Some folks will say there isn’t a “business formula” but there is, and it’s dead simple. Ready? Profit > Cost.
“Duh, what’s new?” Okay, let me put it in a more actionable way: LTV > CAC. Okay, what is that?
The Grandaddy of Business Metrics
CAC = Customer Acquisition Cost
LTV = Lifetime Value (of the customer)
Do you get it? If the cost to acquire your customer is less than what the customer will give you over their lifetime, you win.
Once you figure out this formula for your business, it’s game over. You can pour on as many marketing dollars as possible (as long as it’s in line with your formula) and you will just keep winning over and over.
The Formula Really Is That Simple
Time for an example.
Let’s say you run an eCommerce product. You sell avocado-toast chew toys for bougie dogs.
Most of your customers find you through paid ads. For every $100 you spend on ads, you get $100 in sales. Obviously, this isn’t what you want, as you’re just breaking even (and don’t have any profit).
You can lower your CAC a few ways:
- Start a referral program so you don’t have to do as many paid ads
- Target your ads more specifically so your spend gets more customers
- A/B test different ads to the same audience and develop stronger ads
And about a million more things…
You can also increase your customer LTV by:
- Upselling a new product (same ad brings in a customer, but now they may buy two things instead of one)
- Increasing your prices
- Creating a renewable product (so they don’t just buy once but every month)
And about a million other versions of this same thing…
Nothing Else Matters Until You Have CAC < LTV
What about brand? Accounting? Legal??
It either doesn’t matter or it’s already part of the formula (which isn’t really a formula, shh).
Brand isn’t its own weird thing—it’s a subset of CAC.
If you have a strong brand, you don’t need to think about buying it. If you like it, the purpose of brand is a mental shortcut to you saying yes or not.
A strong brand investment on the front end lowers your CAC when it actually comes down to buying time.
Amazon has the lowest CAC for me because I go right to it whenever I buy a book or other knick-knack. They need to do zero advertising because their brand has already told me they will have whatever I’m looking for and they’ll get it to me more conveniently than anyone else.
They earned that incredibly low CAC because of all the front end work they did (starting from the book store -> the everything store, making me a Prime member, making my previous experiences all go pretty well, etc.).
If Your Business Isn’t Succeeding, Fix One of Those
There are a million ways to do so. That’s the fun and creative thing about business.
Once you take the stress out, it really is just a game.
If you are stressed, fix it ASAP. If you’re already winning the formula, what are you stressed about?
