Interested in Facebook Advertising?
Well, then, let me ask…How much can you spend to acquire a new customer?
What is the lifetime value of your customer?
Do you know? You should.
Today, we discuss the math of scaling a business and online advertising.
Facebook Advertising: My First Attempt at Scale
My first honest attempt at scale came via Garage Gym Athlete, selling $25/mo memberships.
I had a couple of hundred dollars I could devote to advertising, and I really could not afford to lose money. So I made that my ONE job: Learn Ads.
And it seemed that no matter what I did, I could not make selling a $25 membership profitable. And if I was profitable, it was never sustainable or scalable.
Here’s the WRONG math I was going…
- Let’s say I spent $30 a day on Facebook ads
- And for that money, I got one member that paid $25
I would consider that a $5 loss.
So I would go through the cycle most entrepreneurs go through…
“The Cycle of Despair”
- Get excited about the prospect of running ads
- Turn ads on
- Check ads every 30 minutes
- Get scared I am spending too much money
- Turn ads off
- Repeat next month
You might be asking: “Why would I consider that a loss even though they could stick around for another month and become profitable?”
Because I had almost no money to advertise!
I couldn’t hope that person stayed a second month because if they didn’t, I was losing money. And it was money I could not lose.
Facebook Advertising: The Real Math
Then, I started to do the CORRECT math, and scaling started to work.
Here’s the formula:
- CPA < LTV = Keep Scaling / Spending
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If you’re new to this stuff, CPA = Cost Per Acquisition, or how much it costs you in ad dollars to get one new customer. And LTV = Lifetime Value, or how much a customer will spend with you in total throughout the life of their account.
Let’s start with calculating your LTV. There are several ways to do this, but I want to do the most uncomplicated calculation that works.
Let’s say you have been in business for three years and generated $350,000 in total revenue. Next, let’s say you have had 1,000 customers in those three years. If you know those two numbers, you can easily calculate LTV.
LTV = Total Revenue Generated / Total Customers
LTV = $350,000 / 1,000
LTV = $350
If that’s what my business looks like, I can do some very different calculations in advertising. Going back to my previous example of spending $30/day on ads and getting one customer that pays $25 per month (CPA = $30) – That’s a HUGE win!
CPA < LTV = Keep Scaling / Spending
$30 < $350 = Keep Scaling / Spending
That means, technically, I could spend $300 or more to acquire a new customer, and over the life of their account, I would remain profitable.
However, in reality, this is a terrifying and uncomfortable thing to do. Because if you are selling something like a $25/mo membership, it will take 14 months to realize the lifetime value of the account.
And that, my friends, is “The Drop.”
Facebook Advertising: The Drop
Most people will never be able to scale their business because of “The Drop.”
The Drop is where you have unrealized revenue and actual expenses.
It’s a period in which you are spending money on ads, but in the short term, you are unprofitable, but in the long run, you will become profitable. The real goal in advertising is to have an immediate ROI, but I’ve seen very few do this well and consistently.
So there will be a few months when you must continue spending money on advertising and trust math. It’s that simple. And it’s uncomfortable because you don’t ACTUALLY know if everything will work out. Because life isn’t a mathematical equation.
But, in every business I have scaled, it eventually works out. If you can stomach “The Drop.”
How to Survive “The Drop” and SCALE
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So let’s talk about making it through this Drop if you want a BIG business.
① First, you need to know your LTV and try to make it as high as possible and know your CPA and make it as low as possible. Getting a high LTV means selling more (additional products/services) to your current customers or raising prices. And if you have a recurring membership, you should be hell-bent on reducing churn and getting people to stick around as long as possible!
A great way to have a high LTV is to take outstanding care of your customers, be good at what you do, and offer more to them.
To reduce your CPA, you’ll need to learn or hire for copywriting, creative, etc. These things need to be good to lower CPA.
In my case, I spent two years working on every aspect of reducing churn. When we were done, our stick rate was 3x the fitness industry average. I also took copywriting courses, ad courses, etc.
② Second, be in a place where you have money/data to run ads. That means you may need to run your business for 1-2 years before you can start to scale with any advertising. After a certain amount of time, you will have the cash and know your metrics. Then, you can begin to play the scale game.
③ Third, build your business grit. The Drop is much easier to talk about than it is to live through. In my case, it was so incredibly stressful. I didn’t know if it would work, and I was burning cash to determine if my math was correct. This is the grit you need to build, the comfort you need to kill – if you want to scale.
One thing to note: “The Drop” can be 14-30 days in some businesses. And in other cases, several months to a year. The more significant the gap between LTV and CPA, the shorter the Drop.
If my LTV were $20,000 and my CPA was $100, I wouldn’t have to stomach the Drop very long. But if my LTV is $200 and my CPA is $175. Technically, the math works out, but you are running on a razor’s edge.
Takeaways for today
- Use the simple scaling formula: CPA < LTV = Keep Scaling / Spending
- Increase LTV as much as possible
- Reduce CPA as much as possible
- Learn to survive “The Drop.”
If you have any questions about this, please let me know!
Thanks for reading!
-JM