James: James Schramko here with Kory Basaraba from GrowFastMarketing.com. Hey, Kory.
Kory: Hi, James.
James: Kory, what is the most important number to know if you’re going to grow your business?
Kory: Well, for me in my world, when you’re trying to buy traffic on Facebook, or Google or YouTube, the number you have to know is how much you’re willing to spend to get a new customer. We call it your acceptable CPA or acceptable cost per acquisition. And you have to know what that number is because everything you do, all your decisions you’re going to make around your ad spend are going to rely on that number.
James: So, in short, if you know that number, then you’ve got a target to work for. And I suspect if that number is bigger than your competitors’, that gives you an advantage in the marketplace, and –
Kory: Hundred percent.
James: I also expect for some businesses, they’re going to go into a loss in the first part of their sales process where they’re happy to lose money, knowing that some part of their sales or marketing sequence down the track is going to recoup that and then add an extra profit. So there’s plenty of companies out there who you’re competing with, who can spend more on the campaign than you can and they’re just going to outbid you. And I suspect that’s why costs are rising, as the bigger players are waking up, you know, the Sleeping Giants are switching on, Oh, let’s put a million bucks into Facebook this month, then they’re just going to drown out the little players, right? So we have to be pretty nimble with this.
Now, that’s a different number you’ve mentioned, cost per acquisition, than the lifetime value of a client which is another number that we know we need to know, right? But there is some correlation between the two, I imagine?
Kory: Hundred percent. You want to know what your lifetime customer value is. And you also want to understand this kind of shorter-term is just the difference in timeframe. So you want to know how much you can afford to spend, let’s say over on day one or 14 days or 30 days, how much you’re willing to invest to acquire that customer and that number will be determined by what your customer value is over time.
James: So let’s just briefly talk about how we calculate that. So working with the lifetime customer value first. Now that’s called a number of different things CLV, LCV, whatever you want to call it, it’s what is the customer worth to you over time. Quick calculation on that, how would you work that out?
Kory: Well, you want to look at your actual shopping cart data and see what are your customers worth. Go look at the last hundred customers, the last thousand customers depending on how big your business was the last 10 customers and look at how much have we made from each of these customers. You take your total revenue, divided by the total number of customers and you’re going to end up with a number that would represent your first pass at lifetime customer value.
James: That also might be your revenue per customer. So, one thing to check out is the profit margin. So, for example, if your customer is spending $5,000 with you, but you have a 50% profit margin to run your business, you might not want to go on two and a half thousand dollars unless you want to lose money on that customer, right? But again, it depends on your goal.
Some companies, they want to grow their database. Twitter is probably one that comes to mind. They might want to have a lot of users but not necessarily making a lot of money. Because they might have different types of funding other than where the customer is, because the customers up until they ran ads, no one was paying for anything, just investor money. But for normal businesses like ours, information products, eCommerce businesses, we actually need to make the money on the way through. We’re not always too excited about getting investment money, or shareholders and venture capital startups and all that stuff. So let’s say we’re a normal business.
So we’ve worked out what the customer is worth to us over time and take into account a profit margin, we could probably spend a little bit less than what they’re worth to us and still make a profit. So I guess that might be an indicator as to what we might be prepared to spend?
Kory: Absolutely. The point your raising is it takes some work. You have to spend some time on this and really think about it. It’s not just a number of pull out of thin air. Look at your information, come up with a real number that you’re willing to spend, and if they said, Hey, if I dropped a thousand new customers in your business tomorrow or 10 customers and it cost you this, would you be okay with that? And it’s that conversation and looking at some of your data that really gets you on to that number, but it’s important you don’t skip it.
James: So that’s really the golden key that unlocks everything. Because if you can say, I can afford to spend $500 to get a customer then you can take into account, okay, you could spend X dollars per lead at X conversions results in X number of customers that gets me this number. Hey, we’re in the budget, drive it home, let’s crank it up. And I guess it’s also worth noting for a lot of businesses, it’s going to take them 60 days until they get this money back. So the timing issue is a significant one.
You need to bankroll that first group of prospects to see what comes out and I imagine a lot of people run out of confidence or courage in that period and then switch it all off. And then by the time the cohort arrives, that’s when you got to look back. Oh, what did we do 60 days ago to cause these sales today? And when you turn it on, guess what? It’s another 60 days until it starts. So the stoppy-starty nature of it can also get people.
So it’s good if you can have a little bit of budget, try a few different things, but you have to know your data. And this is a common theme we’re coming out with over and over again. If someone doesn’t know what they should be measuring, could they get in touch with you Kory and find out what they’re missing?
Kory: Absolutely, yeah. You can go over to GrowFastMarketing.com and find the contact information and just send me an email. That’s fine.
James: Thank you so much for sharing. It’s always a pleasure. And I’ve got a few more questions to ask you in the next video.
Kory: Alright, next time around. Thanks, James.
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