8. The Three Levers of CFA | $100M Lost Chapters Audiobook

The 3 Levers of CFA. So you're telling me we can get paid to make money? Sign me up. Young me to older me. Lost Chapters Author Note. Same thing here. Too many math questions from the sample readers and everyone got scared with math, so I ended up cutting it. But I love this chapter. To grow a business, you can either get more customers or make them worth more. To grow our business, we do both. But there's one more variable I care about. Speed. In other words, I don't just care that a business grows, I care how fast it grows. And if we're smart, we can have it all. We get more customers, we make them worth more, and do it fast. And those three elements create the three levers of CFA. Number one, get more customers, aka lower the cost of acquiring customers, lower CAC. Number two, make them worth more, aka increase lifetime gross profit, increase LTGP. Number three, do it fast, aka decrease payback period. Decrease PPD. CFA lever 1: Get more customers, aka lower the cost of acquiring them. To get more customers, you need to spend more on advertising or lower how much it costs to acquire a customer . And the lower it is, the better. You find it by adding the money you spent on advertising, sales, and their supporting activities divided by the number of customers you get. Example: You pay a content producer $10,000 a month. Each month you acquire 10 new customers from the content they make. CAC equals $10,000 divided by the 10 customers acquired equals $1,000 per customer. But how much money you can spend to acquire customers depends on how much each customer is worth. The more a customer is worth, the more customers we can get. So CFA Lever 2: make them worth more, a.k.a. increase lifetime gross profit. So to get more customers, we spend more money on advertising. But to spend more money on advertising, we need to make more money from the customers we have. Which brings us to gross profit, GP. This is how much you make from a customer after factoring in the cost of giving them the thing they bought. You find it by subtracting the price customers pay for the thing minus the cost of fulfillment. The higher it is, the better. Product example: I sell a widget for $100. It costs me $20 to make and ship the widget to the customer. So gross profit equals $100, the price, minus $20 of the cost, which equals $80. Service example. You sell 10 service packages at $1,000 each. You pay one employee $2,000 to service those 10 packages. Total gross profit equals $10,000 sold minus $2,000 of cost, which equals $8,000. The gross profit per customer is now $8,000 divided by the 10 customers, which equals $800 bucks. If we make more money from each customer, we can spend more to get them. So we want to make as much money as we can as fast as we can. CFA Lever 3: Do it fast. Decrease payback period. Lowering CAC and raising GP doesn't happen in a vacuum. It happens in time. If a customer pays for themselves today, you get another one tomorrow. If a customer takes 30 days to pay for themselves, you can get another one in 30 days. Which would you prefer? The first one. Main reason: you can go 30 times faster. In the real world, speed matters. The technical term for this is payback period. In other words, how long it takes for your gross profit from a customer to exceed the cost you spent to acquire them. Math-wise, it's when GP is greater than CAC. Bottom line: the rest of this section shows you how to make GP as high as possible and CAC as low as possible, as fast as possible, aka short payback period. The lower your CAC, the faster you break even. The higher your GP, the faster you can break even, get cash flow, and grow. And we do both fast.