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The Digital Utopia Podcast is for SMB Marketers and Business Leaders looking to align their Marketing, Sales, and Service departments so they’re part of one powerhouse growth team.
Each episode will dive into the strategies, philosophies, and tools that will change your approach to organizational growth, give you renewed focus and clarity, and allow you to build a brand that not only helps you stand out—but win.
The Digital Utopia Podcast is produced by Digitopia and hosted by Frank Cowell and Joseph Freeman.
Episode transcription
Joe: 00:00
Exposing these numbers, making this a conversation, making a culture of profitability can also keep this top of mind. If everybody knows how to do this math, if everybody knows how to come up with these numbers, everybody is guarding it. Everybody is cognizant of it. And everyone's making decisions based on that.
DJ: 00:17
You were listening to the Digital Utopia Podcast, a resource dedicated to helping B2B leadership and executives, gain clarity and focus in a chaotic marketplace.
Frank: 00:28
Hey gang. Welcome to episode 11 of the digital utopia podcast. I'm your host Frank Colwell. And I'm joined by my cohost
Joe: 00:35
Joseph Freeman.
Frank: 00:37
Yes, sir. That's what we're doing today. We're doing a podcast. And this is going to be a fun episode because we're going to talk about some really heavy stuff, right?
Joe: 00:48
Heady stuff. Yeah. So we knew everyone feels like they're lacking clarity, consistency, and business. We've been talking a lot about that. Um, and especially when it comes to client acquisition, so hit your growth goals.
You need to systemize revenue generation with a solid sales and marketing program. But why does the process of client acquisition feels so hard? I think we hear this all the time. We've talked to hundreds of business executives. And here's what they kind of all say, this is, this is what they're feeling.
Everything else in business is somewhat predictable. And it's kind of in your control, everything except for acquisition. So think about this, you know, how to operationalize the development of your product. You've been able to create a world-class service. You, so systematically scaled your team, hopefully.
Your finance department operates like a well-oiled machine and you understand how you align against your competitors. So you get the idea. You've kind of gone through a lot of the motions to get this all working like a well-oiled machine. Everything else feels pretty defined, pretty cut and dry, but it boils down to two things.
You don't have a process for client acquisition and delight, which we've been talking a lot about, right. As few episodes. Uh, and to, uh, business leaders in sales, marketing service teams, don't really know the basic business math and marketing metrics that will empower client acquisition. So maybe they learned it.
Uh, maybe they talk about it, but no one is really truly using it. So I think today we're going to break that down.
Frank: 02:12
Yeah. I'm surprised on a regular basis, how many organizations don't know what, you know, we call the basic business math, which we're going to dive into today, but I'm really shocked.
Joe: 02:24
You know, we work with a lot of companies and often we say, um, Hey, do you know what your client costs of acquisition is?
Or do you know how to get there? I think a lot of the time the answer is, yeah, we know how to get there, but maybe you should just
Frank: 02:36
Run through the episode of the office. Like explain it to me as if I was five, right?
Joe: 02:42
Yep. Exactly.
Frank: 02:43
So today we're going to be modeling a daddy, opened a business and they make a hundred dollars,
Joe: 02:49
So today explain it like we're five years old. Okay. So we'll cover this, the basic business math and marketing metrics that every business leader should know. Uh, we're gonna talk about how to align your marketing sales and service teams around the business math and these client acquisition numbers.
And we're going to talk about how to evaluate the health and sustainability of your client acquisition programs, uh, for the long run. Alright, so Frankie, let's dive into this. Um, first of all, why do you think business leaders are ignoring these numbers, and are they avoiding it? Um, do they just not have the data?
Did they learn it once and put it in a drawer somewhere? what's going on here?
Frank: [00:03:25]
Yeah. Well, I think there are two kinds of business leaders. If we talk about who's at the helm of the business, you have someone who. Started the business and maybe they're in the seat as the president, founder, CEO, whatever the head role is that person who founded the business and started it and was responsible for the initial acceleration.
Mentum oftentimes it didn't happen because. They were really great at all the nuances of the businessman that happened because they had a lot of fire and passion and they had, and they were very driven and that energy is really what was responsible for taking the business to where it is. And then you have another kind of business leader who's in the same position, but they're more of a hired gun, right.
They didn't start the company. They're more, more of the person who's brought in to be the GM or the CEO. And. So when you have those two different kinds of leaders, uh, I, I find the ones that are more of the higher gun type. They tend to know this stuff more founder type like a founder. Fred, if you will, if we're giving this person a persona name, uh, that person, um, is amazing at starting companies and initially growing them.
But when it comes time to now, Turn the dials and that in play with the new ones is of business to then take it to another level. That's usually where it falls outside of what they're used to saying that they're not mentally capable, but it falls outside the skill set because their skills. Are about vision, about position and selling, right?
And that, that kind of momentum. And so I find that this is the cause of the problem is most organizations don't start this way because it started by somebody who, frankly, doesn't need to know this right at the beginning, what they need to do right at the beginning is just roll up their sleeves and just make a lot of shit happen.
Right! Just like, make things happen and move because we've talked about in previous episodes, the power of momentum. And so that's what these people are. You know, these men and women who are the starters, they're the people who are momentum creators, which is wildly important.
Joe: 05:35
Yeah. And I think this is why we often, um, you know, get in bed with a company.
And one of the first questions they ask us is how much should we carve out for advertising to which we often respond to? How many customers do you want to get? And, you know, there's some math that can, we can work backward from there. Right. So let's define what some of these terms we're going to be using here are.
So the first one is average order value. So A.O.V
Frank: [00:05:59]
A.O.V., Yes.
Joe: [00:06:01]
We'll be talking about lifetime revenue. So we call that LTR lifetime value, which is similar, but different LTV and then cost of client customer acquisition. And there's a couple of different acronyms that are used here. We use Coca. C O C a cost of customer acquisition.
[00:06:16] This can be called CAC. You know, I've heard people refer to this many different ways, but today this will be
[00:06:22] Frank: [00:06:22] customer acquisition costs.
[00:06:24] Joe: [00:06:24] So AOV, LTR, LTV, and Coca let's talk about what these things are. Let's start with average order value,
[00:06:31] Frank: [00:06:31] AOV. Yeah. Average order value. So if you're a transactional business, let's say you're the type of business who.
[00:06:39] Sells things to clients on a project or just a one off invoiced basis. You're going to have an average order value across all of your clients. And so if that's the kind of business you have, you need to understand your AOV because we're going to get to the next one, right. LTR. But before we get there, you need to know that first.
[00:06:59] So [00:07:00] then you can then multiply that times, the average number of transactions that you have with your clients to get you, you know, the, the average. Revenue that each of these clients are going to bring you. So now, if you're a business that is a recurring revenue business, then your AOV is kind of the average monthly spend in your recurring revenue times the number of months.
[00:07:23] So depending on your business model, if you're a transaction-based, it's the average value of that transaction, times, the average number of transactions your clients have with you. Or, if you're a recurring revenue business, it's the average monthly recurring revenue amount times, the average number of months that they're with you.
[00:07:45] Joe: [00:07:45] Okay. And so moving on to lifetime revenue LTR,
[00:07:49] Frank: [00:07:49] so then a different, so then you take those numbers and again, you multiply them either times, average number of transactions or average number of months, and you get your average lifetime revenue. So this is saying. [00:08:00] For our average clients, the lifetime revenue that they'll spend with us, the gross revenue is X, right?
[00:08:06] So it might be a hundred thousand dollars, might be 50. It might be 10,000. It might be a million, whatever it is, what is that average lifetime revenue that they're going to spend over the lifetime? Now here's something to keep in mind when doing this analysis, we say LTR, lifetime revenue. We say LTV, lifetime value.
[00:08:26] But if you're trying to fund acquisition, which is essentially what we're talking about today, we're talking about how do you figure out the amount you can spend to fund acquisition? The lifetime number actually might be too big. It might be too long of a view. So oftentimes when I run this exercise with people, we'll do like anywhere from a one to three year revenue value.
[00:08:52] So we'll still call it lifetime revenue and lifetime value. But with an asterisk that we're willing to talk about three years, the reason that's important is because let's say [00:09:00] your average lifetime span of a client is 10 years. Well, if you're going to base your acquisition fund off that 10 years, then essentially you have kind of like a 10 year amortization.
[00:09:11] A lot of companies don't want to stretch out their investment of acquisition across 10 years. Right? So that's the only caveat here is depending on. How long it takes for that lifetime revenue to come in. Uh, you may want to put a cap on that, you know, cause you may not want to again, fund a lifetime's worth of revenue.
[00:09:33] Again, if you have long lifetimes with your clients, Upfront.
[00:09:37] Joe: [00:09:37] Right. Okay. So putting real numbers to this, my average order value is something that I sell potentially one time, but maybe many times, and that could be a hundred dollars crunch time. Right. If someone buys it from me 10 times, or I sell a service at a hundred bucks a month and they buy 10 months worth of service, that's my LTR.
[00:09:55] Right. And we know a thousand dollars for my LTR. Correct. Okay. So now. [00:10:00] Nuanced difference. We have lifetime value. So L T R is lifetime revenue. Now we're going to talk about lifetime value LTV.
[00:10:06] Frank: [00:10:06] So the value is the value to the organization after the service or product has been delivered. So what you do is you take your revenue times, your average gross profit, and what's left are your gross margin.
[00:10:20] And then what's left is. The lifetime value. Okay. So on the thousand dollars, let's say your organization spends 500 to deliver whatever they purchased for a thousand dollars. Okay. Let's say it's $500 worth of time or $500 worth of. Materials and labor to put the widget together.
[00:10:42] Joe: [00:10:42] So this is essentially your cost of goods sold
[00:10:44] Frank: [00:10:44] is your cost of goods sold if you're in professional services often called cost of sales.
[00:10:48] Yeah. What is your cogs are your cost of sales or your cost of revenue? Again, depending on what you call it in your, on your P and L, but you, you back out the cogs in your GP, your gross profit [00:11:00] on the client, that is your lifetime value. So again, if you have a thousand dollars of lifetime revenue with this hypothetical customer, And you have $500 of cost to deliver that caught your cogs, right?
[00:11:14] You're then left with $500 gross profit. That's your lifetime value?
[00:11:17] Joe: [00:11:17] Right? So taking it back down to the average order value, a hundred dollars average order value cost me 50 bucks to make it I'm left with 50 bucks. So as we multiply that out $500 becomes our LTV or lifetime value,
[00:11:30] Frank: [00:11:30] correct? Because we're saying we have a gross margin of 50%.
[00:11:34] And so the gross profit, when you multiply that out is. $500 on the thousand. Okay.
[00:11:40] Joe: [00:11:40] And so now we have cost of client or customer acquisition, Coca. C O C a
[00:11:45] Frank: [00:11:45] what is this? Okay, so this is the percentage of that lifetime. You know, the percentage of the gross profit that your organization is willing to spend and commit towards acquiring more customers.
[00:11:58] Joe: [00:11:58] So in our example, one customer [00:12:00] is worth $500 of value to us, correct? Okay. And you're saying that we're going to carve out some of that $500 to acquire them.
[00:12:08] Frank: [00:12:08] Correct. And that's part of your entire business model. Right? And so the way I look at business models is two sides. You have. Uh, the delivery side, which is your cogs.
[00:12:18] And so when I look at someone's GP, that tells me about the health of their model. When I look at the NOI, the net operating income, the bottom line profit that tells me about the infrastructure they're putting around acquisition and servicing the rest of the organization. And how efficient that is. And so now what we're saying is what percentage of the overall gross profit that's being passed to your SGNA side for our P and L people?
[00:12:46] What percentage of that are you willing to commit towards acquisition? No that the S part of your SGNA,
[00:12:54] Joe: [00:12:54] let me go back just a second here, cause I don't want to be too assumptive. Um, maybe you could just define the difference [00:13:00] between GP and NLI for forum real quick.
[00:13:02] Frank: [00:13:02] Yeah. So you're uh, if we were to just look at a P and L at a very, very high level at the top, you have income revenue and then the very next section is cost of goods sold.
[00:13:13] And so that's where you're going to put all your expenses so that the revenue is a plus. And then below that you have a section that's your cost of goods sold your cogs. Those are all minuses, right? It's the expenses related to delivering what you sold?
[00:13:26] Joe: [00:13:26] It's the salaries of the people that are delivering it.
[00:13:28] It's the software or the hardware that it takes to actually create the service or product benefit
[00:13:34] Frank: [00:13:34] materials. Right now, some, some accounting people will say, no, don't put the software in there. Don't put the hardware in there. And there are some schools of thought whether that's right or wrong, I don't want to debate that.
[00:13:45] At, a bare minimum, it's the salaries and the materials that goes into your cost of service or co cost of consult, and then what you're left with. And when you subtract that out is your gross profit. That is the GDP, the gross profit. Now, after your gross profit, [00:14:00] you know, um, math, you're going to subtract out all your other expenses in the business.
[00:14:05] And that in, in, um, PNL language is commonly referred to as your SGNA sales and then your general and administrative. Sales is oftentimes like what goes in there is also marketing, right? So sales just means like everything it took to go sell the stuff you, you deliver. Right. Not only sales people, but marketing people and advertising.
[00:14:27] And so all of those expenses go there. And then when you subtract that from the GP, you came up with, you get the NOI, the net operating income, or net operating profit and Opie. Again, a couple of words you could use there. He was NOI cause that's what it shows on my P and L net operating income.
[00:14:44] Joe: [00:14:44] Okay. So thanks for that explanation.
[00:14:46] So now going back to Coca cost of customer acquisition, how does that play in again?
[00:14:51] Frank: [00:14:51] Okay. So now what you're asking yourself, when you're looking at your models, what percentage of this do we want? Are we comfortable carving [00:15:00] out towards going and acquiring more customers? And so if we have $500 of gross profit that we're passing down into our P and L.
[00:15:09] What percentage of that, do we want to carve out to go get more customers? Is it 10%? Is it 20%? Is it 30%? Some people are down at like 5%. So what, what is that? Okay, so let's go
[00:15:20] Joe: [00:15:20] ahead. So how do you decide the most common question that we ever get is what do you recommend?
[00:15:25] Frank: [00:15:25] So these are all over the board.
[00:15:28] The most common we see as five to 10%, but what I will tell you is a legendary phrase by Jeff Bezos.
[00:15:39] Joe: [00:15:39] So legendary as of like 17 years ago.
[00:15:42] Frank: [00:15:42] Yeah, absolutely legendary. Meaning like, and I attributed the quote to him and forgive me if it's not really the original source, but the quote goes like this.
[00:15:50] He who can afford to spend the most to acquire a customer, will win. His approach is how can I spend the most to [00:16:00] acquire customers and most business people's mentality is how can I keep pushing down those costs? And it's a, it's a, it's a. Paradigm shift. It's a mindset thing. And so we often see five to 10%, but what I will say is if you can ramp that up and you can be 10, 15% of your LTV, you're going to have more to play with.
[00:16:24] You're going to be able to outdo what your competitors are going. Cause remember your competitors are trying to spend the least. And so they're trying to do the least amount of effort to acquire customers. And so if you take a growth driven mindset, you're going to push that. You're going to be at 10% plus.
[00:16:42] Got it.
[00:16:42] Joe: [00:16:42] Okay. So once you've decided what your cost of customer acquisition, what your Coca number should be, what does that money go
[00:16:50] Frank: [00:16:50] towards?
[00:16:51] Joe: [00:16:51] What are you going to pay for with that
[00:16:53] Frank: [00:16:53] money? So technically what Coca covers is everything related to acquisition. [00:17:00] So that's marketing, advertising, PR salespeople.
[00:17:05] Joe: [00:17:05] Got it. So that should, that include the software or you use the marketing automation, the Salesforce is, um, you know, those types of
[00:17:12] Frank: [00:17:12] yes, absolutely. Because when you class, those are when you GL those in your PNL, those are going to go under S okay. So I'm going to take a very basic way to look at this, to understand, you know, what you're currently spending on an acquisition.
[00:17:26] If your P and L is structured like a common P and L with SGNA, just take the percentage of everything under S. And compare that to your revenue. That's your current cost of customer acquisition, right? And then divide that out over customers. How many customers you acquired that that'll tell you per customer, how much you're spending.
[00:17:47] Joe: [00:17:47] Got it. So example, we landed on an LTV lifetime value of $500. And now we're saying, and maybe for the sake of, of simple business math here, we're going to carve out 10% for our Coca. Okay. [00:18:00] Okay. So now we have $50 left. Our Coca is $50 and it's that $50 that goes to acquire the com the customer, right? Yep.
[00:18:08] It goes towards your ad spend. It goes towards your site where costs, when it comes to marketing automation at Ko goes towards the fraction of the time that a sales person and or a marketing person is going to spend. To help acquire that
[00:18:20] Frank: [00:18:20] customer. And by the way, if you're analyzing a business right away in this analysis, in this hypothetical situation, when I hear $50 is our threshold for Coca then immediately, I know this is a volume business because you can't have salespeople involved in closing deals when there's a $50 per customer.
[00:18:43] Threshold for Coca you follow me. So that's, if you're analyzing a business, And you come up and say, okay, well, their threshold for this business is $50. In this example right away, you know that there has to be a volume play. So if you look at what the business is doing, and they're trying to use salespeople to make this [00:19:00] happen, they've got a mismatch.
[00:19:02] That's never going to work. That's going to be square peg round hole.
[00:19:05] Joe: [00:19:05] Got it. Okay. So now we've got definitions for AOV, LTR, LTV, Coca. We've got all of our acronyms lined up. How do we actually do this? Let's run through an example. You know, if we're going to be working, let's say that we want to acquire 10 customers.
[00:19:19] Okay. 10 customers within a certain amount of time.
[00:19:22] Frank: [00:19:22] Well, so let's, let's just go there though at this basic level, this is kind of all we need to know. And we can break that down further, how to then spread that out for, from a marketing and sales spin standpoint, but let's just talk about customers, right?
[00:19:35] So if you know, you want 10 customers. And your threshold was $50. Your budget is $500, right? Period. So again, this is a mismatch because it, when we look at our buyer persona example sheet that we have in front of us, the 10 customers is on a business that has an lifetime revenue of $120,000 with a Coke of $3,000.
[00:19:55] That's a radically different business model. So if we were talking about $50 [00:20:00] acquisitions, We're probably looking at a business that is doing like a thousand customers a month. Right. Right. So to then get your budget, it's $50 times a thousand. And you know, with $50,000 you should then go acquire 1000 customers or more so the, or more part is then you're beating your Coca and when you beat it now you're creating, um, you're, you're, uh, commit, you're creating more profit essentially in the company.
[00:20:28] Joe: [00:20:28] Okay. So let's talk about aligning our teams around this business, math. So who needs to know this? Should this be a one and done? Is this ever present? Where do you do? Do you put this with your buyer persona? How often are you looking at this? And maybe even revising it, let's talk through some
[00:20:42] Frank: [00:20:42] of those things.
[00:20:43] Minimum. There's three people in the organization that should know this at minimum, the GM, whoever the general is the head of finance, CFO, director of finance, head of finance, VP, finance, whatever their title is. Head of finance. And three head of marketing because marketing [00:21:00] controls the activities related to the early parts of acquisition.
[00:21:06] And then a close fourth, I would say head of sales, but sales typically, um, is reacting to leads that are coming in and, or they're using, they're just given a budget for people to just, you know, go make sales happen. Whereas marketing uses money to spend on advertising, whatnot. So at minimum, those three people head of sales.
[00:21:26] It's great if they know it too, and they're involved in this process, but at minimum, the general, the head of finance and the head of marketing.
[00:21:34] Joe: [00:21:34] Got it. So once you figure this out, how often do you have to revisit it? How often do you have to revise it?
[00:21:40] Frank: [00:21:40] So one of the first things you want to do is go through the calculations.
[00:21:45] They're real simple, by the way. Uh, we kind of went through it in a matter of a few minutes. So go through the calculations and put down the data based on what you currently have put down the numbers based on the data you currently have. And then just set a benchmark. Don't worry about whether it's too high or too [00:22:00] low, just set a benchmark and start measuring it.
[00:22:03] And once you start measuring it, then you want to track it on a chart and you want to trend it. And say, Hey, are we like drive? Is this going up? Or is it going down? This is a chart number that should go down over time, right? Like any downward measurement or downward trend on this number is a good thing again, too, to a certain extent, going back to the bayzos comment, you know, he who can afford to spend the most acquire customer will win.
[00:22:32] You know, that's something that you're going to have to figure out in terms of your growth strategy. But generally speaking, being below your target for this number is good. So a trending down is generally a good thing for this number, but the key thing is to start measuring it and tracking it and looking at it and seeing where is the trend going go against your own benchmark is the first thing I would say.
[00:22:55] Joe: [00:22:55] Okay. So once, you know, your Coca, do you still have to operate within departmental [00:23:00] budgets or do you just spend based on your target? Um, you know, what, what trumps what here?
[00:23:04] Frank: [00:23:04] So this isn't the only number that's going to go into your, you know, your budgets for marketing and sales. So in the, in the example, we just talked about where you had $50 times a thousand customers.
[00:23:15] You have a $50,000 budget, but that $50,000 is going to go towards. Marketing and sales, but above and beyond that, you might have money that you are committing towards positioning and awareness and brand building. And while I always suggest that smaller businesses, you know, are spending very little in those efforts because put as much possible to sales and making sales is as possible.
[00:23:43] There that's still a valid way to spend some of your funds, some of your S. Is to a brand awareness brand positioning, right. A brand building. So, um, that, isn't the only budget. Is this a business math [00:24:00] analysis we're talking about here, but once you kind of combine those two, that's your overall budget for the whole S you know, category on your P and L that's it, that's everything.
[00:24:09] And so you've got to divide that out between sales and marketing, and again, Depending on your business model, you're either going to be a marketing centric business or a sales centric business. That's important to understand as well. So then you understand how to divvy up this money between marketing and sales and what I mean by are you a marketing centric or sales centric mostly refers to the kind of volume you need and the kind of offering that you have.
[00:24:34] Okay. So if, for example, let's say you're a SAS company and. Uh, you, you have these $50 a month subscriptions, right? You're going to be more of a marketing centric company because you have to, you have to have a thousand customers per month and he can't afford to really get salespeople involved, you know, until the very end.
[00:24:54] If someone has a question, right, that's a marketing center company on the flip side, let's say you just [00:25:00] need two customers per month, two clients per month, four clients per month. That is a sales centric company, because you can have a salesperson or to just simply go out and get those two to four clients.
[00:25:15] Right. So that will determine how you divvy up this money. So when we run this analysis, you might say, you know what, I'm going to take that, that total budget. And I'm going to devote it mostly to sales because we just need two clients. Let's just go get those two clients. You follow me. If you need a thousand per month, then you're going to be like more marketing heavy.
[00:25:38] So you're gonna be more marketing centric. And so that's, that will be how you determine how to divvy up this money.
[00:25:44] Joe: [00:25:44] Yeah. So you bring up a good point in terms of, you know, the money sliding around. A lot of these numbers are black and white, right? Um, your average order value, like you can just look that up, uh, your lifetime revenue, your lifetime value.
[00:25:55] Those are just functions of that AOV. Um, When [00:26:00] it comes to the actual Coca, we talked about that's a sliding scale, right? 5%, 10% people who want to be really aggressive 20, maybe 30%, um, you know, ongoing as we evaluate the health of our client acquisition program. How do we know if the math we did originally is correct?
[00:26:15] If it's sustainable, how do we look at that?
[00:26:19] Frank: [00:26:19] Well, what, obviously you have to compare that to the rest of, um, your bottom line. And so. Again, this gets into a bit of PNL analysis, but like if I were to look at a hypothetical company and the bottom line, wasn't what they wanted it to be. The first place I'm going to look is the GP, the cogs.
[00:26:41] And if the GP isn't to standard, then that's the first problem to be honest. But if the GP is to standard, then I start going to SGNA. And so then I'll look and say, okay, what percentage of your total revenue is the S. And that, you know, if you are talking about like [00:27:00] 25%, 20%, like that's pretty high, right?
[00:27:03] That's pretty high, especially a business. Who's not funding growth. Like if you're a startup, you're one of these unicorn startups where, you know, people have thrown like a half, a billion dollars into you. Then, yes, you're going to, you're going to have a big percentage in that S category because it's not about bottom line profitability, you're just growing base.
[00:27:24] Right. But if you're a mature business and you're just trying to hit the next growth tier, trying to grow by 25% each year, 10 to 25%. Then I wouldn't expect the S to be like, you know, tipping the scales. Right. I would expect to see that in the five to 10% range. Gotcha.
[00:27:43] Joe: [00:27:43] Okay. So if it's truly this simple, if the math is pretty simple, you can break it down easily using numbers that you probably already have, why aren't more people successful with this.
[00:27:52] And, um, you know what doesn't work when it doesn't work.
[00:27:56] Frank: [00:27:56] I think it goes back to what I said earlier, which is I think a [00:28:00] lot of, um, to that I end up dealing with some of them, the founders are still involved as the general and then some of them, they have hired CEOs. And I think that for the people that have the generals that are the founders still involved, again, this wasn't their original skillset.
[00:28:17] They didn't grow the business because they sat down and did a spreadsheet. And it's just not how they did it. Whereas like your hired gun CEO's they tend to be more analytical this way. So either way though, that skillset is typically what's missing as being analytical about it. And I think as businesses, we tend to complicate business, instead of just saying like, you know, starting with the P and L and just saying, okay, what's the GP, what's the S what's the GNA.
[00:28:45] And then like, using that. As your roadmap to tell you what's wrong with the business, because the people that are in the business are caught up in, well, the clients don't pay on time and you know, we're selling these things that we're not used to delivering and they're [00:29:00] caught up in those problems as opposed to just zooming out and saying, you know, well, I don't have to know anything about the business.
[00:29:05] I can tell you what the problem is. Right. And so it takes zooming out and starting there. And that it's challenging because most people are caught up in the details of their business. Right.
[00:29:17] Joe: [00:29:17] You know, I think we talked earlier about bringing the marketing team in maybe the CFO bringing in, you know, multiple people into this conversation.
[00:29:25] And I think what we found that exposing these numbers, making this a conversation, making a culture of profitability can also keep this top of mind. If everybody knows how to do this math, if everybody knows how to come up with these numbers, everybody is guarding it. Everybody is cognizant of it and everyone's making decisions based on that.
[00:29:43] Frank: [00:29:43] Right? Correct. And when talking about it and exposing it and having transparency around it, it's good to have that conversation, but it has to go beyond the one or two conversations or looking at it once a quarter, this kind of data should be exposed on a [00:30:00] dashboard somewhere. And so you can see it on a daily basis and look at the trend.
[00:30:06] The other thing that drives, this is there's a concept that was brought up in Jim Collins book. Good to great. And it was what plays into your, what he calls your hedgehog concept. And your hedgehog concept is this, you know, um, alignment of like what you're great at and what you can, what you're passionate about and what your economic driver is.
[00:30:27] When you bring these three things together, you have what he calls the hedgehog concept. Meaning like it's the one thing that you do really well that. You know, powers your growth. Well, the economic driver part, he calls it the profit per X, meaning in your business, you need to figure out what is the profit per employee or profit per account or profit per service line or profit per transaction.
[00:30:51] Like what is that lens that drives everything you do in your business. And once you define it, everything in your business [00:31:00] should support making that happen. Right? Um, and so that kind of thing is what needs to be looked at regularly by the entire executive team. This, this shouldn't just be a conversation that has had, you know, once a year, once every few months, this, these are the kinds of things that need to be, uh, identified and chart it on a regular basis and exposed to everyone.
[00:31:24] So that way everyone knows where that's going. Got
[00:31:27] Joe: [00:31:27] it. Okay. So. We talked about the basic business math. We talked about aligning your teams around this. We talked about how to evaluate whether or not this is actually working for you. Um, you know, to bring it full circle. I think if we can just lay out what the formula is, the basic formula again.
[00:31:43] Um, and obviously, probably nobody's penciling this out right now. So there are resources that we can give you to help you with this as well, but laid out for us. What's the formula.
[00:31:51] Frank: [00:31:51] Okay. At the very basic minimum, find out your average lifetime revenue for your clients. Okay. What is that? If it's transactional, how many [00:32:00] times do they purchase on average and what is that average amount, but to give you your lifetime revenue, if you're a monthly recurring, what's the average monthly amount and what are the average numbers months they stay multiply that out.
[00:32:10] Yeah. When you get your lifetime revenue, then what you're going to do is multiply that times, your average gross margin. Okay. And when you multiply those two together, you're going to get your gross profit, your average gross profit. Okay. Pretty simple, pretty straightforward. Once you have that, that will give you your lifetime value, right?
[00:32:30] That gross profit is your lifetime value. Then you're going to simply real symbol multiply that times, the percentage that you're willing to carve out towards acquisition.
[00:32:40] Joe: [00:32:40] And this is the sliding number I was talking
[00:32:42] Frank: [00:32:42] about. This is, you know, we often put 5% as an example or 10% as an example. So just put 10% as.
[00:32:49] A number or if you want to be more conservative, go 5% and just multiply that out. That's it. When you just do that basic business math, you get your Coca threshold. That would be [00:33:00] the maximum that you would want to, you know, have spent there. And so then you've got that number and let's say it's $500 per customer.
[00:33:09] You're willing to spend 500. Then all you have to do is take. The amount you've spent in the S part of European L so go to your CFO and get, get, get that number. And we spent just in the ass and divide that by the name number of customers you acquired for that same time period. So if you get the S number for a year, you also want to total, how many clients or customers you acquired in that same year?
[00:33:36] Okay. Just divide that out and compare the two it's super simple. And if you do this, it'll be very eyeopening. You might find out like, Holy cow, we're at $1,272 for each of those customers we acquired. But the threshold based on the simple math we just did was we should be targeting 500. What's happening.
[00:33:59] Now you can [00:34:00] start to have an informed conversation. You might say, Oh, you know what? Really $500 is not aggressive enough. It should be a thousand. It should be double that we shouldn't be 5%. We should be 10%. We're still, we're still off though. Cause we found out it was $1,272. Okay. That's more manageable, but at least gives you a place to start having a conversation based on the reality of what's actually happening in your business.
[00:34:23] Joe: [00:34:23] It's no longer guesswork or hope work.
[00:34:25] Frank: [00:34:25] Correct? Yeah.
[00:34:27] Joe: [00:34:27] Okay, great. So where can somebody get more resources to help them with this?
[00:34:31] Frank: [00:34:31] So if you want to actually follow along the, the instructions we just gave you download the blueprint that we have, where you can identify a buyer persona that you want to focus on for this conversation.
[00:34:44] And you can actually write out all of these numbers and do the math here. And start to understand what your thresholds are for acquiring customers, or even acquiring visitors to your website that will eventually turn into customers. This sheet that we have, we'll help you figure [00:35:00] that out. You can get, if this sheet it's part of our blueprint of the day, digital utopia methodology, and you can get it@buildingyourdigitalutopia.com.
[00:35:08] I'd highly suggest you go there and get that blueprint and start doing your business math today. And at minimum. Sit down with your CFO and just get those very basic numbers. I promise you, your CFO can help you run through this exercise and probably 10 minutes or less. And the 10 minutes you'll spend here is going to do wonders for your visibility and understanding of what's actually happening in your business.
[00:35:33] So go do that today. Figure out your basic business math. Make sure everyone on your executive team understands it. Start tracking it. And become systematic in how you're going to grow your business, but you can't do that. If you don't first get a handle on the base of businessman. So, Joe, this was super fun today.
[00:35:50] Hope you folks. Go in, download this blueprint again, building your digital utopia.com. Join us in our next episode. Look forward to having you like share subscribe, tweeted out. [00:36:00] We'll talk to you next time.
