LTV zu CAC: Die Kennzahl, die über dein Business entscheidet

0:00LTV to CAC. So for those you don't know, lifetime value, how much a customer spends with you, how much gross profit you make over the entire lifetime of the customer. CAC is cost of getting that customer in the door. So in plain speak, that's how much money does it cost you to make more money. CAC is how much money it cost you. Lifetime gross profit or lifetime value is how much you make. Now a very traditional rule of thumb here in the software world was 3:1. And this has been, you know, pushed all over the internet. And many businesses took that because all these big tech giants and very, you know, huge company CEOs talk about 3:1 as though it's a rule of law. And I want to say it is true under specific conditions which only apply to like 5% of businesses. So let me give you the other scenarios and what I consider to be ideal for that. So 3:1 and this relates to I don't have anything drawn. Hold on. I'll draw this for you guys so this will make more sense. So, let's imagine.

0:59Do we have overhead cam on? Okay. You guys digging this? All right. So, we have our attraction, right? How we get people in the door. That's number one. We have our conversion, which is how do we actually get them to give us money? Number two. And then number three, we have our delivery.

1:22So if we were to use a binary scale of uh zero or one zero or one zero or one then we would say if we have zero basically of unlimited scale I put zero operational drag for attraction conversion and delivery what is that probably a SAS product right you can run ads to a checkout page and then the SAS the software does the delivery right all the way zeros all across and so for that when you have all zeros 3:1 between how much it cost you to to get a customer and how much you make is an appropriate uh uh ratio. But what if one of these three things includes a human. So let's give a simple example.

2:05You run ads to a checkout page and then you have somebody who does delivery. You have a human being who does delivery. Well, as soon as that occurs, or said differently, maybe you run ads to a salesperson and then you have some sort of lighter touch delivery on the back end. In any of these scenarios, I want to now have six to one. Sorry, this is a one. I want to have six one. Now, why would I double this? So, let me explain.

2:34As soon as you add a human in the loop, as soon as you add a human to the system, you're going to have lumpiness or inconsistency. So, what do I mean by that? If let's use the salesperson example. You're running ads to a salesperson. As soon as you get to a certain point where you've capped that salesperson's calendar, what do you have to do? You have to hire another salesperson. And what happens when you hire a new salesperson? That person's not going to be as good as the main person, especially right off the bat and maybe even ever. And so, we have to build into the business padding so that we can incur the cost of trading somebody up and also having them suck.

3:08Because if we're at six to one uh with our one guy or rather if we were at 3:1 with one guy selling as soon as the next guy comes in we're below 3 to one, right? And so we have to be at six to one so that when that next person comes in, we have some we have some we have some cushion. We got a little cushion for the cushioning if you will. Uh that that gives us again padding. I'm keep saying padding. So you'll probably hear padding a bunch of times, but that's what it is. Now let's say that you've got two of these three. So now let's say we're uh we're running ads and we have a we have a manual person who's taking the phone call closing and then the delivery is also service. This is honestly this is many of you guys is that you are in service businesses and this like this is what it is. Okay, when I'm in this situation I want 9 to1. Now the reason this is so difficult for people to wrap their heads around is that most people want to scale when their business model has not been nailed yet. And so that's why we say nail it then scale it. And so people get ahead of their skis, they overexpand, they they bring on, you know, they try to open more locations or bring on more reps too fast because their ego is tied to the number rather than looking at the fundamental economics of their business and saying, is this ready to scale?

4:20Because if I had the pick of like I would rather scale really fast for three years and then realize the business is broken or spend three years just nailing all my nailing the model, getting all the metrics right and then scaling it, I would obviously pick the second one. But the thing is is people if I say that to you, most people be like, "Well, of course I pick the second one." But people don't behave that way. And so what you say you would do versus what you actually do are typically very different. And so because now I have two humans in the loop, I'm going to have uh inefficiencies on delivery when I bring in a new rep or a new technician or new whatever who's not going to be as good, not as not as effective as the other people. I got to be able to eat that. If I have a bad uh salesperson when they come in, I'm going to have to be able to eat that. And so now I got to be at nine to one to have the cushion to scale. And then finally along the same line of thinking, if I have three people all the way through, I've got humans who are doing the attraction, humans who are doing the conversion, and humans who are doing the delivery, then I want to be at 12 to one. All right. Now, I want to put this in perspective for you guys.

5:20One of the gifts that I could hopefully give is frame shifts. Is a change of perspective. So [clears throat] let me know in the chat the first year of gym launch when I started running ads. Okay, so we had automated here and I would say we were like probably a.5 here. It has half media um but we had half kind of like some support reps that help with tech stuff and then this was human-based. All right, we had a phone sales team. What do you think my LGV to CAC ratio was? Let me know in the chat.

5:515 to one, 10 to one, 4:1, 6 to1. What do you guys think? What do you guys think? Let me see some numbers. Let me see some digits. 6:11, 4:1, 9 to1, 2:1, 30 to1. Liam, nice. 30 to1, 3 to 1, 15 to1. I appreciate the the belief, guys. Our pit 100 to1, you crazy mofo. Uh Ronald, 5 to1, 25 to1, 20 to1. Okay, you guys want to know what it was? [snorts] I'll tell you.

6:26The first year of gym launch, my LTV CAC was 100 to one. I spent a hundred grand and made 10 million. Wild recommend. Uh it was wild, wild times. Okay, now what? How is that how is that possible, right? How is that possible? Most of the money that I've made in my life has happened during these distinct windows of opportunity where there was huge arbitrage between what it cost me to get a customer and what a customer is worth to me. And uh I've had that happen four times in my life. And each of those times have been above 30 to1. And so the reason I'm so adamant about this is that I know because I've had it happen that you have to just keep beating up the system. You have to keep tweaking the money model, which is why I made the book Money Models. You have to keep cranking on this thing until eventually you crack through that lever. And so you see 12 to people like that's crazy. I'm like this is the minimum. And again this is if you want to scale big you can absolutely run a business that does six to1 and you know make a million bucks a couple million bucks a year. Like you can do that. I'm saying if you want to see what the biggest companies in the world have they have absurd LTV to CAC.

7:37Now what is there's only two ways to improve that ratio right? Way one is you drive CAC down to zero because there's only two long-term winning strategies in business. Have extremely low CAC, which means you build massive brand A, or B, you have a product that is viral. Those are the two types of things that great really big companies on the cost side. On the other hand, you have the extremely high LTV side. So, Flickville company, I'll give you an example of each. So, Facebook is a company that wasn't, oh, we have unlimited LTV. No, they have a business where CAC approached zero. And so if you can get CAC to zero, you could figuratively get eight billion people for zero dollars.

8:16And when you do that, even if you make a couple hundred bucks a year on them, you still make a lot of money. On the other hand, you might have a company that's like Salesforce, right? Uh and a company like that, they might make a million dollars or $5 million per year on an enterprise level customer. Now, that customer isn't coming to them for free. Now, they do have some brand of course that's going to offset some of those CAT costs, but there's still going to be huge costs of getting those customers, especially the larger customers with contracts. They have to bid against other CRM, etc., etc. And so, both of those are big companies. The idea is that you have to know what type of company you're going and your winning strategy to scale. And so, to make this extraordinary LTV to CAC ratios, one of these has to approach zero or infinity.

8:58That's the game. So, that's the second rule of thumb. Look at your three steps. Am I zero to one on attraction? Do I have unlimited scale on attraction? So if if you're like, what's an unscalable version? This would be like I do manual outreach. That would be human in the loop versus I run ads or I make content. Conversion here would be checkout page is scalable human uh phone team or sales team in person that has a human. Delivery. If I sell services, I'm going to have humans. If I sell software, I sell media that's going to not have humans. I sell physical products for example, that would still not have humans by my definition. That's the idea. You can see what your LTV to CAC ratios are. You can see where you're at and whether you need to improve them.

9:34Real quick, I'm going to show you the exact 10 stage road map from zero to 100 million plus that less than 1% of companies finish. I've now done multiple times. And so I can say with a lot of confidence that these are the stages as headcount increases that you need to get through. And I broke each of these down by eight different functions of the business. What the constraint feels like, like what are the symptoms of it when you're going through it. And then what steps we actually took to graduate. And we've done this across software, physical products, uh, service businesses, brick and mortar, all of this, and it works. And it's my gift to you. It's absolutely free. And so the link's in the description, but you just go acquisition.comroadmap.

10:10Just enter your info and it'll spit it right back to you. Offering.