have those big glass you know
things and weird bathrooms and whatever
people do with glass one of the partners
from that business peeled off and
started a chain only doing one thing in
the entire product stack and so what he
did was he did his homework he figured
out that shower doors were a product
that was very easy to sell people many
people wanted it there was a huge market
for people who just wanted to replace
their shower doors and the delivery so
the cost of goods sold to deliver the
door was actually very low and so one
guy could do five 10 doors a day whereas
doing the custom glass work might take
months so even though the ticket was
higher they could productize that
service to such a higher degree and the
LTV to CAC was actually higher even
though the average ticket was lower and
so because of that though he could turn
this into a machine that he could repeat
again and again and again and I had the
same conversation with somebody who was
in the pool design business he said well
I designed commercial pools I designed
Resort pools I designed residential
pools and I designed modular pools and I
said okay how hard is it to do all these
and he's like well they're all kind of
hard but these ones the modular pools
are the ones that like I could do easily
because it's only like six or seven
variables and you just kind of plug them
together and I was like okay how is the
margin on that he's like well the
margin's good there and I also have a
much faster cycle because you can from
the time they say yes to the time it's
in their backyard is really fast and I
was like okay are there more people who
can buy modular pools than Resort pools
and he was like yeah okay now we're
starting to talk about something that
looks interesting and so he was like
what do I do and I was like well this is
a math problem you have something that
has a higher LTV to CAC you have a
higher Tam and it's something and this
is just side benefit it's faster so you
have a way faster Loop and you can
productize this to much a higher degree
whereas all of this stuff is custom and
oneoff stuff which makes it very very
difficult to scale many of you have a
big Resort thing and a modular po many
of you guys have custom glass work in
the house or a shower door you want to
find the shower door in your business
that everyone immediately understands
they can come in that's really cheap
many people want it you can deliver that
value quickly now some of you are like
well I'm not passionate about shower
doors the question is what game you want
to play listen there's tons of people
that are out there that say like Follow
Your Passion whatever in my opinion so
this might be contrary business at the
highest level is all the same so if you
succeed at your passion to a high enough
degree your business and what your
day-to-day will look like will almost
irely be the same you're going to be
having a team of people who report to
you you're going to have a head of sales
you're going to have a marketing you're
going to have a legal you're going to
have it you're going to have Finance
you're have some Ops maybe some tech
whatever all those people are just going
to roll into you and so whether you're
selling books or you're selling pools or
you're selling shower doors you're
selling marketing agency Services if you
succeed taking to its natural end you're
going to end up in the same boat so I'd
recommend starting with the one that has
the highest chance likelihood of getting
there cuz otherwise what you don't want
to have happen is have your passion turn
into work so it many of you guys don't
know is that the first year of gym
launch my LTV toac ratio was 100 to1 I
spent $100,000 and made $10 million back
and yes it was that insane for me too A
lot of the wealth that I've been made is
made in these punctuated periods of time
when my LTV to CAC Racers were
absolutely absurd and so when you have
one of those things and if you do crack
this code I highly recommend Jam as much
as you possibly can through that through
that machine you think it's going to be
illegal because you're making so much
money and that's okay it's normal just
keep pushing as hard as you can let's
talk about how to improve it so I talked
briefly about the LTV stuff which for
the most part is going to be decreasing
turn increasing price those are the
things that are going to increase LTV
and having additional cross selles and
upsells I'll just give you the Highlight
Reel of how to improve that you can
increase the price you can decrease the
cost of delivery you can get people to
buy more times you can cross- sell them
additional things so that's like if you
buy a burger you buy fries you can
upsell them a better version of the
thing so instead of this burger you get
a sirloin or wagy Burger you can sell a
higher quantity of that one Burger to
two burgers you can down sell them
turning a no sale into a sale so they
would have been a zero instead of you
get a junior Whopper you get a smaller
burger or you go from a sirloin burger
to a mystery meat burger right and so
that's the down sell that gives you more
better smaller worse cross sell
different more number of options that
you sell increase the price decrease the
cost of goods and you can do that with
any product you have if I sell iPhone
cases I can increase the price of this
case I can become more efficient with
the manufacturing to decrease the cost
of my delivery to make this case I can
cross sell a wallet that tax onto this I
can increase the likely they buy another
case in 6 months by trying to say hey do
you want to have different color cases
so you can do them by mood I can
increase the number of cases saying hey
do you want a spare case I can increase
the quality of the cas and say this is a
metal case versus a you know plastic
case I can make this a cheaper case or I
could do in terms of uh the quality of
the material or I could sell fewer units
if I had that case every product that
exists on the marketplace you can find a
better version a more version a cheaper
version a fewer version a cross- sold
version you decrease the cost of goods
you get them to buy more of them or you
increase the price those are the ways
that you increase LTV and so if you want
to improve your ratio that's your
homework for this video and you can show
this video to your team and you have to
check off those boxes okay if we did
have our book How do we make this book
make us more money well I can raise the
price of the book I can try and buy
volume of printing so that I can drive
down the cost I can spread out the books
between three different warehouses so
that I can have cheaper shipping prices
because it's closer to my customers
those would be the first two price and
then cost of goods I can cross- sell an
additional book I can try to get
somebody to buy more of this book can't
really get someone to buy less of this
book I could have a book lit or a
summary version of of the book that I
could choose to sell that would give me
a worse or inferior version of the book
in terms of decreasing quality if I sold
a number of units instead of selling a
three-pack I'd down sell a one pack and
so each of these you can look at any
product through these lenses and think
is through each of those which of these
is the easiest for us to immediately
Implement within our business that
doesn't create operational drag me
writing a second book probably a lot of
work me asking people to buy a second
book much less work now let's talk about
decreasing the other side CU remember
this is a ratio right and so you can not
change anything about your LTV and still
massively improve the ratio by
decreasing CAC your cost to acquire
customer and so what do you do here so
CAC is a funnel right and so in order to
decrease CAC it's about efficiency and
so advertising always works you always
Reach people when you input something
into the system if you make a post You
Reach people if you were to spend a
billion dollars you could reach everyone
on earth right the idea is simply how
efficient are you with that dollar and
so with CAC everything is a percentage
off of 100% so you start with an
advertisement reaches 100% of people and
then a small percentage of those people
click or take the first step from there
you have a percentage of people that
schedule certain percentage people that
show certain percentage that buy certain
percentage that then upsell whatever and
so as you go through this funnel to
decrease CAC you either have to get
cheaper eyeballs the raw unit that
you're taking this price tag off of or
you improve the efficiency after you've
paid for the eyeball to increase the
likely that the person Buys in cro just
like so conversion optimization just
like LTV often times there isn't a
silver bullet i' would say the only
thing that's the closest thing to a
silver bullet in the CAC world is
nailing your offer nailing what thing
you're going to package together that
you can put out the marketplace that
everybody wants I'll give you an
interesting monitor concept around this
is that I build LTV back to front
meaning I want to think about the most
expensive thing and work my way
backwards so that I can stack as much
lifetime gross profit into my customers
as I can I think about CAC front to back
the reason for that is that I want to
optimize the things in the earlier parts
of the funnel because they affect a
higher percentage of people you often
working with smaller percentages at the
onset and bigger percentages later and
so I'll walk you through an example so
if your ad gets shown to call it 10,000
people and you have a 1% clickthrough
rate well me having a better ad might
get a 3% click-through rate there's
almost nothing that's going to take my
show rate well there is nothing that's
going to take my show rate from 60% to
180% there's nothing that's going to
take my close rate from 35% to 105% like
it's not going to happen I like going
front to back because in terms of order
of magnitude of how much I can impact or
grow the business or rather decrease the
cost to acquire customer I can have a
greater impact from the front to the
back I'll make one one tiny Pro tip on
this which is that I in general work
front to back for CAC if I have a clear
outlier if I have a 5% show up rate but
everything else is amazing and I know
the industry average is 60% well then I
do see that I have a 12x there that I
can go get it's it's just not often and
so most of the time the biggest gains
are going to come from Improvement in
advertising improving the offer
improving the headline and the
availability of the team if you have a
sales team or if you have an e-commerce
business then it's going to be cro on
the page the offer you're making on the
page the headline on the page and the
quality of the advertisements themselves
and so whenever I enter any industry and
to be fair at this point I've seen so
many businesses because we get so much
deal flow at acquisition. comom I have a
really good pulse for what it cost to
get a small business owner for an SEO
agency I have a pretty good pulse for
what it costs to get somebody to buy a
$99 a month uh software package I have a
pretty good idea of what it costs to
sell someone into a uh you know a
franchise right there's there's very
different benchmarks that exist but the
good thing is it's very rare that you
have truly novel businesses because more
often you're selling to an existing
Avatar so even if you have a novel
business you're still selling the same
person so it's going to cost you about
the same amount of money to get in front
of those people and then convert them
into a customer now the variable will be
what that person's worth to you which is
the LTV but calcul is much less variable
between different players and so the
reason that some businesses stay around
forever and others don't is that the ca
between the biggest businesses is often
times about the same the difference is
how much LTV they've been able to stack
and that is what creates that long-term
competitive Advantage for them and if
this was a denser video this was
literally just unpacking one ratio
inside of business and you have to get
fluent with this I'd encourage you to
re-watch it or relisten to this if
you're listening to it you have to be
able to breathe this stuff this has to
be your first first language if you want
to get in business this is the language
of business your ability to
conceptualize ideas is directly
proportional to your vocabulary within a
given domain I create Frameworks that
people find simple because I'm fluent in
the language and I can draw pictures
about it because I've had to think
through it so many different times and
so many different types of business I
could draw it what is the difference
between selling a book and selling an
iPhone and selling SEO services and
selling a franchise can you apply LTV to
back to
investing interesting what's the cost to
buy a company what do you make on that
company over the lifetime interesting
it's just chunked up at another level
where the product and the customer
itself is really the business so this
principle applies at all levels of
business the more you EMB brain it into
your DNA and your Lexicon and the
language that you think with rather than
just what you speak with but what you
think with understanding that this is
the ratio that drives the business means
that you're going to Lad up the
initiatives and the activities that you
do in the business to drive one of these
two sides if what you're doing is not
getting you more customers cheaper or
making those customers worth more then
you are probably wasting your time this
LTV CAC ratio is just one of many
numbers that we use to analyze and grow
a business and I have a YouTube video
that's more in- depth more advanced
stuff if you're a business owner and you
want to grow your business faster
comment below or have one of your
teammates comment below which one of the
eight ways that I just talked about you
can Implement in your business tomorrow
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