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I want to talk to you about a formula, better stated, a ratio that you need to absolutely

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know, like the back of your hand, if you want to grow a big-ass business.

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If you understand this number, you'll be able to make better decisions, you'll be able

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to predict how far you can scale your advertising, how profitable you're going to be, how many

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customers you can get, and a number of other factors that are all derived from this one

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number in the business.

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I cracked $100 million net worth at age 31.

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All of the huge growth in money came from times when this number was maximized.

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The most businesses kind of put her along at a mediocre version of this number, but when

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you really knock it out of the park, you can absolutely have a license to print money

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for as long as you possibly can.

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And at the very end, I'm going to tell you the two levers you can crank to move this

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number into the stratosphere.

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So what is the number?

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Well, the number is actually a ratio between two different numbers, and these numbers

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have multiple metrics that create those numbers.

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So it's an incredibly densely packed number, and it describes so many things that happen

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within the business.

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And it will tell you how much opportunity you have, which is why it's so exciting for

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me.

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The first number of this ratio is LTV, so lifetime value.

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Now, in common speak, people say lifetime value, but what they really mean is lifetime

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gross profit.

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And so let me explain the difference.

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Most people say lifetime value, and they think, okay, well, somebody pays me $1,000

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month for five months, that means their lifetime value is $5,000.

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No, that's not the lifetime value.

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You have to take out the cost of delivering on whatever service or good you have, and

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then you have the lifetime gross profit, because that is the profit that you'll be able to

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reinvest in growing the business, or that you'll be able to take out as a business owner.

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On the other hand, you have hard costs, which is the CAC, to get that customer to pay

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you the money.

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And so if you think about relationship between these two metrics, it's really how much

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it costs you to make more money.

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And so you spend money to acquire a customer, or time, which still costs money, to make

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more money.

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This is the fundamental economic unit of the business that propels the business, and

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predicts how big it can get.

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If I see a small business add to the 100-to-1 LTV to CAC ratio, and they have a reliable

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way of getting customers, then I know that this thing can scale to the absolute moon,

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because I can be so inefficient, I can be one-tenth as efficient on my advertising, and

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still have 10-to-1 returns.

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And so people get obsessed in the stock market, about 5%, 10% per year returns.

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Whereas the reason that businesses can create disproportionate wealth in very accelerated

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time periods, is because you can put $1 in and get $100 back tomorrow.

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There's nothing else that does this.

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And that's why mastering the LTV to CAC ratio has been something that I've obsessed

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with my entire life as a business owner, as an entrepreneur, and now as an investor.

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So let me tell you what it looks like when it's done wrong.

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So I had a Facebook ads agency come up to me and say, hey, we're crushing it.

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We're getting 5-to-1 return on our ads, meaning it costs us $1 to make 5.

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And so it costs us $2,000 to get a customer, and they're worth $10,000 to us.

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And they're like, but we're losing money every month.

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Rather than jumping immediately into payroll and trying to figure out what the costs were,

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I said, well, break down your LTV metrics for me.

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And again, I'll use LTV because that's what common speak is in business world.

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I say lifetime gross profit because I think it's more specific.

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So break down your LTV, LTGP for me.

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And he said, okay, it's $2,000 a month for our service.

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And the average person stays five months, and I was like, okay, in other words,

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they 20% turn.

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So you take the price divided by turn, which is 20%, equals $10,000.

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There's two different ways of explaining it.

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Five months on average is $2,000 times five is 10, or $2,000 divided by 20% turn is also 10.

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You have to know this stuff.

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I know people don't like money, man.

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But by swear to God, if you can't do this division, you will literally never make money.

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Okay, back to it.

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From the $2,000 a month, I was like, so what do they pay an ad spend?

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I was like, oh no, we wrap it into that.

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I was like, okay, here we go.

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What are you spending per month for them in ad spend?

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They're like, well, we budget $1,000 a month.

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Okay, so $2,000 becomes $1,000 left over.

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I was like, okay, do you have a super efficient delivery model?

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And they're like, yeah, every account gets a representative.

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I was like, okay, well, how many accounts can a representative handle?

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They're like, well, we used to do 10, but they can't really handle that.

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So we have them do five accounts.

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I was like, okay, well, what do you pay those reps?

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And they're like, well, $5,000 a month each.

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I was like, okay, $5,000 a month each divided by five accounts means $1,000 per account.

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So $1,000 one to ad spend, $1,000 one to management, $0,000 left over.

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And I was like, so what you guys have figured out is a way to take $2,000 and turn it into

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zero.

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And they looked at me like I had killed their mother.

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But the point is, this is an extreme example, but a lot of businesses have the situation

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where they have a cost of goods, they have some cost of service that's added on top.

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And they take it as though it's revenue.

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And it's really you have to look at the gross profit, what's left over after you deliver

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the goods.

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Now, to be clear, there are fixed costs in a business, meaning you've got rent, you've

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got some people that have nothing to do with delivery.

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You don't factor this into gross profit because if you sell an additional unit, that additional

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unit, that additional gross profit goes to you that you can either reinvest in the business

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or just pocket as a business owner, which you doesn't like that.

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And so fundamentally, this is how much money you make from the customer for real, not your

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wink, wink, stripe screenshot.

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And if you're a business owner and you like learning this language of business and want

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to understand more deeply the many other metrics that exist in the business too, that you

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can pull on the leverage that accelerate the value you have.

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We just started a workshop division at acquisition.com for companies that we don't own.

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If you want to see if you qualify, you can fly out to Vegas, spend a whole day with the

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company and our teams there and we show you all the things that we would do if we bought

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your business tomorrow to grow it.

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So if that sounds interesting, you can go to acquisition.com, hit the scale button and

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if you qualify, our team will reach out.

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The CAC is actually very simple to understand.

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It's just how much it costs you to get the customer.

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And all you have to do here is just look historically, you say, okay, over the last 30 days, I spent

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this much on my marketing payroll, I spent this much on my media, the advertising dollars

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I spent and I spent this much on my sales team in commissions.

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You add all that up and then you divide that by how many customers you got.

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So if you spent $10,000 in ads and you spent $10,000 in payroll between sales and marketing,

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your cost is $20,000 and if you had 20 customers, then it'd be $1,000 a customer.

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That would be your CAC.

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And so then you'd look at that CAC, which now is very clear.

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A lot of people can understand their CAC quickly when they get messed up as their LTV.

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But once you have these two metrics, you can understand the fundamental economic unit of

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the business, which is when I put $1 in here, I get this much juice on the back end, back

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to me.

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So let me talk you about what it looks like when it's done right and this is where you

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start printing money.

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So I'm going to give you an extreme example that some of you guys may or may not have heard

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of.

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So there's this little company called Starbucks that has a little coffee business you might

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have heard of them.

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You want to know how they were able to grow to that skill without franchising to grow.

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Now they do have a tiny little bit of franchising, but the vast, vast, vast majority of the stores

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are corporate owned.

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And so something that has cost that much capital opening up, you got all these new stores,

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you got these buildouts, you got marketing, budgets, these local locations.

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How are they able to do that and do it privately?

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They made a lot of money every time they put a dollar into their economic machine.

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So let me tell you how much money they make.

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Every customer that comes into Starbucks, the lifetime value, how much money they make

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from customer is $14,000 and $99.

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And that is gotten five dollar mocky ados at a time, six dollar frappuccinos at a time.

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And that means that they keep customers for years and years and years and years.

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It turns out that when you boil hot water and you sell for six bucks, you make a lot of

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money.

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And one of the crazy things about a business like Starbucks is that the cost you acquire

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customer for a local food business is typically very small.

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Now I don't know their cat and I probably could look into their public data and try and

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figure out how many customers they have.

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But I'll tell you that I had a personal experience marketing for a cookie company years

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ago.

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I ran ads locally for them to have a free cookie with a beverage.

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The average lead cost was under a dollar and we got one out of ten leads in the door.

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And so I'll cost us ten bucks to get somebody in the door.

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If you have a $14,000 lifetime value and it costs you ten dollars to get somebody to walk

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in the door, you make a lot of money.

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And so that wasn't a five to one, a ten to one, even a hundred to one return.

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That was a $14,000 to one return.

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And that is how you build something that is absolutely massive.

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So once you get into business, whether you're at a million or three million or ten million,

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whatever it is a year that you're at, you start to run into this wall becomes more costly

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to get customers because you're reaching out to colder and colder audiences.

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You're going to new channels to find them and it just simply costs you more.

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And so the only way to continue to scale, obviously you can make your ads better.

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You can make your offers better.

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But the other way to scale is to be able to afford to simply acquire customers from

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more expensive.

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And so let's say that Starbucks, Costual Car Customer went from $10 to $50.

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Well, boohoo, still really, really good.

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The point is that if you have a massive LTV to catch ratio, your cat can double or triple

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and you're still printing money.

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And so that allows you to enter new marketing channels, new media channels, colder audiences

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and outspend your competition.

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And so this is in some ways an ethical, competitive mode.

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There's two ways to have a monopoly.

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One way is that you have a way to undercut everybody in the marketplace so they can't survive.

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And then eventually put everyone out of business because you have enough capital to do so.

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Another way of having a monopoly that is legal is that you can literally just outspend

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people to get customers.

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And so most advertising marketplaces are based on an auction.

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That the auction for attention and the highest bidder is the one who wins the eyeball.

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They win the click.

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And so if you in the purchase of the eyeball or of the click, you can outspend 100% of your

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competition, then you can ethically take all of their money and all of their customers.

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The reason this is so important as a business owner is that if you don't know these metrics,

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you might be able to get to a million, two million, maybe $3 million a year, but you're

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not going to be able to scale beyond that because you're not going to have a consistent

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way to spend money on the front end and then know how much you're recouping and at what

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time.

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So I had a business owner who actually was a business coach, ironically, who was doing

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$3 million a year.

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And I said, well, what's your else?

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You need a calculation.

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He's like, I don't know.

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And I was like, how are you doing this, right?

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And I say this with love.

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I just said, know your data so that you can scale your company.

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I just kept repeating.

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He just kept asking me questions.

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I was like, you have to know your data so that you can scale your company.

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That's it.

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And these two data points are so simple to get and yet so few businesses do it.

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And this is not a testament to the fact that you can see despite it.

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It's a testament to the fact that that's why so few businesses make money.

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I mean, shoot, only one out of every 250 businesses gets the $10 million a year.

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And getting to $10 million a year, you just have to follow fundamental business and know

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that I make $10 for every $1 put in.

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I want to run this machine as many times as I can.

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So let me break down a couple of these comp sets for you.

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So you've got the LTGP and you've got CAC, right?

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CAC's the easy one.

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Just whatever your cost is on a monthly basis divided by a number of customers.

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You can look at this on a monthly basis, you can look at a weekly basis.

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And if you really want an accurate metric, look it over a year.

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Just say, how much did I spend over this entire year in payroll for marketing, total

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and ad spend, total and whatever, you can divide it by a number of customers.

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It's back of napkin, but honestly, that takes out a lot of the volatility of campaigns,

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good sales guys or bad sales days, whatever, and that gives you a number that's realistic.

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This is actually how much it costs me to get a customer.

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Now in the lifetime gross profit side, there's a few more numbers.

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So you have your price.

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Most people know what that is.

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And then you have to subtract at your cost of goods sold.

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All right.

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Now in a physical product business, if I'm selling books, let's say it costs me $10 to

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print and chip a book.

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If I sell the book for $20, then my gross profit is $10.

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Most people in the physical product space tend to get this pretty quickly.

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What's interesting is that the service-based guys don't get it at all.

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And so for some reason, they think, okay, well, I have five guys on payroll that do all

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of my delivery.

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All of the customers I get is just all profit.

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It's like, no, you have to take out the fact that you've got five guys on payroll and

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you've got 20 customers and you take that payroll and you divide it by 20 and that's what

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your cost of delivery is, which means that the cost of delivery may change as you get

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more customers.

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But you can model out what it looks like at scale.

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So if you know that every five, you need to hire another guy, then you're going to eat

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guys going to max out at this and you know that that's going to be your fixed amount

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of cost to deliver your service.

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And so the service guys tend to get this more mixed up than the physical product ones.

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Now once we know what our gross profit is, which is just the price minus that cost, then

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it says how many times do I get this?

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And so that's a function of either the number of purchases they make or the number of

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months they stay.

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The number of months they stay, you can take the inverse of that, which is what percentage

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of people leave and you can divide that and you can get that as a hypothetical metric.

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And so I'll give you an example.

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A lot of business owners were younger or starting out or like, okay, well, I've only been

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in business for six months and so I don't know what my LTV is because people are still

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coming in and we're still growing.

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You can actually still get a hypothetical on this, which is you just simply say, I had

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10 customers last month of the 10 that I started the month with 30 days later.

250
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How many of those 10 are still with me?

251
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If nine are with you, then you have 10% turn.

252
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And so you divide your price by 10% and that gives you your LTV, which is the same as multiplying

253
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by 10, which means the average duration they stay is 10 months.

254
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And that's why they call it lifetime gross profit.

255
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And so once you understand this, this gives you an enormous amount of power to do a number

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of things.

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So number one is I had a business the other day that came to me and was saying, hey, I

258
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have two front ends for my business.

259
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It was a hair salon girl.

260
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And so she was able to teach other hair stylists how to make extensions.

261
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I think she was charging $2,000 or something like that to teach them how to do extensions.

262
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And then she also had like a business coaching thing where she helped them grow their business.

263
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And she said, I just, you know, I'm running ads for both of them.

264
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I don't know how I should structure my business.

265
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And I was like, okay, well, what's the LTV to kick?

266
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She had done her homework and so she said, well, this one, we make 34 to one, meaning

267
00:13:26.160 --> 00:13:30.240
her cost to get somebody who wanted to learn how to get hair extensions or how to put hair

268
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extensions in.

269
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It cost her like 30 or 40 bucks, whatever the math is there, on a $2,000 sale.

270
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And so she had a $2,000 sale and so she was getting 30 to one on that.

271
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And so it cost her $67 to get a customer who's going to pay her $2,000 for a digital product.

272
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So the rest of that's gross margin.

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Wow, what a great LTV to kick, right?

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On the flip side, she had her business coaching thing, which she had something close to

275
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like seven to one.

276
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And so that thing was $15,000 and it cost her whatever it was, $2,000 to get the sale.

277
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And so she's like, well, I like these customers a lot, but they're, you know, there's fewer

278
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of them and they cost more to acquire and she says, so what should I do?

279
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Because these obviously stack up fast.

280
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You know, you get 10 sales, but you're granted a month, not bad, right?

281
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And she's like, I got to sell so many more of these.

282
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And so I asked her these questions.

283
00:14:15.280 --> 00:14:19.480
I said, well, are there more of these people that just want the hair thing than these

284
00:14:19.480 --> 00:14:20.480
people?

285
00:14:20.480 --> 00:14:21.480
And she said, yes.

286
00:14:21.480 --> 00:14:28.480
And so what we need to do is you stop advertising this and then you make this the front end for

287
00:14:28.480 --> 00:14:30.480
this and this becomes the backend.

288
00:14:30.480 --> 00:14:34.480
And so then all of your focus after you acquire the customer is to ascend these people into

289
00:14:34.480 --> 00:14:38.400
this thing, which means your cost to acquire customer for here becomes zero.

290
00:14:38.400 --> 00:14:45.360
And then we can tack on 20% of this price to the total LTV here.

291
00:14:45.360 --> 00:14:47.840
And so this is how you start stacking LTV.

292
00:14:47.840 --> 00:14:52.400
The point is, is let's say she got 20% of people to do the $15,000 thing.

293
00:14:52.400 --> 00:14:56.160
So that means that that $2,000 becomes a $5,000 TV.

294
00:14:56.160 --> 00:14:57.160
So let me break that down.

295
00:14:57.160 --> 00:15:00.360
So $2,000 guaranteed, because every person who buys gets that.

296
00:15:00.360 --> 00:15:06.320
Now we multiply 20% the number of them that buys the $15,000 thing, which is 20% times

297
00:15:06.320 --> 00:15:07.320
$15,000, $3,000.

298
00:15:07.320 --> 00:15:09.320
And you add that to the front end.

299
00:15:09.320 --> 00:15:11.320
So it means one out of five pays an extra 15.

300
00:15:11.320 --> 00:15:12.320
Great.

301
00:15:12.320 --> 00:15:13.320
So that means on average, you make $5,000.

302
00:15:13.320 --> 00:15:18.320
So that took her LTV to cack from 30 to 1 to 75 to 1.

303
00:15:18.320 --> 00:15:21.320
That means that she can market even more aggressively.

304
00:15:21.320 --> 00:15:23.320
And she can market to the biggest tab.

305
00:15:23.320 --> 00:15:26.320
Many of you have one or two or three different products her offers on the front end.

306
00:15:26.320 --> 00:15:28.320
You're trying to figure out what's the thing I should advertise.

307
00:15:28.320 --> 00:15:30.320
Look at the LTV to cack.

308
00:15:30.320 --> 00:15:34.320
And then start with the thing that has the best LTV to cack ratio.

309
00:15:34.320 --> 00:15:36.320
And then stack behind it everything else.

310
00:15:36.320 --> 00:15:41.320
And then that further increases your ratio of how much you can do.

311
00:15:41.320 --> 00:15:46.320
This is your ratio of how much you can spend to get the customer to make more money.

312
00:15:46.320 --> 00:15:49.320
So many business owners ask me questions that they can solve with math.

313
00:15:49.320 --> 00:15:51.320
Like, this isn't opinion thing.

314
00:15:51.320 --> 00:15:54.320
This isn't like, well, I talked to three mentors and one guy gave me this advice.

315
00:15:54.320 --> 00:15:57.320
And like, this is a math problem, which is why you have to learn it.

316
00:15:57.320 --> 00:16:02.320
And so if you have a stronger LTV to cack, the exception here is if the tam is tiny.

317
00:16:02.320 --> 00:16:05.320
You're total, just a more market number of heads that you can sell.

318
00:16:05.320 --> 00:16:09.320
But most of you who are listening to this aren't even close to saturating your market.

319
00:16:09.320 --> 00:16:12.320
I've sold 100 customers in my market as one million people.

320
00:16:12.320 --> 00:16:14.320
Okay, you don't need to worry about saturation yet.

321
00:16:14.320 --> 00:16:18.320
And so fundamentally, if you've got something that has an ocean of customers,

322
00:16:18.320 --> 00:16:21.320
and you have a crazy amount of what you put in versus what you get out,

323
00:16:21.320 --> 00:16:23.320
you do as much of that as you possibly can.

324
00:16:23.320 --> 00:16:27.320
And then you stack the other things behind it to further increase your leverage.

325
00:16:27.320 --> 00:16:31.320
The last consideration that I'll bring up, which is already factored into LTV,

326
00:16:31.320 --> 00:16:33.320
is the operational efficiency.

327
00:16:33.320 --> 00:16:34.320
So let me explain.

328
00:16:34.320 --> 00:16:36.320
I had a business that we were looking at acquiring.

329
00:16:36.320 --> 00:16:39.320
It was a chain of glass repair.

330
00:16:39.320 --> 00:16:42.320
And they specifically focused on glass work for residential.

331
00:16:42.320 --> 00:16:44.320
And so they had a number of different customers that they worked with.

332
00:16:44.320 --> 00:16:47.320
They had high end, you know, a million dollar plus homes that would have those big glass,

333
00:16:47.320 --> 00:16:52.320
you know, things and weird bathrooms and whatever people do with glass.

334
00:16:52.320 --> 00:16:55.320
One of the partners from that business peeled off and started a chain

335
00:16:55.320 --> 00:16:58.320
only doing one thing in the entire product stack.

336
00:16:58.320 --> 00:17:00.320
And so what he did was he did his homework.

337
00:17:00.320 --> 00:17:05.320
He figured out that shower doors were a product that was very easy to sell.

338
00:17:05.320 --> 00:17:07.320
People, many people wanted it.

339
00:17:07.320 --> 00:17:10.320
There's a huge market for people who just wanted to replace their shower doors and the delivery.

340
00:17:10.320 --> 00:17:14.320
So the cost of goods sold to deliver the door was actually very low.

341
00:17:14.320 --> 00:17:16.320
And so one guy could do five, ten doors a day,

342
00:17:16.320 --> 00:17:18.320
whereas doing the custom glass work might take months.

343
00:17:18.320 --> 00:17:22.320
So even though the ticket was higher, they could productize that service to such a higher degree.

344
00:17:22.320 --> 00:17:27.320
And the LTV to CAC was actually higher even though the average ticket was lower.

345
00:17:27.320 --> 00:17:32.320
And so because of that though, he could turn this into a machine that he could repeat again and again and again.

346
00:17:32.320 --> 00:17:35.320
And I had the same conversation with somebody who was in the pool design business.

347
00:17:35.320 --> 00:17:37.320
He said, well, I designed commercial pools.

348
00:17:37.320 --> 00:17:38.320
I designed resort pools.

349
00:17:38.320 --> 00:17:41.320
I designed residential pools and I designed modular pools.

350
00:17:41.320 --> 00:17:43.320
And I said, okay, how hard is it to do all these?

351
00:17:43.320 --> 00:17:45.320
And he's like, well, they're all kind of hard.

352
00:17:45.320 --> 00:17:50.320
But these ones, the modular pools are the ones that like I could do easily because it's only like six or seven variables

353
00:17:50.320 --> 00:17:51.320
and you just kind of plug them together.

354
00:17:51.320 --> 00:17:53.320
And I was like, okay, how is the margin on that?

355
00:17:53.320 --> 00:17:55.320
He's like, well, the margin is good there.

356
00:17:55.320 --> 00:17:59.320
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.

357
00:17:59.320 --> 00:18:02.320
And I was like, okay, are there more people going by modular pools than resort pools?

358
00:18:02.320 --> 00:18:04.320
And he was like, yeah, okay.

359
00:18:04.320 --> 00:18:06.320
Now we're starting to talk about something that looks interesting.

360
00:18:06.320 --> 00:18:07.320
And so he was like, what do I do?

361
00:18:07.320 --> 00:18:09.320
And I was like, well, this is a math problem.

362
00:18:09.320 --> 00:18:12.320
You have something that has a higher LTV to CAC.

363
00:18:12.320 --> 00:18:13.320
You have a higher TAM.

364
00:18:13.320 --> 00:18:16.320
And it's something, and this is just side benefit, it's faster.

365
00:18:16.320 --> 00:18:18.320
So you have a way faster loop.

366
00:18:18.320 --> 00:18:20.320
And you can productize this to a much higher degree,

367
00:18:20.320 --> 00:18:24.320
whereas all of this stuff is custom and one off stuff, which makes it very, very difficult to scale.

368
00:18:24.320 --> 00:18:28.320
Many of you have a big resort thing and a modular pool.

369
00:18:28.320 --> 00:18:32.320
Many of you guys have custom glasswork in the house or a shower door.

370
00:18:32.320 --> 00:18:36.320
You want to find the shower door in your business that everyone immediately understands.

371
00:18:36.320 --> 00:18:38.320
They can come in that's really cheap.

372
00:18:38.320 --> 00:18:39.320
Many people want it.

373
00:18:39.320 --> 00:18:40.320
You can deliver that value quickly.

374
00:18:40.320 --> 00:18:43.320
Now, some of you are like, well, I'm not passionate about shower doors.

375
00:18:43.320 --> 00:18:45.320
The questions will game you want to play.

376
00:18:45.320 --> 00:18:47.320
Listen, there's tons of people that are out there that say like, follow your passion, whatever.

377
00:18:47.320 --> 00:18:49.320
In my opinion, this might be contrary.

378
00:18:49.320 --> 00:18:52.320
Business at the highest levels all the same.

379
00:18:52.320 --> 00:18:56.320
So if you succeed at your passion to a high enough degree, your business,

380
00:18:56.320 --> 00:18:59.320
and what your day-to-day will look like, will almost entirely be the same.

381
00:18:59.320 --> 00:19:02.320
You're going to be having a team of people who reports you.

382
00:19:02.320 --> 00:19:03.320
You're going to have a head of sales.

383
00:19:03.320 --> 00:19:04.320
You're going to have a marketing.

384
00:19:04.320 --> 00:19:05.320
You're going to have a legal.

385
00:19:05.320 --> 00:19:06.320
You're going to have IT.

386
00:19:06.320 --> 00:19:07.320
You're going to have finance.

387
00:19:07.320 --> 00:19:08.320
You're going to have some ops.

388
00:19:08.320 --> 00:19:09.320
Maybe some tech, whatever.

389
00:19:09.320 --> 00:19:11.320
All those people are just going to roll into you.

390
00:19:11.320 --> 00:19:15.320
And so whether you're selling books or you're selling pools or you're selling shower doors,

391
00:19:15.320 --> 00:19:17.320
you're selling marketing agency services.

392
00:19:17.320 --> 00:19:20.320
If you succeed, taking to a natural end, you're going to end up in the same boat.

393
00:19:20.320 --> 00:19:23.320
So I'd recommend starting with the one that has the highest chance,

394
00:19:23.320 --> 00:19:24.320
likely it of getting there.

395
00:19:24.320 --> 00:19:28.320
Because otherwise, what you don't want to have happen is have your passion turn into work.

396
00:19:28.320 --> 00:19:31.320
So what many of you guys don't know is that the first year of gym launch,

397
00:19:31.320 --> 00:19:33.320
my LTV2CAC ratio was 100 to 1.

398
00:19:33.320 --> 00:19:36.320
I spent $100,000 and made $10 million back.

399
00:19:36.320 --> 00:19:38.320
And yes, it was that insane for me too.

400
00:19:38.320 --> 00:19:41.320
A lot of the wealth that I've been made has made in these punctuated periods of time

401
00:19:41.320 --> 00:19:44.320
when my LTV2CAC racers were absolutely absurd.

402
00:19:44.320 --> 00:19:47.320
And so when you have one of those things, and if you do crack this code,

403
00:19:47.320 --> 00:19:52.320
I highly recommend Jam as much as you possibly can through that.

404
00:19:52.320 --> 00:19:55.320
Through that machine, you think it's going to be illegal,

405
00:19:55.320 --> 00:19:57.320
because you're making so much money.

406
00:19:57.320 --> 00:19:59.320
And that's okay, it's normal.

407
00:19:59.320 --> 00:20:01.320
Just keep pushing as hard as you can.

408
00:20:01.320 --> 00:20:03.320
Let's talk about how to improve it.

409
00:20:03.320 --> 00:20:05.320
So I've talked briefly about the LTV stuff,

410
00:20:05.320 --> 00:20:07.320
which for the most part is going to be decreasing turn, increasing price.

411
00:20:07.320 --> 00:20:09.320
Those are the things that are going to increase LTV.

412
00:20:09.320 --> 00:20:11.320
And having additional cross cells and upsells.

413
00:20:11.320 --> 00:20:14.320
I'll just give you the highlight reel of how to improve that.

414
00:20:14.320 --> 00:20:15.320
You can increase the price.

415
00:20:15.320 --> 00:20:17.320
You can decrease the cost of delivery.

416
00:20:17.320 --> 00:20:20.320
You can get people to buy more times.

417
00:20:21.320 --> 00:20:23.320
You can cross sell them additional things.

418
00:20:23.320 --> 00:20:25.320
So that's like if you buy a burger, you buy fries.

419
00:20:25.320 --> 00:20:28.320
You can upsell them a better version of the thing.

420
00:20:28.320 --> 00:20:31.320
So instead of this burger, you get a Surloin or Wagyu burger.

421
00:20:31.320 --> 00:20:34.320
You can sell a higher quantity of that, one burger to two burgers.

422
00:20:34.320 --> 00:20:38.320
You can down sell them, turning a no sale into a sale.

423
00:20:38.320 --> 00:20:40.320
So they would have been a zero.

424
00:20:40.320 --> 00:20:43.320
Instead of you get a junior whopper, you get a smaller burger.

425
00:20:43.320 --> 00:20:47.320
Or you go from a Surloin burger to a mystery meat burger.

426
00:20:47.320 --> 00:20:48.320
And so that's the down sell.

427
00:20:48.320 --> 00:20:54.320
That gives you more, better, smaller, worse, cross sell different,

428
00:20:54.320 --> 00:20:59.320
more number of options that you sell, increase the price, decrease the cost of goods.

429
00:20:59.320 --> 00:21:01.320
And you can do that with any product you have.

430
00:21:01.320 --> 00:21:05.320
If I sell iPhone cases, I can increase the price of this case.

431
00:21:05.320 --> 00:21:10.320
I can become more efficient with the manufacturing to decrease the cost of my delivery.

432
00:21:10.320 --> 00:21:15.320
To make this case, I can cross sell a wallet that tax onto this.

433
00:21:15.320 --> 00:21:19.320
I can increase the likelihood they buy another case in six months by trying to say,

434
00:21:19.320 --> 00:21:22.320
hey, do you want to have different color cases so you can do them by mood?

435
00:21:22.320 --> 00:21:26.320
I can increase the number of cases, say, hey, do you want a spare case?

436
00:21:26.320 --> 00:21:31.320
I can increase the quality of the case and say, this is a metal case versus a plastic case.

437
00:21:31.320 --> 00:21:33.320
I can make this a cheaper case.

438
00:21:33.320 --> 00:21:36.320
And what I could do in terms of the quality of the material,

439
00:21:36.320 --> 00:21:39.320
or I could sell fewer units if I had that case.

440
00:21:39.320 --> 00:21:43.320
Every product that exists on the marketplace, you can find a better version,

441
00:21:43.320 --> 00:21:47.320
a more version, a cheaper version, a fewer version, a cross-sold version,

442
00:21:47.320 --> 00:21:51.320
you decrease the cost of goods, you get them to buy more of them or you increase the price.

443
00:21:51.320 --> 00:21:53.320
Those are the ways that you increase LTV.

444
00:21:53.320 --> 00:21:56.320
And so if you want to improve your ratio, that's your homework for this video.

445
00:21:56.320 --> 00:21:59.320
And you can show this video to your team and you have to check off those boxes.

446
00:21:59.320 --> 00:22:04.320
Okay, if we did have our book, how do we make this book make us more money?

447
00:22:04.320 --> 00:22:06.320
Well, I can raise the price of the book.

448
00:22:06.320 --> 00:22:09.320
I can try and buy volume of printing so that I can drive down the cost.

449
00:22:09.320 --> 00:22:14.320
I can spread out the books between three different warehouses so that I can have cheaper shipping prices

450
00:22:14.320 --> 00:22:16.320
because it's closer to my customers.

451
00:22:16.320 --> 00:22:19.320
So those would be the first two, price and the cost of goods.

452
00:22:19.320 --> 00:22:21.320
I can cross sell an additional book.

453
00:22:21.320 --> 00:22:24.320
I can try to get somebody buy more of this book.

454
00:22:24.320 --> 00:22:26.320
I can't really get someone to buy less of this book.

455
00:22:26.320 --> 00:22:30.320
I could have a booklet or a summary version of the book that I could choose to sell.

456
00:22:30.320 --> 00:22:33.320
That would give me a worse or inferior version of the book.

457
00:22:33.320 --> 00:22:35.320
In terms of decreasing quality, if I sold a number of units,

458
00:22:35.320 --> 00:22:38.320
instead of selling a three pack, I'd down sell a one pack.

459
00:22:38.320 --> 00:22:43.320
And so each of these, you can look at any product through these lenses and think is through each of those,

460
00:22:43.320 --> 00:22:48.320
which of these is the easiest for us to immediately implement within our business that doesn't create operational drag.

461
00:22:48.320 --> 00:22:50.320
Me writing a second book, probably a lot of work.

462
00:22:50.320 --> 00:22:53.320
Me asking people to buy a second book, much less work.

463
00:22:53.320 --> 00:22:55.320
Now, let's talk about decreasing the other seconds.

464
00:22:55.320 --> 00:22:56.320
Remember, this is a ratio, right?

465
00:22:56.320 --> 00:23:01.320
And so you could not change anything about your LTV and still massively improve the ratio by decreasing CAC,

466
00:23:01.320 --> 00:23:02.320
your cost to acquire customer.

467
00:23:02.320 --> 00:23:03.320
And so what do you do here?

468
00:23:03.320 --> 00:23:06.320
So CAC is a funnel, right?

469
00:23:06.320 --> 00:23:10.320
And so in order to decrease CAC, it's about efficiency.

470
00:23:10.320 --> 00:23:12.320
And so advertising always works.

471
00:23:12.320 --> 00:23:15.320
You always reach people when you input something into the system.

472
00:23:15.320 --> 00:23:17.320
If you make a post, you reach people.

473
00:23:17.320 --> 00:23:20.320
If you were to spend a billion dollars, you could reach everyone on earth, right?

474
00:23:20.320 --> 00:23:23.320
The idea is simply, how efficient are you with that dollar?

475
00:23:23.320 --> 00:23:28.320
And so with CAC, everything is a percentage off of 100%.

476
00:23:28.320 --> 00:23:31.320
So you start with an advertisement reaches 100% of people.

477
00:23:31.320 --> 00:23:35.320
And then a small percentage of those people click or take the first step.

478
00:23:35.320 --> 00:23:43.320
From there, you have a percentage of people that schedule, certain percentage of people that show, certain percentage that buy, certain percentage that then upsell, whatever.

479
00:23:43.320 --> 00:23:52.320
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,

480
00:23:52.320 --> 00:23:57.320
or you improve the efficiency after you've paid for the eyeball to increase the likelihood that a person buys.

481
00:23:58.320 --> 00:24:04.320
In CRO, just like, so conversion optimization, just like LTV, oftentimes there isn't a silver bullet.

482
00:24:04.320 --> 00:24:09.320
I would say the only thing that's the closest thing to a silver bullet in the CAC world is nailing your offer.

483
00:24:09.320 --> 00:24:13.320
Nailing what thing you're going to package together that you can put out the marketplace that everybody wants.

484
00:24:13.320 --> 00:24:24.320
I'll give you an interesting moniker 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 I can.

485
00:24:25.320 --> 00:24:32.320
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.

486
00:24:32.320 --> 00:24:36.320
You're often working with smaller percentages at the onset and bigger percentages later.

487
00:24:36.320 --> 00:24:42.320
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% click through rate.

488
00:24:42.320 --> 00:24:47.320
Well, me having a better ad might get a 3% click through rate.

489
00:24:47.320 --> 00:24:53.320
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%.

490
00:24:53.320 --> 00:24:59.320
There's nothing that's going to take my close rate from 35% to 105%. Like it's not going to happen.

491
00:24:59.320 --> 00:25:09.320
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 a car customer.

492
00:25:09.320 --> 00:25:11.320
I can have a greater impact from the front to the back.

493
00:25:11.320 --> 00:25:17.320
I'll make one one tiny pro tip on this, which is that I in general work front to back for CAC.

494
00:25:17.320 --> 00:25:24.320
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%.

495
00:25:24.320 --> 00:25:29.320
Well, then I do see that I have a 12X there that I can go get. It's just not often.

496
00:25:29.320 --> 00:25:37.320
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.

497
00:25:37.320 --> 00:25:45.320
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.

498
00:25:45.320 --> 00:25:51.320
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 jailflow at acquisition.com.

499
00:25:51.320 --> 00:25:56.320
I have a really good pulse for what it costs to get a small business owner for an SCI agency.

500
00:25:56.320 --> 00:26:01.320
I have a pretty good pulse for what it costs to get somebody to buy a $99 a month software package.

501
00:26:01.320 --> 00:26:05.320
I have a pretty good idea of what it costs to sell someone into a franchise.

502
00:26:05.320 --> 00:26:16.320
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.

503
00:26:16.320 --> 00:26:19.320
So even if you have a novel business, you're still selling the same person.

504
00:26:19.320 --> 00:26:24.320
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.

505
00:26:24.320 --> 00:26:27.320
Now the variable will be what that person's worth to you, which is the LTV.

506
00:26:27.320 --> 00:26:30.320
But CAC is much less variable between different players.

507
00:26:30.320 --> 00:26:38.320
And so the reason that some businesses stay around forever and others don't is that the CAC between the biggest businesses is oftentimes about the same.

508
00:26:38.320 --> 00:26:45.320
The difference is how much LTV they've been able to stack and that is what creates that long-term competitive advantage for them.

509
00:26:45.320 --> 00:26:52.320
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.

510
00:26:52.320 --> 00:26:55.320
I'd encourage you to rewatch it or re-listen to this if you're listening to it.

511
00:26:55.320 --> 00:26:58.320
You have to be able to breathe this stuff. This has to be your first language.

512
00:26:58.320 --> 00:27:01.320
If you want to get in business, this is the language of business.

513
00:27:01.320 --> 00:27:06.320
Your ability to conceptualize ideas is directly proportional to your vocabulary within a given domain.

514
00:27:06.320 --> 00:27:14.320
I create frameworks that people find simple because I'm fluent in the language.

515
00:27:14.320 --> 00:27:20.320
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.

516
00:27:20.320 --> 00:27:26.320
What is the difference between selling a book and selling an iPhone and selling SEO services and selling a franchise?

517
00:27:26.320 --> 00:27:29.320
Can you apply LTV to CAC to investing?

518
00:27:29.320 --> 00:27:36.320
Interesting. What's your cost to buy a company? What do you make on that company over the lifetime?

519
00:27:36.320 --> 00:27:42.320
Interesting. It's just chunked up at another level where the product and the customer itself is really into business.

520
00:27:42.320 --> 00:27:46.320
So this principle applies at all levels of business.

521
00:27:46.320 --> 00:27:53.320
The more you embrace 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.

522
00:27:53.320 --> 00:28:01.320
Understanding that this is the ratio that drives the business means that you're going to ladder up the initiatives and the activities that you do in the business to drive one of these two sides.

523
00:28:01.320 --> 00:28:08.320
If what you're doing is not getting you more customer cheaper or making those customers worth more, then you are probably wasting your time.

524
00:28:08.320 --> 00:28:18.320
If you're listening on the podcast, tag me on Instagram with which of those eight things sell more, sell better, sell less, sell fewer, cross sell, decrease cost of goods, increase price.

525
00:28:18.320 --> 00:28:25.320
Which of those are the ones that you will use or can use easily in your business tomorrow. You can tag me on on the Graham.