The Game with Alex Hormozi - Money Marketing Ratios | Ep 247

Episode Date: November 6, 2020

Man makes the money. Today, Alex (@AlexHormozi) talks about the three kinds of numbers and their relationships when looking at high-level businesses to invest in or partner with.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps: (0:59) - CAC & LTV: 1st number to look into.(2:37) - Gross margin: basis for decisions & "30-day cash".(4:16) - Relationships: LTV, 30-day Cash, and CAC.(7:27) - Focus on 2 relationships: LTV to C ratio & 30-day cash to C ratio.(9:22) - Goal: at least 3 times greater than CAC for viable business.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

What's going everyone? If you've ever struggled to figure out all the different numbers in marketing and figure out what's important, what's not important, what's good, what's bad, and you just can't get your stuff to convert or you can't make sense of all this stuff, then this video is for you. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. So when I got into marketing, there were so many different numbers, KPIs, CPL, CPC, like CTR, I was like, I was, I had no idea. My head was spinning. I was trying to figure it out. And over time, it's kind of like you start to distill down. What are the big buckets of things that matter?

And then once you discover those three are, then you can open up the drawer and look for more details and whatnot. And so what I want to do is outline the three numbers that I'm looking at at a high level in any business that I'm looking to invest in or I'm looking to partner with or whatever. All right? And I'll show you the relationship between them that I am looking for, and hopefully that will help you for your own business.

So the first number is what my cost of acquisition is, which I call CAQ. That's not I call it, that's what people call it, right? Cost of acquisition or CAQ, right? So how much does it cost me to acquire a customer? Now, this number should include everything. So that means your sales commission, that means your ad spend, it means the marketing team that created the increase, whatever. Your software that's associated with it, it's all of the costs of acquisition put together.

That is CAAC. Number two is LTV. LTV. Now I define this a little bit differently because I think it's important. So LTV is not the total revenue that I'm going to get over the life spend of a customer, but for me it's the total gross profit that I'm going to get over the life spend of a customer. So let me give you a simple example. So if I were selling meals, for example, or selling food, and my cost of delivering food, let's say, was nine bucks, all right? And I know that someone's going to order $700 a month

of food and it cost me $9 and I'm selling it for 10. That means I only have a 10% margin on gross profit, gross profit, on the meal sold. And so $700 of food over the lifespan of a customer might sound like a huge LTV. But the reality is it's actually only 70, which is what I'm going to make on that customer, right? And so the reason I use gross profit is that if I were doing marketing for food, for example, and my marketing was like, hey, man we're spending $200 to acquire a customer who's going to pay a $700. I would be like, that's horrible because we only make $70 on the $700, which means that we're spending $200 to make $70. And that's why it's so important to understand the gross margin of your business, right?

Because this is where all of your decisions should be based off of. All right, it's on that margin. The third number is what I call 30-day cash. All right. Now, in the formal business world, the fancy world they call this they they use a different uh metric they call it payback period which is how long does it take you to pay back your cost of acquisition right because inherently whenever you're getting a customer there's usually a cost that's put into it and that cost might there's always a cost you're either paying in time or you're paying in money or you're paying in someone else's time which is in payroll hours but there's always a cost right there's a cost of acquiring customer and then you have uh the payback period i use 30-day cash for this reason i

think that virtually every business can gain access to a credit line, which means a credit card or an Amex or even a bank can loan you, whatever, where over 30 days they can use that money and then pay it back virtually interest-free. Credit cards are all interest-free for the first 30 days, all right? Or at least all the ones I'm aware of, right? And so what that means is that if I can know what my 30-day cash value is, and if I can get that to be at least equal to my KAC, then it means that I can use other people's money to acquire customers. And this is why we've had such big growth in the companies that I've had is that I don't actually need to use my own money to acquire customers. I can use someone else's money, acquire them, get the money in the first

30 days to pay back the debt, and now I'm left over with customers, and ideally customers and profit that I can still continually upsell into continuity. If you can understand the words that I'm saying right now, you'll understand how big of a deal this is. All right. So what are the relationships that looking for. So for LTV, like if I'm looking at it because there's there's different relationships that I need to draw here and when I'm looking about how the marketing's working. All right. So my LTV to KAC ratio I want to always have greater greater than three to one. All right. Three to one is the number that I'm looking for which means that I need to be able to generate more than three times the

cost of acquisition in gross profit. Real quick, guys, you guys already know that I don't run any ads on this and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the words so we can out more entrepreneurs, make more money, feed their families, make better products and have better experiences for their employees and customers. And the only way we do that is if you can rate and review and share this podcast. So the single thing that I ask you do is you can just leave a review.

It'll take you 10 seconds or one type of the thumb. It would mean the absolute world to me. And more importantly, it may change the podcast. the world with someone else. All right. So that means that let's say my gross profit, I'll get another number, let's say that my gross profit on a service that I sell is, is 80%. All right, we'll use that as a number. And so it's 80% is my gross profit. And I have a $1,000 lifetime. All right? That's how much they're going to spend with me over the lifetime, which means $800 is what I am going to use as my number. Now, if $800 is what I make, then I have,

have to three to one be able to acquire customers for less than two hundred and seventy or two hundred and sixty five sixty six dollars right um so my cost of acquisition has to be less than two hundred and sixty six all right that's the total thing now that's the first uh relationship that i'm going to look at the next relationship that i'm going to look at is the 30-day cash requirement compared to my KAC. And so for me, if I have a one-to-one relationship between my 30-day cash and my KAC, then that means that I am breaking even on getting customers.

And I'm breaking even within a window that I can use other people's money to finance the acquisition. And that's where this gets super cool. All right. And so using the example that we just had, if $260 is what it has to be under, right, for me to get three to one, then let's say that if I can just get my, ah, if I can get my 30 day cash to be greater than 260, then it means that in the first 30 days, I'm breaking even in my acquisition for free, and then I'm still going to collect the other $500 and whatever dollar. that's remaining from this process. And so those are the two biggest relationships that I'm looking at. What's my LTV to KAC ratio? And what's my 30-day cash to KAC ratio?

All right? I want this to be greater than three times what it costs me to acquire a customer. And that is how I know I'll have sufficient profit to grow the business. I want my 30-day cash and my KEC to be at least greater than one so that I know that I can use other people's money, OPM, to acquire customers. All right, this is what it looks like visually. A person comes in the business, let's say I pay,

let's say I pay $200 in CAC. So I'm now negative $200. This person now comes into my business. You know, they've got their little money. They come into my business. They decide to give me money, right? Now at this point, this could be, you know, day one, and this could be day seven, whatever,

because it depends how long it takes them to give me money, right? And so maybe the first time they give me money, they only give me 50 bucks, right? I'm still negative, but by day 30, let's say I have another upsell or two, and at this point now I've made $200 on this customer. What this means is that now, I've covered my cost of acquisition,

And then at the end of this point, I'm going to continue to sell them or they'll continue to buy, let's say it's on recurring, day 60, day 90, day 120, et cetera. And I was able to break even to then get all of this money that happens on the back end for free. That is the power of this concept. And so to summarize this, the three numbers that you need to always know when your marketing

is going to be your CAAC, it's going to be your LTV. Important point is that it's the gross not the total revenue and the 30-day cash that you can make per customer and you need to break-even on 30-day cash to cac and you want this to be at least three times greater than your cost of acquisition for you to have a viable business and that is the game that I try to play so anyways I hope that was valuable for you I hope when you're looking at your business model you're looking at your marketing and you have these metrics you can make decisions empirically quantitatively and the nice thing is if something's below these metrics

then you just know that you have to fix it. Is there an upsell? Or is there some sort of liquidation thing? Can we give them some sort of special offer in their first week or two? Can we sell them ancillary products? And we have an affiliate relation. Can we refer stuff out in order to increase this 30-day cash number? The reason this is important is that if I can make this really, really big,

then it means I can spend more to acquire on customers, which means I can even open up further my acquisition net and still make more money. And obviously, the amount that you add your 30-day cash is still going to add into your total lifetime value. of the customer. So hope that was well before you. Hope this makes sense for your business. This is how I think through these things and I hope you do too. So anyways, have an amazing day. Enjoy and I'll see you next video.