57. Climatech is Biotech. Kristin Ellis of Lowercarbon Capital Replay

[00:00:00] Ralph: Hello and welcome to the perpetual traffic podcast. This is the show. We talk about business, math, business, math, how to use math to make more money in business, and we do not talk about seesaw swinging the boys in the school, your feet flying up in the air. I am Ralph burns, the founder of tier 11.

[00:00:17] Ralph: And alongside my co host who is not here today, Qasim Aslam, he's the co founder of Driven Mastermind. We're really glad you joined us today because today is a repeat episode, a blast from the past, a throwback Friday. Another is no such thing as a throwback Friday, but this is one of the episodes that was one of the most popular episodes we've ever done.

[00:00:39] Ralph: And I think it's important for you all to listen to this again, especially in light of the couple of the episodes that we've done just recently. The two we did with John Moran about. A new customer acquisition cost, understanding your numbers, understanding your CAC, your cost to acquire a customer and most importantly, one of the most important laws, I think, in digital marketing, digital advertising, and one that we actually Thought up buyer lonesome, which is the law of inverse profitability, which is as you scale, you not expect the same numbers when you're bigger as a business, as you were when you were smaller.

[00:01:22] Ralph: Let me talk about that here today, myself and Qasim on this Replay episode. Now, a couple of things in context, I'm going to leave these in the show notes, the two shows from John Moran, if you haven't watched those yet, now he's a member of tier 11, really excited to have him on board with us. He understands this stuff better than anybody. New customer acquisition, how it actually all works with your numbers and how that plays back into paid traffic.

[00:01:51] Ralph: There's a couple of caveats to this, though, is that since we have recorded this episode, we have actually found ways in which to maintain profitability and actually not lose money. Accept decreases in profitability by looking at other channels outside of paid traffic. And we'll do an episode with John on this specifically how we were able to leverage paid traffic, turn it into SEO, and then use that SEO to gather more customers.

[00:02:21] Ralph: So it's now a sunk cost doesn't need to be maintained as much as increase in ad spend second to that. There's another model that we've referred to on the show a number of times called the ACC model. We actually refer to it as the CCA model, which is conversion consideration and awareness, where you can actually lower your ad spend through brand awareness because you reach a level of scale in which you're now, your brand is actually pulling in most of the traffic and you don't have to go and compete against everyone else for those.

[00:02:52] Ralph: High value keywords, you don't have to compete for everybody else, for mind share and for conversions in the newsfeed inside meta or Instagram or Facebook. The point is, is like, there are some exceptions to this rule here, and we're going to be discussing a lot of those in coming episodes here, because even though math isn't the thing that you think of when you think of digital marketing and digital advertising without it, none of the stuff that we talk about on the show.

[00:03:18] Ralph: Even matters because at the end of the day, it's not about getting just more customers. It's about getting more customers profitably, creating lifetime value for them and scaling and growing your business. So, enjoy this week's episode. Let us know what you think about, these types of episodes. We bring them back because they're relevant to the things that we're talking about here today.

[00:03:40] Ralph: And of course, check us out over at our telegram channel. If you haven't joined. I know a lot of folks have joined that channel because of the episodes. We talked about, the, why ROAS sucks, episode, actually a two parter, and I think this one will have the same sort of effect. So join us over at perpetual traffic.

[00:03:58] Ralph: com forward slash telegram. I promise I will be in there more. I've been out the last two, three weeks. So if you've been adding me directly, I will get to that as soon as possible. So without further ado, it's myself and Qasim. But this week's episode on the law of inverse profitability can actually help you grow and scale your business.

[00:04:19] Intro: you're listening to perpetual traffic.

[00:04:33] Ralph: Hello and welcome to the perpetual traffic podcast. This is your host, Ralph burns. And this is where we share cutting edge strategies and acquiring leads and sales for your business through paid traffic, paid traffic. That's what we say in the past custom, but it's not really about paid traffic anymore as the last show, I think sort of blow that whole thing out of the water.

[00:04:53] Ralph: A bit evolving. Yeah, we're evolving. It's just humans here. We're not just paid traffic machines. So we're here to help you grow your business, but acquire new customers and enhance their lifetime value. How about that? Maybe we should just change the tagline entirely.

[00:05:09] Kasim: Yeah, I like that we're doing it live.

[00:05:10] Ralph: Yeah, I think we are. We're just doing it right on the air here. Meetings for us. No, that's right. It's a straight red line as opposed to it. Yeah. Like we're going right for it. So when it comes to customer acquisition and it comes to acquiring customers, we've talked about this a lot on this show, believe it or not.

[00:05:27] Ralph: We actually have three or four episodes. I think this was in the pre QASM days. It was like BK, before QASM. So, which we'll, which we'll leave links in the show notes for that before, before KA, BKA, because now it's like BCE, all that's just different sort of annotations now, but yeah, we'll leave links on that in the show notes, because today we're going to be talking about how to actually make more money with less profit.

[00:05:54] Ralph: That's the idea here, which is not something that I think a lot of online businesses really think about as they scale and grow, it's easy when you're first starting out and when you're small, remember those days when you first start out, you have 60 percent profit margins. It was great. And then all of a sudden, as you got bigger, you had to add more staff when you have increased costs and all these other sorts of things.

[00:06:15] Ralph: So we're going to talk about those sort of realities here. Today and how that relates back to traffic. Thoughts, concerns, comments, Qasim on this highly non traffic related topic here.

[00:06:25] Kasim: I'm excited about having this episode just to send to people. Because I did this too as a business owner, but I think everybody pays attention to the early stage metrics that they're able to achieve and then they try to stick to them.

[00:06:37] Kasim: They become these like obsessive benchmarks in their mind. Look at, dude, if you look at massive organizations, they're making like 3 percent profit margins. I don't know if you're reading like earnings reports and stuff, like they make effectively nothing on a percentage basis. They do so much gross revenue that they're just minting money.

[00:06:54] Kasim: And I'm not advising that people head in that direction, but I do think it's worth integrating into your mind that as you grow, the efficiency factor of your organization changes. And I think that's what we're talking about here is just how to manage that change and how to account for it.

[00:07:08] Ralph: Yeah. I mean, Tesla, for example, everyone knows Tesla and now they're actually a profitable company for years.

[00:07:13] Ralph: They weren't actually profitable, but their goal is a 20 percent net operating income. So when I say profit or I say net operating income or net profit, that's like. Everything before taxes, amortization, all those sorts of things. A lot of people will call it EBITDA, earnings before interest taxes and amortization.

[00:07:36] Ralph: Although I always get confused with the amortization thing. Earnings

[00:07:39] Kasim: before interest taxes, depreciation and amortization.

[00:07:41] Ralph: With the D in there. That's right. Because sometimes it's called EBIT or it's EBITDA. So that's what we're talking about here. When we talk about everything that you're making, like what you're actually making After all your expenses, after your overhead, after your cost of goods sold, like all that sort of, and that's really what kind of matters.

[00:07:59] Ralph: That's the stuff that actually drives the business forward. And a company like Tesla right now is a 15 percent profit margin. Their goal is 20%, meaning that is like everything, all their costs out, but probably before Musk's salary or whatever it happens to be. If you look over at Apple, Apple is one of those companies that.

[00:08:19] Ralph: A lot of people will say, geez, they must be making tons of actual cash. They have more cash on hand than any other company in history. They have more cash on hand than the U. S. government. The U. S. government. There's a lot of free cash. It's crazy. Yeah, it's unreal. And they're at a 24 percent net operating income as of their last earnings report.

[00:08:37] Ralph: When all is said and done, we're going to be talking about that here today. So before we get into that, I think you have a spicy, tasty little nugget.

[00:08:45] Kasim: I'm calling it the botched launch. We launched our book March 1st. So two days ago is the time of this recording. And dude, I did this insane media blitz, Ralph.

[00:08:54] Kasim: I went to our entire list, all of our social channels. We ran a ton of ads, tens of thousands of dollars in ads, and we promised people they could buy the book. And it's a great big media book. Like it's a real book. It's the type of book you'd expect to pay 30 bucks for, full color. And we told everybody you can get it for 99 cents.

[00:09:08] Kasim: You can get the ebook for 99 cents one day only. And the scam here is you get all these people to opt in, Hmm. You launch it, everybody comes and buys it on that day, and you're instantly a number one bestseller. And say what you will about the integrity of the system, I don't care. I'm not here to protect it.

[00:09:23] Kasim: But the truth is, when you become a bestseller, then your book sells. And so you have to get on the top of the list. And so that was the plan. And I've done it before, and I know that it works. Here's the problem. Our book is so damn big, the file size exceeds Amazon's limitations to list it for 99 cents. So I ran this week's long promotion promising literally thousands of people.

[00:09:45] Kasim: They could buy my book for 99 cents. And the day before the night before, when we go to launch Amazon, sorry, lowest you can go is two 99. So now I'm like, Oh dear God, what do I do? And two bucks is two bucks, but every marketer knows. Marketing is relationship building. And if you promise somebody something for 99 cents, and you don't deliver it for 99 cents, you will, they will never trust you again.

[00:10:07] Kasim: So now I'm facing just this, there's just this catastrophe, and we pulled an audible that, I just wanted to get out of being a liar and a scam artist, and so And we created a landing page and we emailed everybody and said, Hey, we told him exactly what happened. Amazon won't let us list this for 99 cents because the file size is too big.

[00:10:24] Kasim: I made a big value proposition there about how this is that good a book. So I'm gonna give it to you. I'm gonna give you the book for free and they could fill out, they could fill out a form, they could download the PDF version of the book for free. And then on that page I said, But if you want to buy it and you want to support us, here are links to Amazon.

[00:10:39] Kasim: Now, here's what's interesting. I would have expected everybody who opted in to buy the book. Only in a normal circumstance, if I could have actually gotten them to the price to 99 cents, when I gave him the book, only a third of them actually purchased. So two thirds downloaded the free book and then pieced me out.

[00:10:54] Kasim: But here's, what's crazy. And this is what I didn't expect. The amount of shares I got to that page, Ralph was insane. The thing went viral on me, like I got 20 times the social reach I would have got when I paid for traffic. And because I got that many shares, people came, they downloaded it for free, but about a third of them would go and they'd buy the book.

[00:11:15] Kasim: They're like, hey, we can kick you three dollars. This is, you know, we appreciate you doing this. And because it was a quote unquote botched launch and people smelled blood in the water, Then it was this thing where it was very authentic, but it was like, Oh, you can get this book. That's not supposed to be free.

[00:11:27] Kasim: And you can get it for free because these guys screwed up. So if there's a way for you to manufacture the botch and run a botched launch, your ability to reach people, I think increases in the believability of some of the offers increased too. So for whatever that's worth and whatever realm of business you're in, Go run yourself a botched launch.

[00:11:46] Kasim: Cause dude, we like it. I was the number one in marketing and advertising, which are two of the hardest nonfiction categories in all of Amazon books, we beat out Alex Formosy. He's impossible to beat out. He's the smartest guy working right now. And it's because we just got this unbelievable boost from the fact that I screwed up and people like watching screw ups.

[00:12:04] Ralph: So the fact that you screwed up and you were honest about it, really, it worked as a diabolical marketing strategy.

[00:12:14] Kasim: Yeah, I didn't even know it was being diabolical, Ralph. But if you ever see, if you follow stuff I do and I accidentally make a whoopsie, now you're gonna wonder. You're gonna be like, I wonder if Kostner just, yeah.

[00:12:24] Ralph: I'm just wondering if you're like coming on the show here today and just telling it. Dude, that's how I

[00:12:27] Kasim: got on Perpetual Traffic. I was trying to schedule for another podcast.

[00:12:30] Ralph: Yeah, I just don't believe anything you say now, now that I know. No, that's tremendous. No, it actually makes a lot of sense. So, in essence, Because of the botch launch, you ended up selling more of it.

[00:12:41] Ralph: Got to number one. What's the end goal when you're launching something on Amazon for the first time as a, trying to become a bestseller, like how long do you want to stay on top? What was the goal for you to get like one day or

[00:12:53] Kasim: what was it? Yeah, my goal is always to be the number one in new release.

[00:12:57] Kasim: Cause that's the easiest, but, and we achieved that by 7am because the botch launch pushed so much visibility. We didn't just get number one in new released. We got number one in. Advertising generally, like the category of advertising, all advertising books, all the great Seth Gogan, Ogilvy, and like just people that sell hundreds of thousands of books.

[00:13:19] Kasim: We were number one in advertising and number one in marketing. I bet you at the time of this recording, we're still there. We're at least in the top three, five, it's recalculated every single day, but I never would have gotten that much visibility if it weren't for the botch. That's tremendous. I was physical books.

[00:13:33] Kasim: I would, did you sell any book? It's all ebook. It's all. So people bought the ebook and the physical book. I actually rank for the physical book too. We're in the top five, which is again, much, much more competitive. I think we peaked at top three, but we're selling the ebook and the physical book. And because the physical book is full color, it's a lot more expensive than a normal, like.

[00:13:52] Kasim: Usually you pay 10 to 15 bucks a book. Ours is 30 because we print on demand through Amazon. And it's about that to print and to ship. I, we don't make money on the books. I want to be the name. I want to be the guy that wrote the book. So it all worked out perfectly in the end, at the end of the day. Did you outrank

[00:14:08] Ralph: David Ogilvie and everyone like that?

[00:14:10] Kasim: I was, I'll send you the screenshots. I was literally, I was the number one book in all of advertising, Ralph, like the number one in advertising and marketing. It's all over my Facebook!

[00:14:19] Ralph: I'm actually on the, oh yeah, I've been away for a couple of weeks, so. Yeah, yeah, by the way,

[00:14:24] Kasim: how was Thailand?

[00:14:25] Ralph: You versus, that's not you, I actually just googled it.

[00:14:29] Ralph: But it does say you're in new releases, which is good. Who is Patience Hurlburt Lawton? That's not you. No,

[00:14:35] Kasim: she's our director of marketing. So there's three authors on it. There's Patience, who wrote the book. Okay. There's John Moran, and Patience, to write the book, watched all of his videos, all of our internal training videos, all the YouTube videos.

[00:14:44] Kasim: And then I wrote the title. Which is how I got my name on the book. Which I think is, most people only read the title, Ralph. I think I'm probably the most important participant in that process.

[00:14:55] Ralph: You're definitely the most well read on the entire book. Because when you read the, like, you read the book, you read the title.

[00:15:00] Ralph: You don't even read who it's by. So, technically, people are reading your stuff more than the guys who actually know what they're doing. Like John Moran and, yeah, so. Yeah. Lawrence, Patience Hurlburt. I've never met Patience, actually. She got poached. She doesn't even work for me anymore.

[00:15:15] Kasim: Yeah, she went, dude, she's brilliant.

[00:15:17] Kasim: She's amazing. She's, uh, she's working for Hawk SEM, a competitor, friendly competitor. And she was my director of marketing for gosh, five, six years. And she just outgrew me. I'm like a really brilliant human, but that poor girl, I threw so much just, I'm like, random ideas at her, and she could just, she could do anything.

[00:15:33] Kasim: She was unbelievable. Directors of four, right? Yeah, she, dude, she wrote the definitive guide to Google Ads without knowing how to run Google Ads, and she just did it by watching everything John ever said.

[00:15:41] Ralph: Yeah, that's pretty good. That's pretty good. I think there's no worse job in the world than being like the director of marketing for a marketing company where the CEO is actually a marketing person.

[00:15:52] Ralph: So I feel bad for our VP of marketing almost every day because I'm constantly like all over his shit. But Tom, if you're listening, he does a great job though. So it's actually, it's a lot of fun. How can you not be involved? I know Ryan dice says, I don't do any of our marketing. It's like bull crap. Like you gotta get involved at some point.

[00:16:10] Ralph: Here's why he

[00:16:11] Kasim: says that because the bar is too high. That's true. The bar is too high. When you're a digital marketer, your marketing has to be spot on. So it's a brilliant strategic move for him to be like, Nope, not involved in that at all. You can't hold my feet to the fire because you're going to teach it and then not do what you teach.

[00:16:24] Kasim: You need to have an excuse. Yeah.

[00:16:26] Ralph: Yeah. He said, he's just off the org chart now, which is just a nice way to explain things as you scale. I'm rich now. That's right. That's right. That's what we're talking about here today is how to actually get off your own org chart by scaling so much that you use the law of inverse profitability to be tremendously wealthy.

[00:16:44] Ralph: So you can be like Ryan Dyson, just write yourself off the org chart. So we're going to get into that. Right after this quick break

[00:16:52] Ralph: We are back today. We're going to be talking about how much you can pay to acquire a customer, but really more about how you can accept lower profitability for your business, but make more money as you scale. So one of the real big concepts of this is, I think I originally heard from It was J Abraham way back when this was actually cool.

[00:17:17] Ralph: We did like an in person in session thing with him and a buddy of yours, Jason Fladlin and Joe Polish. And I got the chance to meet Jay Abraham, hang out with him. We talked about this a lot. Did you know that there are three ways to grow a business? Kossum?

[00:17:34] Kasim: Sell more

[00:17:35] Ralph: stuff, sell to more

[00:17:37] Kasim: people.

[00:17:40] Ralph: What's the third?

[00:17:41] Ralph: Sell, sell more, which is basically sell to more people. Okay.

[00:17:47] Kasim: Get them to buy more when they buy. That's what I meant when I said some more stuff. So like some more stuff to the same people, sell to more people.

[00:17:55] Ralph: Yup. And then the third one is to get the same people to come back and buy more.

[00:18:01] Kasim: That's a little bit of a crowbar similarity to sell more stuff, but I understand, I understand why you would need to make the distinction.

[00:18:07] Kasim: So I'm not going to fight J Abraham on that one.

[00:18:09] Ralph: So you can acquire more customers, right? Which is number one. Like, all right, I have a thousand customers. You know, that a lifetime value I figured out is, and we'll leave links in the show notes on how to do all this, because we're not going to get into all the math here because today's a relatively short episode, but let's say that the lifetime value of your customer base is 2, 000, like over the long haul, like, for example, like the lifetime value of a customer at Starbucks is, I think it's like 14, 700 or something crazy like that.

[00:18:40] Ralph: Dude, I spend that a day. Yeah. Yeah. Just on coffee alone, man. Haircare products really for you. Yeah. 14, 000 a day. Now that,

[00:18:47] Kasim: those I make my own. Ah, okay. In the lab. Viscous roots in my backyard. Downstairs. Grind them into small powder. We'll do a whole episode on it. That's great. That's

[00:18:55] Ralph: great. You are like out in the desert Southwest, so you probably have a, I don't know, like a breaking bad lab in your basement or something like that.

[00:19:02] Ralph: But anyway, so there's really though, there's that, there's acquire more customers, which we talk about a lot, like customer acquisition, like that's a big deal. But when they actually buy, can you get them to buy more when they actually do purchase? And how many times are you going to be able to get them back to buy again?

[00:19:18] Kasim: So, so it's CAC, AOV, LTV

[00:19:21] Ralph: in essence. Yes. So would you like to explain those three acronyms for us?

[00:19:28] Kasim: CAC, Cost to Acquire a Customer, uh, which is one of the most important data points that a business can have, and nobody knows if they're CAC. And I'm the ag dude, I'm not throwing grenades, I have a hard time calculating our CAC sometimes, just because everything gets so convoluted.

[00:19:41] Kasim: AOV, Average Order Value. This is one of the deal breakers for small spend e commerce campaigns, because Even if they can make money long term, they don't liquidate fast enough. And so it's almost like they're borrowing money from themselves and they can't bridge the gap. And then LTV is lifetime value of a customer.

[00:19:59] Kasim: And that, again, is one of the most important data points. And really, if you take CAC and LTV, that's your profitability ratio. What's it cost me to acquire a customer and how much do I make from that customer long term? And as long as the first number is lower than the second number, I'm in business.

[00:20:17] Ralph: Yeah, and I think a lot of businesses don't go through this sort of basic math.

[00:20:22] Ralph: And like I said, we're not going to get into all the specifics here, but we'll leave links in the show notes for two episodes we've done on this prior, because this is so important. It's basically what's your average order value and you minus all your costs and then you take out your desired profitability.

[00:20:36] Ralph: And then what's left over is what you can pay to afford or afford to pay at the maximum value to acquire a customer. Or if you accept. Zero profitability. Hey, I'm going to break even, I'm going to try and outbid my competitors. Cause we're talking about paid traffic here primarily, right? Or it could be your overall marketing expense.

[00:20:57] Ralph: That's another thing that a lot of people miss is that they look at, all right, what's my sales and marketing expense or just my ad. Spend it's actually your entire marketing department.

[00:21:06] Kasim: Yeah. What's the salary of your director of marketing? You know what I mean? What's it cost for you to keep the lights on and the applications that you're paying for in order to run these things.

[00:21:13] Kasim: People never factor those into, I love when agencies return row as numbers. And I'm like, how come your fee's not in there, bro? I'm like, how come we're not talking ROI? We're talking row as.

[00:21:22] Ralph: Yeah. We just had a recent customer who was like, all right, we're going to spend 600, 000 per month. On paid media. And we want to factor it like that's our budget.

[00:21:34] Ralph: And we want this like moderate, like they understand their numbers. This is one of the rare ones where they're like, we know what we can afford to pay to acquire a customer. Cause we understand what the lifetime value is. And a lot of people say LTV is lifetime value or long term value. I prefer a lifetime.

[00:21:52] Ralph: I think that's really more of like the marketing standard, but you could say long term. Value to a certain degree, I would

[00:21:58] Kasim: fight to the death to make it lifetime value. I wouldn't accept long term value from anybody because now it's subjective. And what does that mean? You're just going to move the goal line on me.

[00:22:05] Kasim: But one of the

[00:22:06] Ralph: things about LTV is like, what timeframe are you using? Like when we're trying to figure out, okay, what is your LTV? What can you pay to acquire a customer with your desired profitability in the mix? A lot of businesses. Don't really know what the timeframe is for that LTV. They might look at three months, six months, 12 months, maybe five years.

[00:22:29] Ralph: If they have more time

[00:22:30] Kasim: versus long term because lifetime, what's nice about lifetime is especially for small businesses, new businesses, I should say. The lifetime value grows as the business ages, because you have your strongest retained clients that continue to add to the lifetime value. And so what that means is, in a long enough timeline, you end up being able to pay more for customers.

[00:22:48] Ralph: In theory, yeah. You should be able to do The best way to do this, like I said, we've got a couple of different episodes here where we go through this in a lot of detail, is Look at just to pick a timeframe. If you've never done this before, go back a year, figure out what your sales were for last year.

[00:23:06] Ralph: Figure out how many unique customers you have that bought from you in that year. And I think that's a good place to start. At least, because I think that's more than a lot of businesses actually do.

[00:23:18] Kasim: I agree, but so I, can I make this conversation more complex, Ralph? Because this is a fun, this is a fun topic.

[00:23:22] Kasim: This is a fun topic. Don't go too complex now. I won't go too complex, but I'm just going to ask a question. And here's where I struggle. Let's say that you have a three month sales cycle. So I know that when I spend a dollar, I drop somebody in the top of my funnel and between the time when I've spent that dollar, it takes about three months to nurture them down from the top of the funnel to the bottom of the funnel, get them on the phone with my sales team, do the proposal and the dance and the song, whatever, kiss, hug, make up, we're married, bam, three months.

[00:23:48] Kasim: When I'm calculating my cash out, my costs, shouldn't I be taking today's income and three months ago's expenses?

[00:24:01] Ralph: But people don't do that.

[00:24:03] Kasim: They don't. That's where this gets really, and it's simple logic, but it's complex decision making.

[00:24:11] Ralph: It's extremely complex. I think you have to settle on a number that you're comfortable with that isn't precise and exact.

[00:24:19] Ralph: In a lot of ways. Especially if you're dealing with paid traffic. Because that's so easily measurable. We're testing right now this idea of really don't do much in the way of paid traffic, but just do organic social and see exactly what. Effect that has on our leads. So the best guinea pigs I've always found for us to test new theories, just test it out on ourselves and just figure out, okay, is there really something to this?

[00:24:45] Ralph: What we're finding is that it's not quite all right. We're saving money on ad spend, right? Our salaries and everything else that goes into our marketing department, which is part of your marketing expense, selling general administrative, like there's an M in there, which is marketing and it's not necessarily all just ad spend.

[00:25:04] Ralph: So, but we're actually finding is that some of the paid traffic that might not develop into leads is actually generating leads somewhere else. Just what we talked about, I think two or three episodes ago, when you were talking about what you guys were doing on YouTube, dude,

[00:25:18] Kasim: 150 grand a month with zero attribution.

[00:25:22] Kasim: It's crazy. Go back and listen to that episode if you didn't hear it. Cause it is, it blows your mind. It's it, and attribution is getting harder. So this conversation is even more important because your ability to do C, when somebody converts from paid traffic, is going to continue to diminish.

[00:25:40] Ralph: So, in that way, I think you have to get comfortable with a number.

[00:25:44] Ralph: And know what that number is. Like, for you, alright, let's say it's 150, 000 in spend per month, because you know you're going to get in the back end at 90x plus days, because you know your cycle. Yeah safe to say

[00:25:58] Kasim: my cost per acquisition on a customer is 2, 500. My lifetime value on a customer is about 24, 000 So we do pretty well there But as to the point that you're making those are old numbers actually now that we're scaling up cac is going up Ltv seems to be going down.

[00:26:11] Ralph: So this is actually a perfect example of what we want to talk about here inverse profitability It's like you guys have enjoyed Good profitability. And now you are spending and scaling. Let's just say, when I want to talk about solutions, eight specific numbers, but let's just say you're at a 40 percent or like a 30 percent net operating income.

[00:26:30] Ralph: Yeah, that's about

[00:26:30] Kasim: exactly where we were 30 to 40%.

[00:26:32] Ralph: Okay.

[00:26:33] Kasim: Yeah.

[00:26:34] Ralph: So let's say you're a 4 million company. We're not going to talk about like your numbers specifically, but let's say you're about that. Let's say you're at a 30%. Net operating income. No, I don't think

[00:26:45] Kasim: we're there anymore, by the way. I think we were there and then we exploded in this growth.

[00:26:50] Kasim: Yeah. This is my point.

[00:26:51] Ralph: This is my point. The law of inverse profitability States. And this is an issue that we have with customers who come on board. They're like, I can't scale anymore because I still want that 30 percent net or they don't tell us what's even worse. So. I just won't work with him. I don't want to tell you guys, like, what I'm making.

[00:27:07] Kasim: You don't want to tell your bus driver where you're going? Like, what do

[00:27:09] Ralph: you mean? Seriously. Yeah, just hit the gas. Just get on the Waze app and just take me somewhere. Right. Yeah, just, yeah, whatever. Like, where are you going, man? Oh, I don't know. Like, Waze is just going to take me somewhere. That's what's happening when you're being that way with your Let's just guess.

[00:27:25] Ralph: Oh, I want to go across town, but I'm not really sure where. I'm just going to let Waze take me there. No, you need to know what the goal is. Be transparent. If you're working with an agency, if you're working with an internal marketing department, it's okay to talk about these sorts of numbers. It's like, it's not going to kill you.

[00:27:40] Ralph: It was so funny. We were at a client meeting about a month and a half ago, and we went through this like a step by step, literally five, six hours, and they kept not wanting to give us their profitability. I'm like, guys. It, just tell me for Christ's sake, it's like, it's not going to raise fees on you today.

[00:27:56] Ralph: Like, just tell me what it is so we can actually be in the same page. We eventually did. I don't think he was completely transparent. They patted the hell out of him. The point is like we beat it out of him. My point is this. So if you're a 4 million business, let's just use this hypothetically. And you're making 30 percent net.

[00:28:15] Ralph: Okay. You are making about 1. 2 million, like after everything, right? That's could be salaries. It could be under distributions or whatever it happens to be like, that's pretty profitable. That's more profitable than Apple. Right? Apple is 24, 25%, which is

[00:28:32] Kasim: pretty good

[00:28:33] Ralph: net operating income.

[00:28:34] Kasim: Dude, I, when you said that, that shocked me that Apple does 20%.

[00:28:37] Kasim: I'd have guessed sub 10. I mean, they have premium price products. Yeah, but I mean like the Apple stores, the Geeks Squad thing they do, all the support. I know they're not Geeks Squad. Who are they? Uh, that's

[00:28:49] Ralph: Best

[00:28:49] Kasim: Buy, I think. Yeah. Yeah, but Apple has their own version. I just figured that the overhead would be so high.

[00:28:54] Kasim: I'm actually really impressed with 24%.

[00:28:56] Ralph: Yeah, real estate and all that sort of stuff. It's shrunk over time. It's shrunk over time. It used to be in the 40s. This is exactly what they figured out. It's like, All right, if I can actually double down on scale, then I can accept a lower net operating income. So in my little example here, so let's say you're at 30 percent net for a 4 million business.

[00:29:17] Ralph: Let's say you grow that, let's say you double it, okay, and you get to 8 million in revenue. That's pretty good. 30 percent net is going to be harder to come by, especially if you're using paid traffic. It's going to be harder for you to achieve it. Have you ever seen a case where you've taken a business or a customer solutions eight, where you've doubled their ad spend and doubled their business and their profitability remains exactly the same, or it actually widens.

[00:29:45] Ralph: All things being equal. I don't think it's possible. Right. Unless you fundamentally change the offer or going back to Jay Abraham's thing, get them to buy more when they're buying potentially there's

[00:29:56] Kasim: an optimization opportunity there. And when you spend more, maybe you can optimize more, but all other things being equal, that's like.

[00:30:04] Kasim: Adam Smith 101 market demand as you spend more you it's self imposed inflation is the way to think about it You actually increase the cost of traffic yourself. It's true every time you spend a dollar You are also the market spending one more dollar on an audience

[00:30:20] Ralph: true and as you scale and grow and this is exactly what happened To this particular customer is that when they first came out seven eight years ago six?

[00:30:30] Ralph: Yeah, about seven eight years ago. There was basically no competition. So they had literally 60 70 percent at operating income I'm not exactly sure what it was because they won't tell us Well, let's say it's 50%, but now they're like, well, there's all these competitors that came into the market and traffic costs are so much more, and now we still want those old net profitability numbers from five, six, seven years ago.

[00:30:52] Ralph: I'm like, it's just not possible. It's not going to happen. Cause traffic costs have increased and primarily they're using paid traffic, paid social in order to scale and grow as well as YouTube and Google and a lot of the other social channels. But, so we're managing all that, but the point is as you scale, you're going to make less as a percentage, but the beauty is that if you can accept a lower percentage, let's say you get from 4 million to 8 million.

[00:31:17] Ralph: Okay. And you say, okay, 30 percent net. Those are bygone. That's a bygone era, but I've doubled now at my sales to 8 million. Let's say I'm going to accept 25 percent net operating. It's 2 million. So you're now making 40%, if my math is correctly, more in actual dollars by accepting a lower net profitability goal.

[00:31:44] Ralph: If that makes sense, so 30 percent at 4 million is 1. 2 million, 8 million, you're doubling. Okay. You're now making 2 million, so you're making 800, 000 more. That's pretty good. But the point is you're not living by yesterday's rules. You're actually living by today's rules. And I think this is the standard that people have set.

[00:32:03] Ralph: Like they come to us all the time. Oh, Facebook has, it did so well for us three, four years ago. Our CPA was 50 bucks. I'm like, that's great. Those days are gone. Yeah. You know, it's just not going to happen anymore because traffic costs are more. You have more competition. You have more stupid advertisers that are on the platform that are just going to push, push all the prices up.

[00:32:22] Ralph: So you have to look at things as you scale. You have to actually start to look at your internal metrics differently. So let's take that example out further on this law of inverse profitability, which is, all right, now let's say you're at 8 million, you're at 25 percent net, you're making 2 million. Okay.

[00:32:40] Ralph: And net operating income. Pretty good. Let's say you grow by another 50%. Let's say you grow up to 12 million, but now you're like, all right, if I can only get to 25 percent net, that would be great, but chances are you won't. So you're going to have to add more to your cost to acquire a customer. Okay. Cause traffic costs are going to be more.

[00:33:00] Ralph: So it's going to decrease your profitability. So you have to be able to set a lower goal. Let's say in this example, that goal is 20%. 2. 4 million. So, now, you no longer have a profitable business at 2 million, at 8 million, you now have increased it by another 20%. Now you're actually making more in real dollars at 2.

[00:33:22] Ralph: 4 million, which is the whole idea behind this. And you can take this all the way out to doubling, tripling, quadrupling

[00:33:30] Kasim: your revenue. Depending on your infrastructure, you could get to a point of delineating returns, where you're actually making less money when you do more. And I think that generally speaks to a scale problem.

[00:33:41] Kasim: I've been there. Yeah. I've made, I've taken home less money when I was making more in gross revenue. And it's because my business model was flawed. And so it doesn't mean that you've hit this glass ceiling and you need to stop. It means I need to go look at what am I doing wrong from a fulfillment perspective, because if I'm taking more money in, I'm obviously doing something incorrectly if I'm making less money than I did.

[00:33:59] Ralph: Yeah. Chances are, if that is the case, then you have some kind of cost issue internally inside the business. And there's either a systems issue. There's a people issue. There might be an accountability chart or like a, an org chart issue. And you really need, what I find is that as a CEO is more like on the visionary side, it's like what you really need in cases like this is somebody who can dissect it all and pull out the inefficiencies like an integrator, a true COO can do, which is.

[00:34:28] Ralph: Yeah, how are you looking at all your systems and do you have duplicate processes that are overlapping or things that are actually redundant that are costing you money or time wasters? If you're in the service industry, you're probably experiencing this right now. As you guys are scaling and growing, it's like your systems start to break.

[00:34:44] Ralph: So you actually have to look at that and say, well, how can I restructure myself? Maybe it's not you who does it. Maybe it's somebody who's has a different sort of mindset as far as systems operability, how to actually put things together, as opposed to just having the vision. And I think that's where things get a little bit more complex, especially in the service based business.

[00:35:04] Ralph: Cause when it was. You, two or three people, it was simple. Now it's you and a hundred people, right? So the systems are more complex. There's probably things that need to get revised or revamped to make them more efficient. And as a result of that, that should help you with your profitability. But the point is, is as a business, and as you grow, you should be able to accept a lower net operating as you scale and grow.

[00:35:32] Ralph: Through paid advertising at the very least, all things being equal. And that's the law of inverse profitability here is, is really understanding your numbers. And a 10 million business is very different than a 1 million business. A 1 million business at a 40 percent net is making 400, 000, but a 10 million business at a 20 percent is making 2 million.

[00:35:53] Ralph: So I find that business owners really have a challenge. Understanding this is wrapping their head around it. Thoughts?

[00:36:02] Kasim: I couldn't agree more. I think there's this horrible chasm that exists, and you actually nailed it just then, Ralph, in that one to ten, because right when you get to about a million dollars, that's when, and forgive me if I'm about to lob a grenade, I don't mean to say this in a way that would hurt anybody's feelings, but that's when it becomes a real business in my mind.

[00:36:20] Kasim: Before a million dollars gross revenue, it's like you're freelance, sewn together, whatever it is that you're doing, but a million dollars gross revenue, you're a real business. Four hundred thousand,

[00:36:28] Ralph: you're saying, right? Not four million. Sorry? Sorry. 400, 000 like

[00:36:31] Kasim: in the 100, 000 range. I just mean, if you get to a million dollar gross revenue, that to me signals quote unquote, real business, you sold a million dollars a year, but between a million and five, my experience.

[00:36:46] Kasim: It's, it's this horrible position where you're actually better off staying at a million unless you know for a fact you can get to five. Right. Because two, three, and four are gonna cost you so much because you now have to build the infrastructure for a five million dollar business, but you're still only making one, two, or three million dollars, and it was a nightmare for us.

[00:37:04] Kasim: It was like this, this bowed bridge to where I'm like, dude, why am I doing this? I was putting a million, when I was making a million bucks, I was putting half of it in my pocket. And now everything is going out to all these people and these systems and these softwares you have to pay for and per user pricing and all this crap.

[00:37:16] Kasim: But then you get to five and you're like, Oh, now I do less. I make more. And there's those bows throughout. There's other thresholds. We haven't gotten quite to 10 million yet, but. It feels like we're in that same era again, from five to ten is another one of those, you know, friction fraught growth periods.

[00:37:35] Kasim: And I don't think that those ever stop. You just have to continue to solve the problem at hand.

[00:37:39] Ralph: I once heard the three to ten, I think it's called the three to ten paradoxes by the Rakuten CEO or founder. It's basically, in essence, he says, every time you triple in growth, everything breaks. And like, you have to reinvent it and that 1 to 5 million range, that's a lot of stuff that breaks.

[00:37:59] Kasim: Oh, dude, it all breaks. Your business at 1 doesn't exist anymore. When you get to 5, it's a totally different enterprise.

[00:38:04] Ralph: It's totally different. And then 5 to 10, like at least at 5, you all of a sudden have an understanding of what you're doing. Like from a complexity standpoint, it's no longer a lifestyle business.

[00:38:15] Ralph: Like 1 million. Yeah. It's like a legit business. I totally agree there. And that's not to disparage anybody who's sub a million. Cause you still have people than we are out. They probably are. Cause things are simpler, but you're probably doing a lot as an entrepreneur, but while you're making more, if you're pricing yourself accordingly, but the point is every stage of your growth, like that one to three to five to 10 to 25 to a hundred million, each stage has its own levels of complexity.

[00:38:42] Ralph: And as you scale and grow. Your net operating income cannot stay the same as it was when it was at a million. That's my point. And that's the law of inverse profitability. And if we can just accept that and wrap our heads around it, I think people will be able to leverage paid traffic and ramp up their marketing a little bit easier, but actually by making a little bit more money in real dollars, but less in percentage terms, Hashtag knowledge bomb.

[00:39:10] Ralph: There you go. So we will leave all the links that we mentioned here in the show notes. If you like this kind of content on perpetual traffic, this was one of our most downloaded episodes. We looked back on this, Qasim. We looked at the data. How much we looked at the data. Yes. Looking at the data as a business owner is a pretty good thing.

[00:39:32] Ralph: You should probably do that, especially on the financial side. So if you like this kind of stuff, certainly let us know over at perpetualtraffic. com forward slash better. Let us know what we can do better over there. We're always looking for ways to improve Kaizen. 1 percent improvement every day. That's right.

[00:39:48] Ralph: Just a little bit, just a teeny bit of a sudden you're on a completely different trajectory. So follow me over on LinkedIn, where we talk about this stuff all the time. Qasim Aslam on Twitter. Like I said, go back and listen to previous episodes and all resources and show notes are at perpetualtraffic.

[00:40:04] Ralph: com. On behalf of my awesome co host, Qasim Haslam, peace! Until next show, see ya.

[00:40:17] Intro: You've been listening to Perpetual Traffic.