Success is Hard Until You Understand This Formula

Sad truth is your business might already be dying and you won't know it. There's one ratio that can tell you the truth, but most owners never run it. I've used it across companies doing $100 million a year to small businesses on Main Street. The formula will determine if your business lives or dies. You can calculate it in 5 minutes, but the formula to make sure you make it better is in this video for you today. Here's the breakdown. I call it AOV. AOV. To CAC. Now, there's something particular about the way we do this today that is different from what everybody else does. But let me explain what these are first. This stands for average order value, what a customer pays you today, and your customer acquisition cost, CAC, what it costs to get you that customer. Here's the thing. The number everybody else tells you in the world to go after is a lie. It's called LTV. And if you rely on LTV, your business is going to starve and die. Why? Because Silicon Valley is going to tell you that a customer who spends on LTV $250, that's over the lifetime that they are with you, is actually worth $2K. The initial amount they pay you is $250, but over their lifetime, it's $2,000. So you're fine with that. You're like, okay, great. What does that mean? Well, I'm going to spend $500 to get them. Don't worry about the fact that I'm going to lose $250 on the first transaction. You'll be fine. That customer will turn profitable in a year. Here's the problem, boys and girls. The data tells the real story, and that is that only 18.8% of e-commerce customers buy again within a year. And the ones who do come back, well, only 50% do it within the first 30 days. Okay. What about 90 days, Codie? That'll be fine. All right. 76% of the— 18% only, remember, who are gonna buy from you again come back in 90. So if your lifetime customer hasn't returned by your 3rd month, well, they're probably never coming back at all. And it's even worse for brick-and-mortar businesses than this. So when you lose money on the sale banking on some imaginary LTV number, it only works if you have what venture capital has, which is millies. For you to literally burn, that's a fire, because you can use all of their money to give back before you ask. But for most businesses, even ours, this is how you would end up bankrupt. So what's the truth? If you go with LTV alone, it equals fake confidence. I instead only focus on average order value, what they buy from you the first time, because LTV was built for SaaS companies, business with no sales team, no cost of goods. You're probably not that, but rarely do they calculate LTV correctly. In fact, you know what's crazy? Most people, and I know this cuz we teach 15,000 people how to grow their businesses, most people when they calculate LTV, well, only 42% of them do it right. 42%. That's a failing grade. So not only on average is LTV not going to be right, but it's wrong even if it is right, because most people don't come back continuously. So if you are like your competitor and your competitor is spending that $500 to get $250 upfront, Mm-hmm. For that supposed golden ticket of $2K in lifetime value, you know what they're actually doing? They're going broke. And you know who's actually making all their money? Mark Zuckerberg. Because they are waiting on a payback that most companies will never actually get from their customers. So instead of all this, I like to focus on AOV. Okay. The ask for AOV is what did the customer pay you today? This is like real measurable money. And so if you're profitable on the first order, you never need a projection to save you. You win even when you mess up. So let's, let's do this math the right way. The right way would be your average order value is $500, let's say roughly, and it costs you about $100 to get a customer. So we got AOV, then we got CAC here. Solid. Now, if we raise that average order value to $1,000 for the same customer, well, you can increase your CAC, right? You can spend $300, you can spend $400. To win that same customer profitably. But instead of actually looking at this, most people are going to play what I call finance arbitrage and try to say, well, if I get $500 the first time, at least 50% of my customers are going to come back and pay again. So I'm really going to get $1,000. The problem is once you start paying this $300 to $400 and you haven't actually increased your average order value, but just your lifetime value, you are now paying for the right to have a customer. Your competitor their prices on LTV will run out of money, hoping that one day will come. Instead, we should focus on the important thing, which is how do you increase the amount of money that people spend with you the first time? AOV. And there's really 2 main ways. These are the big 2 to AOV increase. Option number one, very simple, but nobody does it. Raise your prices. Most business owners in the boardroom where we teach people to buy and sell businesses, when I ask them, when was the last time you raised prices? Do you know what it is? It is usually 24 months. And in fact, a study found that 80 to 90% of all products are priced too low. And I think about that like a reverse Pac-Man, essentially. So this is what you're getting from your customer because this is where you've priced it. And this is what you've missed out on from your customer that they would pay you for the exact same thing. But you are like most people and you haven't raised your prices enough. It's actually mind-blowing how much money owners leave on the table because they use something called market-based pricing. Market-based pricing basically means that you are asking your competitors what they charge, or you're looking at what your competitors charged. And in order to do MBP, typically you're charging about 10% either more or less than your competitors. And this feels safe, right? But what it actually is, it's lazy. It's copying someone else's guess. Why do you think that they know what they're doing any better than you do? The fix is actually something called value-based pricing. And value-based pricing asks a totally different question. How much value in real dollars did I just create for this customer? And what percentage of that am I entitled to? I actually break this entire thing down in my new book. The link is below. So I want to talk about value-based pricing and why this is so good. One reason is, is it has what's called asymmetric upside. So as opposed to being stuck by what your competitors charge, you can always take more. So think about it like this. For our Growth Boardroom, we charge $24K a year to join. It's actually quite cheap for 12 months. It's targeted at established owners looking to grow. Now, if I charge $24,000 for this, how much value do I have to provide to the members? Well, I could go out and compete and say, well, actually, this is really low priced versus $100,000 or $500,000 that McKinsey or Bain would charge you. But instead, I would look at what the average ROI is for my members, return on investments, and I'd say, wow, The average boardroom member grows by $130K a year when they pay us $24K a year. Well, that's interesting because basically that means that the $24,000, every time they tell me $24,000 is expensive, I say, well, show me that math because instead we could actually just be saying that it would be really expensive to make $106,000. Now there's a very easy formula. To determine what your value-based pricing is. So I like to think about it as the value created times 10 to 20% equals your price. And it hands you the answer to the classic objection, it's too expensive. What's my go-to on that? Compared to what? Then show them the value that they're getting at 80 to 90% discount. Again, this is saying, well, I don't know what's more expensive, missing out on $106,000 or paying $24K. If you had the opportunity to give me $24K and I handed you back $106K, $6,000, wouldn't you say that you won that transaction? And it's not just the value they gain, it's what costs them if they don't buy. And this is actually really important, and I talk about this on page 40 in a lot of detail. You can see the value created graphic here, but it's also the reason that this is something most people don't do is you don't have really a pricing problem. What do you actually have? They have a, we don't believe what you're really selling problem, right? I say that your lack of confidence shows up in your prices. We see that consistently. And so we want to think about this cost dynamic as the gap. So what does it cost them if they don't buy? I want you to picture a plumber, right? And he shows up when a pipe bursts in your kitchen at 10:00 PM. He's there 20 minutes. He tightens one thing, he stops the leak, and he hands you a bill for $400. Price that by the hour, you're pretty pissed. You're like, he tightened one wrench and said hi to me, and I showed him where it went. So how does the plumber never allow you to be mad? He goes, oh gosh, so glad that we found this, right? If we hadn't have found this, oh man, I saw this other client, they had mold in their walls. That was a gut shot. It's $150,000. It's great we caught this. Let's actually put some towels down here. This, this floor is nice. If we didn't catch this very quickly, it could warp the floors. That's pretty nice floor. That looks like $5K we'd be pulling this up. And we want to make sure we get your water bill. This could be a couple hundred bucks just in water. In the state of Texas, water is pretty expensive. If we were actually able to make a case that $15K is what that would've cost you, he could've charged you $1,500 and you'd still shake his hand and say, thanks. He just saved you $15,000. This is what we call the bridge. This is the gap between what you do not have and what you now do have thanks to this product or service. So you could argue actually that because this saved you $1,500, this plumber is what? He's underpriced. That $400, even though that was like 10 minutes of his time. So the number should follow the disaster it prevented, or it should follow the opportunity it created, not the minutes it took to prevent it. We don't want to price ourselves based on our input. We want to price it based on their desired outcome. Price to value, not to the market. Most people are not smart enough to do this, and so they don't. And here's the kicker. Raising prices, and I know this is hard to understand, but you can see the compounding math here that will show you raising prices just 1% with no change in volume on an average operating profit jumps 11%. So your operating profit is going to jump 11%, not 1%, from doing a 1% increase in prices. And so the second way to think about this is give your customers more solutions to buy. So if we can't just charge more per hour, I want you to think about what we call increasing And I think about this as a big net, the Luxe surface area or the customer surface area. So if you have your leaky faucet over here, you have that problem, but how could you build a higher tier to solve more problems that person with the leaky faucet could have? Easiest way to picture it is this. Instead of just solving that thing under the sink, why don't you also say, hey, I have a checklist here and this checklist has all the things that could also be wrong if your plumbing's wrong here. You want me to take a look it another 10 minutes, see if there's anything else going on. Okay, now we've increased what? Our average order value because we add another option. What if we say, hey man, I'm so glad that I got here at 10:00 PM for you. Sometimes I can't because I actually have this level of service where we guarantee somebody within 3 hours of a problem, they always get first priority. Do you wanna put yourself on like my premium subscription tier? It's actually just $10 a month to add on top of it. What have we done there? Increased our average order value, plus we've increased recurring revenue. What if I also say, oh, you know what? I have a partner that actually helps the HVAC system, which was one of the reasons your pipe burst. It looks like this HVAC's real old. This thing might not do very well for you. You want me to get him to come out and look at it tomorrow? Oh, you do? Amazing. Great. He's going to give me a referral fee. That's increasing my average order value without even having to do any fulfillment. So do you see how increasing the surface area means we don't even have to find new customers. We just sell more things to the same customer again and again and again. I also like to think about it like the easiest way to get somewhere is not walking, right? If you wanna go to New York, it would take you a long time to walk. You could get there, but some people drive, some people pay first class, and a few will charter a private jet. Now that's just the same destination, but wildly different speed, access, price. Your job is to offer all 3. In that instance, I just showed you how to do a premium. tier. We also talked about how to do a recurring tier. We also, uh, talked about how to do an upsell. We also talked about how to do a cross-sell. We also talked how to do an affiliate sell. There's basically 3 tiers here as a way to think about it. Tier 1 is going to be free slash low cost, right? Tier 2 is going— you're going to pay for speed and depth. And tier 3, little tiny 3, you're going to pay for full access, whatever I want it, whenever I want it. Here's ours. Same customer the whole way up. A business owner who wants to make more profit with less pain. Let me show you how we solve it at 3 levels. All right, we're going to use the same process. So let's say you're a business owner right now and you're in some level of pain. Level 1, Free or low cost would be a book or my free event on September 18th. You can have this as the bottom step. This is kind of cool because this is top of funnel, which means that somebody could learn 15 years of everything I've learned in private equity and advising thousands of owners. I'll walk you through the 12 Ps. I'll help you build a business that doesn't collapse when you go away. I give away $1 million in cash and prizes live, and you can sign up for free. That's tier 1. All right. Tier 2 might be Boardroom. Boardroom is where our advisors personally coach you through a custom growth plan and resources to move faster than they ever could alone. If you wanna talk to one of my advisors who have helped thousands of business owners with their sales, click the link right here. We will get you on a call. And then tier 3, you might say, I'm ready to sell my business. At the top step are people who wanna come into Exit Ready. And basically that's for people who wanna fly private, like they want advisors to help them hands-on to de-risk your business so you can sell it for more and walk away with a big check. One customer, a business owner, 3 different ways, 3 different pain levels. This is really important. Now, in your business, this is on, I believe, page 39 of the book. In here, you're going to really explain how to do these low margin versus high margin products. Now, here's how you build this. In your own business. You start with a free or entry-level offer so good it's almost uncomfortable. This would be our free event. Then you build your second tier for people whose problem is bigger or who want it solved faster. That's the first-class seat on the airplane, right? Once that tier is full, only once it's full, you add a private option, maximum access, maximum done for you, a lot more expensive. Typically, I like these to be like one figure. This could be 2 figures. This is 3 figures plus is how I think about this. This rule that holds it together, every tier actually solves the same problem. You're not trying to solve 3 people's problem. All you're trying to do is equate for faster and faster speed, right? You're letting people who already trust you keep raising their hand because most are never going to climb past tier 1. That's okay. The few who go all the way in, you know, might be paying you hundreds of thousands of dollars a year, and they're the ones that are going to increase your average order value substantially. Now comes CAC, customer acquisition cost, what it actually costs you to get a customer. Everybody chases basically more of these, but what they forget is customers aren't free. Every new one not only has a cost, like it has to be found, convinced, and closed, but eventually it has to be fulfilled on. So I want you to obsess on this customer acquisition cost in a couple unique ways. Okay, so how do we get to this number? I want you to have your complete acquisition spend. This means we're going to include ads, we're going to include marketing, and this is controversial, but it'll save your ass, I promise, sales. And I want you to divide all of that by net new customers. Now, people typically take out sales costs and labor and marketing costs from client acquisition costs. This is not totally normal, but the reason is because these are your real costs. And so when you're actually operating a business, there are a bunch of people doing this on the internet telling you about the right and wrong way to calculate it. In the beginning, you are measuring by cash and are you going to survive another day? So this is the way that we found it's more likely to survive. Here's how this works. If your CAC is more than half your AOV, then your CAC is not at a ratio we like, and we can start to fix it with a few free options. The first lever that we have is organic demand. So before you start saying, well, how can I just lower ad spend? I want you to look at who's already showing up for free. So a lot of times people think about customer acquisition acquisition cost, and it's just way cleaner and easier to look at how much can I spend in order to get a customer back? So if I spend $2, can I get one? That's how everybody thinks about it. You've got search, you've got direct organic, and you've got referrals, your customers sending more people to you. You also have things like partnerships. You also have things like affiliate deals. You might have JV lists. You might have co-branded launches, all built through trust. So I take all of these, basically all of your customer acquisition costs and channels that are not ad spend. Most people think about client acquisition costs as just ad spend to acquired customers. So if I spend $2 on Facebook advertising, do I get, uh, $1 in customers? If I spend $1, do I get $2 in customers? That is one way, but I also like thinking about owned demand percentage. And what do I mean by this? Owned demand percentage equals your organic traffic plus your referrals plus your partnerships, and divide that by your total revenue. That is going to give you a number that tells you, hey, if I stop spending on ads, how much money could I still bring in? What I like to see when it comes to my owned demand percentage is in my companies, because I don't ever want to rely totally on ad spend, when you cross 50%, something shifts. Your growth stops living and dying by ad spend and an algorithm. Like, there's lots of studies that show organic dominant brands run a 41% lower median cash-on-cash percentage than paid dominant brands, with basically an AOV-to-CAP ratio, the thing we were talking about at the beginning, better than double. You know, another way to think about this is the return on investment of SEO was 25% higher on average than ad spend. It's just harder to do. It's harder to find the right team. It's harder to find the right vendor. It's not an immediate payback. It has a longer tail on it than ad spend does. And so most people skip that building organic first isn't just cheaper, it makes you better over the long term. If you think about it as tails, you have ad spend and how long you continue to make money from an ad. Well, it's really only as long as you're running the ad, then the ad dies. It doesn't live anywhere. Customers will never see it again unless you keep paying for it. And then you have content, right? Which content You could create it, but it stays in existence. It might even have an uptick again at some point. Same thing with search or SEO. Yes, you create it once, but if you're doing it right over time, it's going to continue to have a much longer tail. And so this is how you avoid spend at the beginning, and it's also how you learn how to create demand without having to buy it every single day. We call this non-transactional demand. So I believe in getting these skills first, and your spend Your ads become rocket fuel later. The second lever, obviously we know more of, is paid demand, but not all acquisition spend behaves the same way. I split it into basically 2 numbers, return on ad spend and return on content spend. So ROAS and ROCS. So ROAS, simple. This is basically your ad spend divided by revenue from that ad spend. Give a dollar to Zuckerberg, track what comes back. Most people know this number roughly, except ROAS is actually dangerous. Because with paid ads, you're renting attention. So the second that you stop putting the coins in the slot machine, you have to stop paying. And tomorrow you're gonna pay full price to reach that same human, sometimes even more. In fact, a lot of times more. So if we think about it this way, Meta's average CPM, do you know how much, you guys, it's up since 2020? So in 2020, Meta's average CPM is up since then roughly 89%. The CAC across e-commerce has climbed roughly 60% over 5 years according to a bunch of benchmark analyses. Not to mention one algorithm change and your CAC can triple. You know, this happened to a company in our, our boardroom over 18 months. CAC went from $50 to like $150 because they only sold through ads and it became a more competitive market. When more competitors come into a market, what happens? Well, it's more expensive for whatever you're doing. And so even when ad spend is working, the ceiling is lower than people think because if you think about it this way, the average Facebook ad account at roughly, let's call it a 2-to-1 return, which you think sounds great, right? Maybe 3-to-1 on a great month. With anything under 2-to-1 is usually unprofitable once you add in all the costs because you don't have your costs of goods sold. You don't have your labor on top of this. You just have your top line, your total revenue or top line revenue, right? And so it's only going to go up from here because we've seen on all platforms, the longer they exist, as long as there are still users on them, the more expensive they are. Now I wanna talk about ROCS for a second. The fix to continuous ad spend increase is take the same dollar and put it towards content instead. With content, you own the attention. So a follower, a subscriber, an email address, you can reach that person next month, next year for free, as long as they stay in your ecosystem. That's ROCS. In my mind, it measures a relationship, not a rental. And here's how you calculate it. First, what is your audience value and what one follower is worth in a year? Okay, so let's break down how to get to audience value, the first thing in ROCS. If we want to get to audience value, we've got to go and know our revenue per channel, which is really important, divided by the followers we have on that channel. That tells us what an individual member of that audience is worth. You can also get more fancy and you can multiply this by frequency, so how often you actually show up— emails, posts, videos, Then you can also multiply it by lifetime, like how long do they stick around on your email list or in your follower base? So ROX equals audience value times frequency times lifetime, which equals your subscriber economic value, right? And this is all broken down because I know this is pretty tactical for you guys. This is all broken down Very explicitly on page 203. And you can break down how you get to audience value, how you get to frequency, how you get to lifetime value. And I'm even so obsessed with this that I break down real numbers that we did in our company and how a few other companies do it as well. Now, I want you to divide that by what you spend making content. This gets you to your ROCS number. The channel with the highest documented return on this logic What do you think it is? Of all the ones, you've got TikTok, you've got Facebook, you've got Instagram. It's email. Email is always the king, even though we hate getting spam in our inboxes. The business average is about $36 to $42 for every $1 spent. This is data from Litmus and DMA. The most recent that I saw was probably 2022 data. So here's what my rocks looked like in my own media business 3 years So year 1, we made over $3 million in revenue on less than $10,000 of content spend. So what is that? That's 300 to 1. Year 2, we did about $5 million against $200,000. So that's 25 to 1. Year 3, $7 million on roughly $1 million invested in content. So 7 to 1. Now compare that to the paid ad running 2 or 3 to 1 on a good month, and I think you get why owning attention beats renting it almost every single time. And I guess the last piece I'd say here is like, Which channel when is really important. If you're under $250K in revenue, I want you to pick one channel and master it. From $250K to $1 million, you can add a second. So if you started organic, test paid. If you started paid, build something you own. From $1 million to $5 million, run 2 or 3 well, but at least one owned and one earned. Paid only if margins support it. And then past $5 million, You can go omnichannel, but keep— I really like to keep a majority of the budget, even for companies doing $20, $30, $50 million on the 1 or 2 channels that are already proven. I really see until you get up to $50 million plus, you're not having huge ad spend across all channels. Now, the way that I break this down is in detail on page 217, so you guys can see the numbers yourself. I will also break this down for you and give step-by-step live at the event. Here's the problem. Most owners skip straight to the last stage on day 1. That's how a $200,000 a year business ends up with a $200,000 a month ad bill and no idea why it's not working. Okay, so here's the machine. We're going AOV to CAC is 3 to 1. If the average order value is $100, keep CAC around what? $30. 33. But here's the thing, you're gonna run this every single week because your business doesn't break all at once. It breaks bit by bit when the CAC creeps up just 5% at a time. But now you have the golden rule. By the way, this is unhinged. Do you wanna learn about LTV, CAC, and AOV live? I'm giving away $1 million in cash and prizes. I'll show you how you can do that profitably.