Why small businesses get ADDICTED to Advertising (and NEVER become profitable)

So here's why small businesses get addicted to marketing and spending money on ads and never become profitable.

Numbers don't lie. So this equation of new revenue divided by your attrition is going to be the thing that determines exactly how big your business will become before it stops growing. Now at that stage of business, there's two things you can do to affect the equation and make sure you continue to grow the business. One, you can improve the top line revenue and pump money into marketing. And if you pump money into marketing, you will increase the amount of new revenue that's coming in every month, every week, every year, et cetera. Or you can also increase the customer service side of the business and improve the attrition, the retention side of the curve. But I want to talk about the first part because that is the scary thing that small businesses do to keep growing their business. But it's an extremely unprofitably and is why most businesses will not be successful or become profitable. Here's the thing, A business will hit that point where their new revenue growth equals their attrition. And when that happens, the business stops growing. So what do they do? Well, I need to go get more customers. I want to keep my accelerated growth, 50, 60, 70% a year, year over year, just trying to grow my business. Well, that, that slows down. I've got to spend more money on marketing and generating more top line revenue. That growth engine needs to keep burning. So what do we do? We go spend money on Facebook ads and Google Ads and we try to optimize. We've spent a whole bunch of money around advertising and marketing, whether it be every door, direct mail and print marketing, radios, tv, social media ads, whatever it is, we pump money into acquisition and increasing the amount of new revenue that's coming in the door. Here's the thing, when you do that, you are artificially changing the equation. And if you don't have a brand that's going to sustain that new revenue growth, I want to walk you through that process because this is what a lot of small businesses do when they hit that plateau of revenue because their attrition now equals their new revenue growth. What they do is they start spending that money on marketing and their business does continue to grow and it's artificially growing because there's money being pumped in. However, that new revenue growth, if you were to take away the marketing, the direct response marketing, they don't have enough brand. And what will happen is the revenue actually continue to decline because there's not more money being pumped on the marketing engine. This is why focusing on brand is so important. But take that aside, what typically happens? The revenue begins to go up because the marketing engine keeps burning. We keep piling money into advertising and Facebook ads and all these different types of advertisement. So the business does continue to grow in new revenue. However, that growth of the business now needs more infrastructure, needs more non revenue producing employees. It needs office buildings, it needs more overhead, it needs more management. So what do we do in order to accommodate that acceleration, that second wave of growth that comes in the business? We get more office space and hire more people and get all this overhead. And now the business is literally relying on the overhead structure, the infrastructure. The business has been built to support this growing business that is only artificially growing because we're pumping money into marketing. So what happens? We get in this infinite loop of spending money on ads and being unprofitable, but then needing more infrastructure and management and overhead to support this growing business. But all the while it's all fugazi because. Because as soon as we turn off those advertising dollars and soon as we stop inflating our customer acquisition costs and just pouring money on advertising, as soon as that is taken away, the revenue will decline. And now we're stuck in this position where we have to lay people off, we have to abandon our lease for the office. And the reason for that is all because this equation. And so the question is, well then what do I do if I have plateaued because my attrition is equal to my new revenue? Yes, generating more business is absolutely part of the equ. But what so many small business owners fail to do is address the denominator of the equation, which is attrition. And if you can just focus on having your attrition, you will double the size of your business over the course of time. If we take the example of $10,000 in new revenue each month and we divide it by a 10% attrition rate, that means that we have $100,000 as the plateau where the business will stop growing. However, if I can take that 10% attrition rate and turn it into 5% attrition rate, now, the capacity, the plateau that business can 200,000. I literally double the size of the business over time as long as I get that attrition from 10% down to 5%. And here's what's really cool. A lot of the things when it comes to attrition doesn't have anything to do with spending more money. So you can actually be profitable while cutting your attrition Instead of spending a bunch of money on advertisement and infrastructure and office spaces and Facebook and Google Ads and all of these things, I can actually focus on something that doesn't take any money. And I'm able to increase the capacity of my business while at the same time remaining profitable because I'm not spending, pouring money and inflating my customer acquisition cost. But see, the thing is, this attrition is affected by things like customer service, improving how you pick up the phone, improving your communication skills, improving your website and your click through and your estimate request form and your conversion rate. All these really basic things, even just a matter of how do you respond to complaints from customers, these are things that affect your attrition rate. The amount of customers are leaving every single month. And it's yet the thing that's so unsexy. And we as business owners neglect because we're always chasing the new shiny customer. When the customers that are currently with us, if we just take better care of them, it would actually make a bigger impact on our business. So if you're wanting to maximize the profit in your small business, I first want you to recognize that the denominator, focusing on attrition and keeping customers, making sure that customers stay with you for years to come, is the number one thing that you can do. And it doesn't cost any money in terms of making your business more profitable. The second thing you can do, if you're going to focus on the numerator, the top line revenue, generating more growth, ask yourself, instead of spending more money on customer acquisition, how could I reduce my customer acquisition? By making my ads more efficient, effective, so that when I spend the same amount of money on marketing, I actually produce more top line revenue. So instead of spending more, how can I spend it more wisely? By reducing my customer acquisition cost. Instead of spending $10,000 with a customer acquisition cost of $500 per customer or CAC of $500 and getting 20 customers. Now if I can take that $500 customer acquisition cost and move it to $100 in customer acquisition costs, now I can take the same $10,000, but instead of just getting 20, custom get 100. That would essentially make the equation allow for the plateau of my business to literally 5x. The business could 5x in size before it ever hits another plateau simply by reducing my customer acquisition cost. So the moral of the story, here's two numbers you must focus on in your business. Number one, attrition. What percentage of your customers are leaving every single month, every single year in your business and how can you reduce that secondarily? Your customer acquisition cost? How can you be more effective with your marketing dollars and ensure that every single dollar is spent most effectively by ensuring that for every dollar you spend, you get the most amount of customers from it? Reducing your CAC is another way that you can improve your business, make it more profitable and allow it to grow without hitting a plateau. Now if you want to breakdown of further KPIs key performance indicators in your business, watch this video here. I break these down even further and talk in depth about the most important numbers in your small business tool absolutely lead to game changing results.