In every business owner’s journey, they happen upon what I like to call The Flatline: A no-man’s land of stalling results and increasing costs that feels impossible to navigate.
This messy middle will rear its ugly head in nearly every aspect of your business, but it can be especially frustrating when it happens to your acquisition strategy.
After all, it’s pretty discouraging having to spend more and more on marketing and have no apparent growth to show for it.
That’s why, over the past few weeks, I’ve been unpacking my survival kit and sharing a strategy that helped get me out of the messy middle.
This Scaling Customer Acquisition Strategy centers around one business-changing idea: going negative
Last week we talked about the importance of thinking long-term when planning your acquisition strategy. We also unveiled the secret goldmine of high-paying, loyal customers you should be targeting.
This week I’ll be laying out the actual strategy and answering all the big important questions, like:
- How do you know you’re ready to go negative?
- How long should you expect to be in the red?
- How do you go about recouping the loss?
But first, I have a few disclaimers…
Read This Section Before You Build Your Acquisition Plan
Before we dive in, there are a few things you should be prepared for.
#1. There’s going to be math.
The data nerds out there are rejoicing, but I know some of you are rolling your eyes and groaning instead.
Here’s the thing… In order to run a business, you need to know the numbers.
So, if metrics and data are not your strong suit, I’d encourage you to run through the plan with your CFO.
#2: Your predictions will only be as accurate as your data.
I know for a fact there are at least 10 different business leaders reading this right now…hopefully a lot more, but 10 is probably a safe bet
As such, I can’t possibly give you all 100% exact, individual processes for implementing this strategy… All 10 of you have different business models, measurement systems, and customers.
You’ll need to take this advice and tailor it to your business.
If that means you have to change the way you calculate your metrics, so be it!
#3: Don’t sit in analysis paralysis.
Piggybacking off of #2, having most, but not all of the answers should not deter you from taking action.
Excuses such as…
I don’t have the right metrics tracked…
I can’t do this part because…
Well, but I’m so bad with numbers…
…are just that. Excuses.
And excuses don’t scale.
So even if you have to work off of some safe assumptions, that’s okay—just be prepared to adjust once the data starts coming in.
With that said, let’s start by reviewing the key metrics you’ll be using to develop your plan.
Metrics You Need to Know (And How We Calculate Them)
Now, metrics are tricky.
Google any 1 metric and I guarantee you’ll find 7 different ways to calculate it.
Remember: data is just a numbers-based way to tell a story.
How deep you can dive, and how specific you can get with your predictions will depend on 2 things:
- How much data you are currently tracking, and
- How long you’ve been tracking that data.
So, the more details you can add, the closer to reality you will get.
All this to say, it’s your business, so get as “in the weeds” as you’re comfortable.
But if you’re fairly new to this, here’s a list of the metrics we will use, and a basic explanation of how to calculate them.
Customer Acquisition Cost (CAC)
This metric tells you how much it costs to acquire 1 customer.
Basic calculation: total marketing costs / number of conversions
NOTE: sometimes it’s hard to define “total marketing costs,” after all its nearly impossible to track marketing efforts like word of mouth. Not to mention “hidden” costs like tools usually get left out.
This article by Andrew Chen should help get you on the right track.
Customer Lifetime Value (CLV)
Also called lifetime value of the customer (LTV) This metric tells you how much profit you make from your customers over the course of their buying time.
Basic calculation: average order value x average # of purchases a customer will make in their lifetime
NOTE: For larger businesses it can be difficult to nail down the average number of purchases made. One simple way you can get an estimate is to divide the number of purchases made by the number of customers in your database.
Return on Ad Spend (ROAS)
This ratio tells you the “effectiveness of your online marketing ads,” aka how much you are making in relation to how much you are spending.
Basic calculation: Income from conversions /ad spend
Now that you know the basic metrics, it’s time to dive into the strategy.
How to “Go Negative” Confidently
Going negative basically means spending more up front, in anticipation of having your investment pay off in the long term.
You see, you have to shift your thinking.
The way to profit effectively in your business is not to immediately recoup your acquisition costs.
Sustainable profit comes from providing value up front at a loss, nurturing your audience along the journey, and then making your profit by providing consistent opportunities for your customers to continue to purchase.
At first, this might seem like a big gamble.
But with the metrics we mentioned above guiding you, you can rest easy knowing your investment will pay off.
Here’s how it works:
Pre-Requisite: Build Up Your Back End
The only way going negative pays off is if you have a reliable method for monetizing your existing customers.
You’re going to be acquiring customers at a loss, so you have to make sure that you give them a reason and means for continuing to purchase so you can ROI on your investment.
These opportunities can look like upsells, subscription services, tech, etc.
Paul Lemberg and Roland Frasier talk all about this in an older episode of business lunch.
So if you don’t have your back end built out, stop reading this and go check out that podcast episode. It’s a good place to start.
If you’ve already got your back end built out, you can move on to the next step.
Step 1: Identify Your Average and Ideal Customers
Like we talked about last week, not all of your customers are equal in value.
Scaling your profitability comes from having customers that are return purchasers, not customers who purchase once and leave. You want people who don’t churn out.
In order to get the most bang for your marketing buck, you want to target your efforts towards customers who have higher customer lifetime values.
So, your first step is to do some customer analysis. Identify and segment your customers so you can find those “goldmine” customers who buy all of your products.
If you have more than one back end offer, you can segment those groups if you’d like.
Basically, the goal is to get an accurate idea of how profitable each of your different offers are, and what percentages of your customer base end up taking advantage of those different back end offers.
Next, calculate the CLV for each of those different customer groups.
This will give you a simple understanding of the different value each group brings to the table.
(Bonus: If you really want to get in the weeds, and have a deep understanding of how your customers interact through your funnels, you can run a cohort analysis.
Just be forewarned… this is not for the faint of heart.)
Step 2: Determine the Acquisition Cost
Now that you know what you’re making off your customers in the long run, it’s time to see how much it costs to acquire them.
So, calculate the CAC for your average and ideal customers.
This is where having your CFO comes in handy.
There are certain acquisition costs that can be applied evenly across all customers (tools you use, employee pay, etc.), but you may have certain costs that only apply to certain customers (i.e. ad costs for a high ticket offer may only apply to customers who took you up on that offer.)Again, you can go as shallow or as complex in your cost analysis as you’d like.
If you’re not sure, make the best estimate based off of what you know, and assume it’s probably a bit more expensive than you think.
Step 3: Discover Your Ratio
Now it’s time to get a good idea if the money you are currently spending is being monetized well.
You can do this by looking at the ratio of your CLV: CAC.
This is your customer profitability ratio. It’s showing you that for every dollar spent acquiring a customer, they are providing X amount of value over the course of their lifetime purchasing from you.
You’ll want to find the ratio for all your different customer groups.
If your score is…
- 10+ = you’re in great shape; keep spending
- 6-9 = spend, but with caution
- 5 or below = recalibrate
Why do you want over a 5:1 ratio?
Well, remember that we’ve really only taken into account your marketing costs. There are still lots of other costs you need to cover before you actually know your bottom-line profit.
As the industry saying goes: You have to make ~10 dollars in order to spend 1 dollar in profit.
The more precise you can get with your CAC and CLV, the better you’ll be able to pinpoint just how profitable each customer segment is.
Step 4: Determine Your Payback Period
The final piece of information you need to scale confidently is your payback period. This is the anticipated time it will take for you to recoup your up-front acquisition costs.
The simplest way to “calculate” your payback period is to examine your funnels, and previous data.
Here’s what you need to know:
- The price points for your offers
- The time it takes for your customers to get through your funnels.
If you know this, then you can represent your acquisition cost as a negative. Then add the income from each offer along your funnel, and you’ll be able to pinpoint the exact point in the funnel where you recoup your acquisition costs (breaking even.)
The time it takes for your customers to get to that point is your payback period.
Now, how far you can stretch your payback period is really up to you (only you know when your bills are due.)
But the general rule of thumb is that the larger your business is, the longer you can push your payback period.
Here’s our general guidelines:
- <$1 million: 7 days
- $2-5 million: 30 days
- $5-10 million: 90 days
- $10 million+: 1yr
Step 5: Allocate Your Budget and Test
Your final step is to allocate your budget.
Here’s the basic gist of it.
By decreasing the price of your entry point offers, you’ll be able to get more customers through the door. And by increasing your marketing spend for retargeting efforts or back end offers, you create lots of opportunities for customers to make return purchases, increasing their CLV.
You sacrifice the up-front profit for long-term sustainable growth.
So how do you actually go about allocating budget? Well, let your ratio be your guide. Allocate more budget for areas where you have a good profitability score.
One caveat though..
Because these customers typically have higher acquisition costs (high ticket offers require more hand-holding), and longer payback periods (they will purchase low ticket offers first before getting high ticket offers), you may also need to scale the spending on your average customers to make up for some of the sort term gap in ROAS….
So, find a budget ratio of short/long term plays that helps you grow your ideal audience.
You can do this by playing around with the different metrics and running some predictive models.
What would happen if you increased your marketing efforts by X amount, targeting customers with a new high-ticket offer?
Well, your costs would go up, but so would your profit. So, figure out how many people can you expect to convert on that offer, what price point they would pay, and then see what that does to your payback period. If it’s within the range, give it a try!
The whole point is to make the best educated guesses you have and run a test.
Then learn from that test, optimize, and go from there!
Adaptation and calculated risk taking is the bread and butter of entrepreneurship. So gather your best advisors, share this strategy, and see what they think!
And when you start to hit the panic button because your costs have gone up, relax. Refer to your payback period. And remember, it’s a long-term play.