numbers to help you reverse engineer business growth

Summary

know your numbers. every mentor says it. nobody tells you which numbers. here’s the granular breakdown that actually moves the business.

1. don’t just stare at a profit and loss statement. that level is too coarse to inform decisions. you need to get to the per product or per service level. that’s where pricing, scaling, hiring, and killing decisions get made. broad view first, then per offer.

2. step one, pull the acquisition cost inputs. ad spend, referral commissions, affiliate fees, sales commissions for closing, anything you spent on the front end to bring a customer in. small brick and mortar might have $0 here. online business usually has real ad and platform cost.

3. step two, count new customers this month. plain integer. then divide total acquisition spend by new customers. that’s cost to acquire. if it cost you $10,000 to land 10 customers, your CAC is $1,000.

4. step three, break customer count down per product or service if you have multiple offers. if 10 people bought a $1,000 program and 5 bought a $500 product, those need separate tracking. that split is where the next level of decisions lives.

5. step four, capture fulfillment costs per offer. salary for the coach who delivers it. additional per customer pay. software seats. anything specifically tied to delivering that offer to that customer.

6. step five, calculate profit margin per offer. take total revenue for that offer, subtract the cost to acquire those customers, subtract commissions and fulfillment, get to profit. divide profit by revenue, get profit margin.

7. now you can play with the model. raise price by $200 and watch the margin move. increase coach pay by $5 per session and see what compresses. set a goal like 30%, 40%, 60% margin per offer depending on the type. you’ll also see when one offer is a 70% margin and another is a 30% drag. you either learn from the 70 and apply it to the 30, or you kill the 30. that’s the level of decision you can’t make from a P&L alone. try harder.

Transcript

what know your numbers actually means

The most impactful business is the business that genuinely improves another human, a better human business. And to grow a business like this, you have to continually improve yourself. This podcast is a documentation of that thesis, scaling businesses and also personal growth. My goal is for you to shortcut this journey.

So if you’re ready to try hard, subscribe. If you like what you’re hearing, please share and enjoy. Hey, Jerred Moon here. Welcome to the better human business podcast. Today I’m going to be talking about numbers, knowing your numbers, cost to acquire a customer, how to calculate these things, how to know the profitability of an individual product or service and why that’s important.

So you have probably heard someone say, know your numbers. I say it to entrepreneurs all the time. I’ve had it said to me by mentors, know your numbers. You really have to know your numbers in business, but then they don’t really tell you what numbers to know because there are a lot of them. Now you can just look at your profit and loss statement, assuming that you are getting your books done every single month and assess how your company is doing.

But that’s really not granular enough to make changes, to know how to make decisions, to become more profitable or to find out if there’s a product not working or service not working or if you should charge more or charge less or hire new people or don’t hire them or pay them more, pay them less. There are so many questions you can answer if you just know your numbers and I’m going to do a broad overview here because I like to keep these podcasts short.

But if you do take out pen and paper and start calculating these things in your own business, it will have a huge impact. So let’s look at acquiring or acquisition costs and overall what we’re trying to do is get down to a profit margin for your product or service. So not only looking at, hey, how much did this customer cost to acquire, but how profitable is my product or service?

Because that’s going to be what drives the ship for you later on. So you’re going to first look at, your first step here is you are going to get all the data that you need. So just looking at your company, did you spend any money on ads, write that number down. Did you pay commissions to anyone or a referral fee to anyone?

calculate cost to acquire

Any kind of things like that, anything that’s front end, I got a customer, but I had to pay a fee to be able to get that customer. If you’re running a small brick and mortar, that might be $0 if you’re running an online business like I am, then there’s typically a lot of ad costs, referral costs, those kind of things.

So you need all of that, those numbers down. The next thing you need is just how many new customers did you get this month? So write that down, how many new customers did you get in the month? And then the next step is to actually calculate the cost to acquire. So you’re going to take the total cost of everything that I mentioned, so your ad spend, whether or not you paid commissions to either sales or a referral commission to someone who referred you business, something like that.

You’re going to take all that number up, add all that up, and then you’re going to divide that by how many new customers that you got. All right, so now we have a number. So let’s just say that it cost you $10,000, all of your front end cost, and you got 10 new customers, that would be $1,000 cost to acquire.

And I’m not going to stick with the example here because I’m just jumping all over the place, but you can do this for yourself. So that’s step two, calculate the cost to acquire. So this is all the front end cost divided by how many total customers you got. Now we can start attributing a single number to every single customer, and that’s why it’s important because we have to be able to go down to the customer level to know if the product or service we are providing is profitable enough to sustain and grow the business.

So you have that number if you follow those two steps. Now step three, if you have a more complicated business, like you sell multiple different products or multiple different services, then you need to break down the number of new customers you got by those products and services. I’m not going to do a big example there, but if you had 10 people sign up for a $1,000 thing and then you had five people sign up for a $500 thing, you’d want to be able to break that down.

That way you can, again, go back to looking at each individual product or service to know if one’s doing better than the other. Because if you have one product that’s just insanely profitable and another one that’s actually losing you money, that would be very eye-opening. You might be able to either mimic what’s going well in the more profitable product or just completely kill off the service that’s not profitable.

break it down by product

Alright, next you’re going to break down any additional costs. So this would be step four. So if you do pay any sales commissions or additional commissions, just say someone on your team gets paid a salary, but then if they see more people, they get paid an additional fee per customer, per client, something like that.

Maybe they coach more people so you pay them more per person or something like that. So this is secondary because that’s not an acquisition cost, that’s a fulfillment cost. That’s why we’re doing it in step four. So that’s what we would need to know. So now you have all of those things and what all your costs are that are laid out there.

Now we would start looking at profitability. So we could stop there and we know our cost to acquire. So again, say I had all of my costs were $10,000 and I had 10 new customers. My cost to acquire a new customer would be $1,000 and this is just simple math. And now if it costs you $1,000 to acquire a customer, you better be charging way more than $1,000, just at baseline, right?

You should know that. But now we get down to the profitability of a product or service and this is where it becomes way more impactful because cost to acquire really only matters if you are spending to acquire. If you are doing advertising or you’re paying a lot of referral commissions and that’s a big part of what you’re trying to do, then you really need to know the acquisition costs.

But some people don’t have a lot of acquisition costs depending on your business. So this next step is the most important and that’s finding the profitability of an individual product or service. So again, you would take, there’s like a multi-step process here for profitability and I’m going to walk you through it.

You would take an individual product or service. If you only have one, great. If you have multiple, you would do it per product or service. So you take the total revenue generated in that month. So you’re going to take the total revenue generated in the month. So write that number down. Then you’re going to say that number we calculated earlier, the cost to acquire.

additional fulfillment costs

The next step is to calculate the cost to acquire. So if I had 10 new people, let’s say I had five new people come in and my cost to acquire that I calculated earlier was $1,000. So five new people times $1,000, that would be $5,000 is my cost to acquire this particular product or service. And then you’d calculate any commissions or additional payments.

Like I was saying, like you would pull from that list that we did in step four. Oh yeah, I pay an extra $75 per person when they see X number of people or whatever, coaching, however this works for you and your business. Then from there, you’re going to add any fulfillment costs. So if you do have additional fulfillment costs, should I say, so we’ve maybe already calculated the people, but if you haven’t yet, go ahead.

The coaching costs of the individual, you’re going to throw that in there. If you have a software costs, you can throw that in there and it’s specific to this one product or service, throw all of that in there. And then any other fulfillment costs that you can think of, and this doesn’t necessarily have to be every single cost in your entire business to attribute to a product or service, just very specifically that single product or service.

And then from there, you’re just going to subtract. You’re going to take the total revenue generated. You will subtract the cost to acquire. You will subtract any commissions, any fulfillment costs, any software costs, all those kind of things. Just subtract all those one off. Now you have your total profit.

Okay. That’s congratulations. You have a profit. And from there, there’s just one more step. You’re going to take the profit number that you just calculated, and you’re going to divide that by the total revenue generated for this product or service. And now you have a profit margin. So you can know whether or not this is a healthy product or service or not.

Something that you can scale or something that you can’t, or maybe you need to charge more, those kind of things. And that’s what you can sit down with and do all of this math. If you write out every single thing that I just said, and you can turn that into a form, and this is something you can do every single month, you can start to play around with this.

the profit margin per product

If you’re like, oh, the total revenue generated was this, like, okay, what if I raise my price by 200 bucks? How does this change everything else? If fulfillment costs stay the same and I increase by 200, what’s the profit margin here? And then you can start setting goals of, oh, hey, I want a 30% profit margin.

I want a 40% profit margin. I want a 60% profit margin. All depends on kind of what you’re selling and the actual hard costs. And now you can start making real financial decisions in a business. Because I think going back and looking at your books, your profit and loss statements, like the worst way to go about it, because you haven’t broken anything truly down by product or service.

You’re just looking at, okay, here’s what I made, here are all my expenses. And then a level one business owner is just going to go, oh, maybe I can cut some expenses or maybe I’ll do a price raise occasionally. But you can get way more into the weeds with this of, okay, what if I paid someone $5 more for fulfillment as a coach or $5 less?

You can start getting very granular and seeing how this changes the overall profit margins and start setting goals around that. And the fact that you can do it by every single product or service if you have multiple different offerings, now you can really know, hey, this one, 30% profit margin. This one’s 70% profit margin.

How do I make this 30 look more like the 70 or should I just kill the 30 altogether and put all my efforts on the 70? You can start making these decisions as opposed to just, this is what I do and that’s where profit kicked out of the month. So I know this is a lot throw at you via just audio podcast here, but it’s something that I’m working on training some team members on and I wanted to throw it out there for anybody listening who’s curious how to do these things.

And I think that in calculating these types of granular work, you’re going to be able to make some really impactful decisions here. So sit down with this podcast. If you really do want to get good at these things, press pause, rewind, and just every single thing I said, make sure you’re writing out and doing, and you will be able to calculate profitability and profit margin for your individual products or services and you’ll make a lot better decisions long term.

So if that’s too hard for you or too much work, then all I have to say is try harder.