Business Owners: You NEED to Know This

Summary

This 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

00:00

💰 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.

05:00

📈 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.

10:01

🚀 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.

15:02

🤔 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.

20:02

🛠️ 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.

25:03

🔍 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.

Keywords

💡LTV (Lifetime Value)

Lifetime Value (LTV) refers to the total gross profit a business can reasonably expect to generate from a single customer over the course of their relationship. In the video, it is emphasized that LTV should be calculated as lifetime gross profit, not just the revenue, by subtracting the cost of delivering the service or product. The script uses the example of a business where customers pay $2,000 a month for five months, and the correct LTV calculation would consider the cost of service delivery to find the actual profit.

💡CAC (Customer Acquisition Cost)

Customer Acquisition Cost (CAC) is the total cost of sales and marketing efforts divided by the number of new customers acquired in a given time period. The video script explains CAC as the cost of making more money, which includes advertising, payroll, and other expenses associated with attracting a new customer. The importance of understanding CAC is highlighted through the example of a Facebook ads agency, which had a high CAC that was not initially recognized, leading to a loss despite a seemingly profitable LTV.

💡LTV to CAC Ratio

The LTV to CAC Ratio is a critical metric in business that compares the lifetime value a customer brings to the cost of acquiring that customer. The video emphasizes that a high LTV to CAC ratio indicates a strong business model, where the potential for profit and scalability is significant. The speaker shares his experience of scaling a business to $100 million by maximizing this ratio, and provides examples from Starbucks to illustrate its importance.

💡Churn Rate

Churn Rate is the percentage of customers who discontinue a subscription or stop purchasing from a business over a given time period. In the script, the churn rate is used to calculate the lifetime value of a customer, by dividing the price by the churn rate to estimate how long a customer stays, which is crucial for understanding the true LTV.

💡Gross Profit

Gross Profit is the profit a company makes after deducting the costs associated with making or selling its products, or delivering its services. The video script clarifies that when calculating LTV, one must consider the gross profit, not just the revenue, to understand the true profitability of a customer relationship.

💡Scaling

Scaling in the context of the video refers to the ability of a business to grow and expand, often by increasing the number of customers or the value per customer. The speaker discusses how understanding and optimizing the LTV to CAC ratio can lead to better decisions and the ability to scale a business effectively.

💡Advertising Efficiency

Advertising Efficiency is the effectiveness of advertising spending in generating desired outcomes, such as customer acquisition or sales. The video script uses the example of a business that could afford to be inefficient in its advertising due to a high LTV to CAC ratio, still achieving a profitable return on investment.

💡Fixed Costs

Fixed Costs are expenses that do not change with the level of output, such as rent or salaries for staff not directly involved in the production process. The video script mentions that when calculating LTV, fixed costs should not be included in the gross profit calculation because they do not change with each additional unit sold.

💡Variable Costs

Variable Costs are expenses that vary with the level of output or with the number of customers, such as the cost of goods sold or the cost of delivering a service. The script explains that understanding variable costs is essential for calculating the true LTV and optimizing the business model.

💡Cross-Selling and Upselling

Cross-Selling and Upselling are sales strategies aimed at increasing the value of a customer. Cross-selling involves selling additional products or services that complement the customer's initial purchase, while upselling involves selling a higher-priced or more profitable version of the product or service. The video script suggests these strategies as ways to increase LTV.

💡Operational Efficiency

Operational Efficiency refers to the effectiveness of business operations in producing desired outcomes with minimal waste of time, money, or resources. The video script discusses how improving operational efficiency can decrease the cost of goods sold and delivery, which in turn can increase the LTV to CAC ratio and the overall profitability of the business.

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