Saw an awesome post on FB from Alex Becker (founder of Hyros) and I wanted to riff on it a bit as it's something you need to be focusing on if you wanna scale.
This is something I'm focusing more on for my own offers and also the people I help in places like GM+ (join here over BF to get some bonuses).
In short, the secret of scale is economics.
No surprise there. But a lot of people get this wrong - and it's worth taking time to remind you of what you should be focusing on to get better results.
Here's what this all comes down to.
The brand that will win is the brand that can afford to spend the most to acquire a customer.
If we simplify it to the basics, imagine 2 brands.
- Brand 1 can spend $100 to acquire a customer
- Brand 2 can spend $200 to acquire a customer
Brand 2 will eat Brand 1 for breakfast.
They can be...
- Seen in twice as many places
- Run 2X as many tests
- Make 2X the loss comfortably
They'll eat up the market simply by flooding the advertising space with their cash and presence.
And that’s really the whole game, the business that can afford to spend the most to acquire a customer wins everything.
It's why most of the business out there goes to the established brands.
They have existing cash flow and cash reserves to outbid everyone else.
I can tell you from experience that having more money to play with makes it a hell of a lot easier.
When I've managed campaigns for VC-backed or established companies, I get insane results right out the gate cause I can throw money at ads.
I launched a brand new product for a Pharma brand and we generated almost 7000 new users in 8 weeks.
Now, I now the vast majority of people are not in this camp.
When you've got a small budget, or you're dependent on the ads bringing in cash quickly to offset the costs, it can be really hard to scale.
You're kinda surviving day to day, hoping your average order value can pay off the ad spend.
I've been on both sides of this equation and want to outline the right system.
First, you've gotta ask yourself...
How to shift the economic scale in your favour
Broadly speaking, there are 2 stages in your business when it comes to this stuff.
- Growing business
- Established business
With both, there are also 3 metrics that matter.
- Average order value (how much someone pays you on transaction 1)
- Lifetime value (how much they pay you over the lifetime of their business
- Payback period (how long for you to make your money back)
Understanding these 3 metrics for your business is what unlocks scale.
All three of these metrics only matter because they raise or lower what you can afford to spend to acquire a customer.
But you also have to know how to optimise them for your business's current stage of development.
Let's start with...
Payback period
Payback period decides how fast you get your money back, and that directly controls how much you can afford to spend to acquire a customer.
This is where the stage of your business will really change the approach.
Imagine 2 brands again.
Brand 1 is small and only has $1k in the bank.
Brand 2 is established and has $50k in the bank.
If they both spend the same amount - let's say $33 / day or ~$1k / month - how will things look at the end of the month?
Brand 1 NEEDS that money to be paid back to them or they're finished.
Brand 2 can do that for FIFTY months without ever going into the red.
Brand 1 is trying to survive.
Brand 2 is working on expansion.
When you're in the position of Brand 1 - payback period has to be as short as possible to stay alive.
You have to balance AoV against CPA and minimise your losses.
When you're in the position of Brand 2, you can afford to pay $100 to make $10, because you have time to earn back the rest.
Then the next thing you need to think about is...
Bumping Average Order Value
So if payback period determines your speed, AoV determines your firepower. The higher your AoV on day one, the more you can afford to spend to acquire a customer without sweating.
Someone in the GM+ Community recently emailed me with a win of theirs despite never running ads before.
And one line in her email told me that she is gonna do well, because she gets it.
That one line where she says "even though yes, the goal isn't profit, it's to get leads" is a huge indicator her thinking is on the right path.
I always say, your job is to get as many buyer leads as possible.
Not because of the profit they bring (it's minimal when you pay for ads), but because buyers buy again.
The problem most have is that ads are so expensive right now that even getting buyers is super hard.
People kill their ads ASAP when they see a $27 requires $60+ in spend to get a sale.
Big advertisers won't care cause they have reserves to extend the payback period. But the small brands need that cash back - even like 80% of it, ASAP.
Which is where the right $1 Product Funnel comes in.
Using bumps and upsells is key to raising that AoV so you have a fighting chance against the brands who can afford ot make a loss for 3-6 months.
You have to do whatever you can to raise that AoV, think of everything from...
- Testing new offers at each stage
- Playing with pricing
- Change the positioning
- Try to reduce the risk
Anything to increase the value per customer who decides to buy from you.
Whether you're a big or a small brand, bumping that AoV on day 1 will do wonders for your ability to scale as it takes a lot of the risk out of running ads.
But the real value for all of us is not in the initial AoV, it's on the back end.
AoV gets you in the fight, but it’s LTV that decides who wins. The higher your LTV, the more you can afford to spend to acquire a customer over a longer period, and the easier it becomes to outbid everyone else.
Growing your LTV
Lifetime value is where everything clicks into place.
Once you can raise this you'll find you are...
- Making more profit per customer
- Giving yourself that buffer to spend more on ads and be in the red for longer
- Basically, outperform the competition
There's 2 ways to bump your LTV.
- Sell people more stuff
- Keep people paying recurring fees
Ideally, you want some combo of both.
If you can do these two things right, you can increase that initial AoV 10-100X easily.
And then, you can start tracking your cost per acquisition not just against the initial AoV, but against the LTV.
When you have all of the pieces in place to create this kind of system, and you know the numbers, you unlock way better scale potential.
If you see that after 3 months your average Customer Value is at $3k, and you ave enough money to cover advertising for that same period, you can then feel comfortable spending up to $3k to acquire the customer.
Which means you will beat out the guys and gals who are stuck worrying over a $50 acquisition cost.
And all of this rolls up into one thing... increasing the amount you can afford to spend to acquire a customer.
In summary
If you want to scale, you have to know your payback period, AoV, and LTV.
When you're smaller, focus on shortening the payback period and increasing AoV to enable higher spend.
When you have some cash reserves, look at your LTV and what is a reasonable payback period for you.
Use that to anchor your advertising costs. This will enable greater spend and easier acquisition of customers.
LTV is the real unlock, and you can’t raise it without a proper system.
I'm working on something to help people increase LTV which will go live in December.
If you want to join us for that and get the support to action the whole system I use for this (ACCER), the consider joining us in GM+ to get the support and assets you need to set it up.
Right now, there's a little bundle deal I have put together for you.
Speak soon,
Pete "scaling rules" Boyle