If you like watching Shark Tank, you're gonna love this.
Because episode four of this season is pretty dang insightful, if I do say so myself.
One of the three contestants featured is Sophie...
... who started a weaving basket company three years ago with $500...
... and turned it into a $3.6 million business...
... without ever having a loan and never acquiring any debt.
When Sophie told the Sharks her average yearly sale is $900K, and her total sales are $3.6 million...
... the Sharks were astounded.
"Wow!" shouted one Shark.
"I was not expecting that!" exclaimed another.
One Shark broke out in spontaneous clapping.
"Good for you!" said another.
When asked what her sales were last year, she said $1.6 million.
The Sharks were collectively floored.
The excitement only continued to build when one Shark asked...
"What are your gross margins?"
To which Sophie said, "$1 million."
More "Wows" came from every seat in the Shark Tank.
But then, but then, but then...
The wheels suddenly began to fall off this fast-moving chariot.
"What is your net profit?"
"$75,000."
To say the Sharks were bewildered is to understate the moment.
"How much do you spend on ads?"
"$400K average."
"What is your average sale?"
"$206."
"What does it cost you to acquire a customer?"
"$116."
"That leaves you only $5."
"Right now, it's getting harder and harder to get a customer the way we are doing it," Sophie said in defense of her position.
"For every customer, you're losing money," one Shark retorted.
Within moments every Shark was out.
Sophie's unfortunate story brings me to the point –– and the lesson –– of this email.
If you don't know how to increase your CAC (Customer Acquisition Cost), your business can't scale.
And it may not survive.
CAC may not be the sexiest lesson you'll ever learn, but it could be the most profitable.
If you saw my last email, we answered the question, "How much profit should I generate for my business?"
As a reminder, CAC = (Cost of Sales + Cost of Marketing) / New Customers Acquired.
Continuing with this fictitious business example, we featured a $4 million business with revenue of $2,000 as their lifetime customer value.
We determined through their refunds, cost of goods sold, overhead, and projected profit margin that they could pay $200 to acquire a brand-new customer online.
Now that $200 was the result of all these other costs...
= equal customer acquisition cost.
Let's use a projected profit margin of 30 percent.
Also known as EBITA = Earnings before interest, taxes, and amortization.
In other words, it's what you have left over after you spend everything.
Stay with me here because this is important.
Customer acquisition cost is a factor in determining what the projected profitability is for the business.
To get to this $200 number, we plugged in a projected profit of 30 percent.
But what happens when this company wants to scale to $8 million in the next two years?
Well, the short answer is this requires the wisdom of Solomon. The savviest businesses we've worked with understand that hyper-aggressive goals mean they need to lower their profitability expectations to reach the next level of scale.
And this is where things get interesting.
Because the thing that varies the most as you scale is –– you guessed it –– CAC.
As a general rule, the more you spend on paid media, the higher your Customer Acquisition Cost.
So, if you're one of those businesses that understand how online businesses scale...
... and are willing to accept a lower profitability goal, you can jumpstart your growth again.
To set the stage, let's say your company is a $1.2 million company with a 30% margin.
If then, instead of a 30% profit goal, you are willing to accept a 25% net profit goal...
... you have the freedom and flexibility to increase your CAC from $200 to $300.
Now, this is where things get r-e-a-l-l-y interesting.
Because it's not how much you make that matters –– it's how much you keep.
Here's what I mean.
Let's say your business scales from $4m to $8m at 25% profit and $300 cost per acquisition (CAC) ... you are now a $2 million profit company...
... a far cry from $1.2 million. In other words, you can make more money if you accept lower profitability.
Now, let's take this scenario to the next level.
Let's say you now want to grow your $8 million business to $12 million in the next five years.
Can you reasonably expect to grow that aggressively with a $300 Customer Acquisition Cost?
Um... probably not.
To achieve this new goal, you'll need to downgrade your profitability goals to 20%.
The good news is you can now afford to invest $400 to acquire a customer.
The better news is, all things being equal, your business is now a $2.4 million profit machine.
Understanding how increasing CAC also increases profitability is the one thing that most online businesses are missing.
But not you, not after learning how CAC can give you the business of your dreams.
If you'd like to see a video where I explain this in a good old chalkboard teaching style, you can see it here.
And if you need help scaling your business online, it all begins when you click here.