- 0:05 The principle of business
- 0:29 The logic behind the principle of business
- 1:13 The mindset shifts for businesses
- 1:45 We profit on month two.
- 2:06 What is your ROI Lifecycle
- 2:35 You can’t continuously buy customers at higher and higher price points
- 3:26 Costs increase with longer ROI
- 3:51 The principle of business is true but you should still be cautious.
- 4:42 Food For thought
Hey, guys, Tanner Larsson here, and just dropped my daughter off at school, on my way to work, and I want to talk a little bit about the concept, or the principle of business that gets tossed around a lot, and that is,”He who can afford to spend the most to acquire a customer, wins.”
You’ve probably all heard it. “He who can spend the most to acquire a customer is going to win,” meaning that if you can outspend your competition profitably to acquire your customers, you can beat your competition.
The logic behind that is if you, both you and your competition are acquiring customers for $5 each, and you reengineer your business, dial in a sales funnel, whatever, to where you can now spend $10 to acquire a customer, well, now you can go out and buy traffic that your competition can’t, so you can actually get more traffic, more customers coming into your store because you can actually afford to spend more money.
Now, this is a concept or a … It’s kind of a principle of business, but people are teaching it, lots of guys are talking about it and teaching it, and it sounds really sexy, and it’s kind of, for a lot of new people, it’s, whoa, mind-blowing, game-changer kind of light bulb, never even considered that.
In truth, most companies are out there trying to spend the absolute least to acquire a customer.
This is a good mindset shift for people, and it’s a great way to get things started. The problem is, and I was just realizing this the other day, is that we talk about that, and if people take it to heart and I push all of my clients and my students and everything to engineer their business so that they can acquire customers at the highest possible cost. In our business, in one of our e-commerce brands, we actually go negative until the second month.
We actually don’t profit until month 2 with our customers, because, with our rebuild, continuity and everything, no matter … That’s basically our average. We profit on month 2.
Okay? That’s basically a 60-day ROI cycle, which is a fairly long time, what we, but people don’t talk about, though, is those kind of things. What is your ROI lifecycle? How long is it taking you to actually make those profitable customers profitable? There’s only so many traffic sources out there that have instant or very quick ROI.
Now, once you know your lifecycle with your customers, and your average value at 30, 60, 90 days, things like that, you can start acquiring customers more expensively. The problem is that this is kind of a blanket statement and nobody looks at it from the other side.
You can’t just continuously be buying customers at higher and higher price points, even if they’re, quote-unquote, “profitable,” because you run into, unless you’re funded, but if you’re not funded and don’t have a bunch of super-duper deep pockets, what you’re going to run into is cash flow.
e-Commerce businesses are already notorious for having lousy cash flow due to inventory, manufacturing, raw material, purchasing, the whole workflow, and inventory cycle, so there’s always a lot of cash going in and out, then you factor in advertising; now, let’s say you do have … You can acquire customers and you’re acquiring, you’ve maxed out your ability to acquire customers at the quick ROI, 2 to 3 week range, and now you’re into the 30, 40, 60 day range.
Now you have to wait that long before the money comes back in to break even on those customers, so you’re going negative there as well, and the more customers you have, the more products you need, so the more inventory, the more products and everything like that, the more operations, whatever, the more staff, so your costs are increasing as well, but the money’s not coming back in, so it’s very possible to acquire your way into acquiring all these profitable customers, you acquire your way out of business, because you get into this cash flow pinch, where you can’t afford to operate your business.
I’m not saying, “He who … ” I’m not saying that, “He who can acquire a customer at the highest possible cost wins,” is not true. It is absolutely true, and you should be trying to make your business capable of acquiring leads and customers at the most, at the highest possible cost, but at the same time …
That doesn’t mean you should spend every possible dollar and just because it will ROI on month 6, you should go ahead and acquire that customer, unless you have the stable cash flow to make sure that that’s not going to be a problem. You got to have a deep enough pocket so that you can weather the storm when things get tight, and they will get tight. You’re going to have to buy more inventory, money’s out, you’re going to have to buy more advertising, money’s out, and with that money not ROI-ing, not coming back in for 30, 60, 80, 90 days, that can be a real, real detriment to your business.
Just some food for thought, I want to further explain that concept. Again, this is something, a lot of people teach this concept but nobody explains the backend of it, so the backend of it is, budgets do matter. You will have to be smart about your acquisition, and realize that just because they will, these customers do ROI quickly, or, I mean, not quickly, I’m sorry, but they do ROI eventually, and you know they will, because you know your metrics, that’s great, but just realize that that 30, 60, 90 day window may be too long for you to survive, unless you have the cash flow to back it up; and if you have recurring income, that can help pad out those cash flow pitches so you don’t have to worry about that as much, which is one of the reasons we can afford to go to negative 60 days.
Okay. Anyway, guys, just a quick video, I’m about to pull in the office here, so I got to shut this off, but hopefully that gave you some food for thought, and further explained that concept of acquiring customers at the highest possible cost. See you.
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