Growth funnels: Part 5 - Funnel Maths & formula
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The two ways to grow your business.
- Increase the number of clients
- Increase the value of each client
The magic ratio you must understand!
THE MAGIC RATIO = CLV:CA
- Client Lifetime Value (CLV); how much is a client worth to you over a period of time.
- Client acquisition (CA); how much is incurred in acquiring a new client.
If your CLV is $500 that means you can spend up to $500 advertising to that customer and break even.
Generally, the highest cost to a company is customer acquisition whether it's time or money…Once you have a buyer it is significantly easier to sell to them again.
*Most of Apple’s revenue comes from existing customers when they launch new products.
A successful company must shift from....
...“How much money did we make on the first order”
To…
...“How much money have we made throughout the relationship”.
CLV beats CA
Businesses must stop thinking about their business as a single block buster movie that creates a large short term profit. Instead think of a successful business as a franchise like ‘Star Wars’. You must think about maximizing the client experience with different avenues; movies, TV shows, comics, novels, merchandise etc.
Companies like Amazon and Uber understood the power of long-term value and used that to create exponential growth. Amazon lost over $100 million a month undercutting its competition and locking up market share because it knew after a time its wallet share would far outweigh the initial loss. This is the same case with Uber and when they started giving away $20 credit for each new sign-up. After months of testing on a small scale, they understood how much money on average an Uber client spent on their services.
They knew their CLV was more than $20 thus giving new clients a $20 bonus was a no-brainer.
Kogan.com the Australian online technology store is valued at $400 million and has grown between 200% to 300% every year since 2006 when it started. Kogan.com decided to acquire Dick Smith electronics which boasted revenues of over $1.3 Billion in 2015. The reason was elusive to most, however for those who understand CLV it is all too clear. They understood to reach the clients of Dick Smith they would have to spend far more in marketing than they would have if they just bought the whole company. They understood that their CLV for each client would far outweigh the price they could buy the company for. So Kogan just bought the company itself so they had direct access to Dick Smith’s clients.
Develop an ecosystem instead of a single product.
Let's look at two great movies “2001 A Space Odyssey” and Star Wars….
Both were great space movies but ‘Star Wars’ was able to create a cult and ecosystem throughout the world. It wasn’t just a movie it became a TV show, it spawned thousands of comics and novels, and it made billions through merchandise, fan fiction and so much more.
ONCE AGAIN A successful company must shift from “How much money did we make on the first order”
To…“How much money have we made throughout the relationship”.
The six factors for growing your business
Now that we know the two main numbers that are vital for growth, we can further break them up to give companies more actionable insight or where they can focus.
There are six core factors that all companies should use to grow their business.
- Creating more leads for your business (CA)
- Boosting Conversion rates (CA)
- Increasing the size of average customer transaction (CLV)
- Building higher profit margins (CLV)
- Increasing frequency of purchase (CLV)
- Referrals (CLV)
Creating exponential growth
When you break growth funnels down into a simple formula, exponential growth is relatively simple.
If you want to double your business it is simpler than it may seem.
Let’s look at an example where we decide to focus on improving three of the six policies of business growth.
Let’s use the following three
- Boosting conversion rate
- Increasing the average transaction size
- Increasing frequency of purchase
A company is setup as follows
- Revenue - $2,000,000
- Net Profit - $400,000
- Conversion rate of 10%.
- Average transaction value of $100
- Average repurchase frequency of 2
With just a 10% increase in three simple areas, a company’s revenue has jumped 33.1%. Here is the important note; our fixed costs remain the same and we have not spent money on advertising like most companies believe is mandatory to grow. Instead, the company that was profiting $400,00 it is now profiting over a million dollars.
We have more than doubled our profit at 265.5% just by increasing a few areas by 10%.
Let’s see what happens when we increase it to a more reasonable and still conservative level.
Extra notes...
Outspend your competition to win
In most cases - The company that can spend the most resources to acquire a customer normally wins!
“I had this crazy idea that we could sell just as many Macs by advertising the iPod. In addition, the iPod would position Apple as evoking innovation and youth. So I moved $75 million of advertising money to the iPod, even though the category didn’t justify one-hundredth of that. That meant that we completely dominated the market for music players. We outspent everybody by a factor of about a hundred.”
- Steve Jobs
The key question is - How can I increase my CLV so I can completely outspend my competition?
Retention is a key driver of growth
Key question: How big would your company be if you kept every customer who bought something from you?
This question truly demonstrates how much we let go of our customers and only focus on acquisition too much.
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