It’s time to put your thinking cap on.
Because this might challenge your thinking in new ways.
As a business owner, have you ever wondered how your competition affords to pay more to get a customer than you?
I’ll reveal the mystery behind that in just a moment, but first…
There’s a reason the tried and true business axiom says…
“The business willing to spend more to acquire a new customer wins.”
It’s because the principle is 100 accurate as you scale.
As a high-volume paid marketing agency, we at Tier 11 see this all the time.
One of the barriers we see in our customers is they get to a certain level of success and stall.
Take, for example, a $4 million business with an offer that resonates with the market.
If this hypothetical business hopes to grow on a horizontal scale, it will need to find new markets, avatars, ad creatives, and even new ad platforms.
But here’s where the rubber meets the road.
Continuing to scale a business requires a clear understanding of something that most companies have never heard.
We call it, The Law of Inverse Profitability.
In Friday’s email, I’ll explain exactly how the Law of Inverse Profitability works.
But for now, here’s what you need to know.
A business with a growth mindset can no longer expect to get the same profitability that brought them to its current level of success.
Stated another way, what got you here won’t get you there.
Because as you attempt to scale your business, it’s unrealistic to expect the same CAC (Customer Acquisition Cost).
… Aanndd … that becomes the primary hurdle in scaling a business.
Using a $4 million business with a $2,000 LTV (Lifetime Value) and a profit margin of $1.2 million, for example…
… we determine their Customer Acquisition Cost (CAC) is the result of all these other costs…
- cost of goods sold
- desired profitability
= equal customer acquisition cost.
In this scenario, the projected profit margin is 30 percent.
But, as they attempt to scale up to an $8 million business, a savvy business team knows they must scale down their profitability goals.
Because when you adjust your profit goal from 30% to 25% (as an example), you can afford to spend more to get a client.
So instead of a CAC of $200, you can afford to spend $300 to get a customer.
In the process, this company leapfrogs from a $1.2 million profitable business to a $2 million business.
In the next growth phase, this company attempts to scale to a $12 million company…
… and adjusts its profit expectations down to 20%…
… which allows the business to invest $400 to get a client.
In understanding it needs to double its Customer Acquisition Cost, this company becomes even more profitable at $2.4 million.Now, let’s take a look at this visually.
- As a $4m business, they have a 30% margin, giving them a $1.2m profit.
- Doubling their sales to an $8m company, they accepted a 25% margin yet grew to a $2m profit business.
- Growing to a $12m business but accepting only a 20% margin, they’ve grown to a $2.4m profitable business.
In other words, they accepted 5%-10% of the front-end profit and doubled their overall profit in real dollars.
…So… if you are savvy enough to accept that a declining net profit (as a percentage of revenue) can make a lot more money…
… you are well on your way to scaling your business.
It’s not what you make, after all, that matters.
It’s what you keep.
If you’d like to see me explain this in good old chalkboard lesson style, you can see that here.
Finally, if you need help scaling your business, it all starts when you click here.