Jeremy Yang here from Honey Whale, and in today’s blog I want to talk to you about the art and science of customer acquisition. Now if you think about the business landscape, advertising and marketing your business online, there’s two fundamental factors that are really going to be impacting your success and your ability to bring on new customers.
The first one is that if you look at what does the competitive marketplace look like right now? What does that landscape look like? There’s only one thing that’s going to change with that. It’s only going to become incredibly more competitive to market your business online. It just makes sense as more and more businesses flooding online, the inventory for both Facebook and Google is limited. Therefore, the competition is going to dramatically increase.
The second thing is really the second-order consequences of what that is going to result in, and that is really the cost of advertising is only going to go up. There’s only going to be more competition, and then there’s going to be a higher price to reach the same amount of people that you’re looking to reach right now.
If you start to think about, how do I engineer a business where I have a mathematical advantage in order to be able to go out into a marketplace, regardless of the sea of the influx of new competitors coming in and flooding the market and that the cost of traffic going up infinitely more. And it really comes down to this whole theory of having a proper cell business with the front end and a back end.
So what do we mean by that? If you think about how business is traditionally done, let’s look at two scenarios:
On the first scenario. You’ve got a business that’s out there and is buying traffic and they’re generating leads or they’re trying to send traffic through to an eCommerce site and actually make a sale, right?
Typically the way that these businesses work is they’re just purely based on the front end. So they’re in the business of basically getting as much traffic as they possibly can for the cheapest price possible and then generating as many leads or as many sales for the cheapest price possible. That’s their whole focus is whittling down and getting the cheapest cost per lead that they possibly can because their business is optimized purely for making a profit on the front end.
That is the thing that dictates how much that they’re willing to spend in order to generate a lead, for instance, is what their close rate is from their sales team to convert those leads into a customer. Or what their conversion rate is on their eCommerce site to convert that traffic into a customer again. That’s the only thing that they are focused on.
And you look at them, for instance, you know that with their business model, the only thing that’s really going to take place with the rising cost per click and the rising cost of competition is they’re going to end up getting less amount of traffic for the same amount of money. Basically I have to spend more to get that same level of traffic as what they are right now, meaning that their cost per lead is going to go up and their cost of sale is also going to go up.
The overall cost to acquire a customer is only going to go one way and that is up. And their profit margins are going to be just chomped away constantly forever on their business because they purely have a focus of just making as much profitability on the front end. They’re over-optimising for profitability.
Then you take scenario number two:
This is where you’ve got a growth-focused marketer. Someone that’s really trying to grow their business in an aggressive function and understands the proper unit economics of a business, they’re going out there and they’re not overly concerned about the amount of profit that they make on the front end, because they know that they’ve got a very sophisticated back end to basically get that customer to repeat purchase over the course of their lifetime with them. That’s where they’ll make all their money.
So typical businesses, they only have a front end, I.e, they’re out there generating traffic, generating leads and just trying to convert as much of that traffic and leads into customers. That’s just a one-time event. Just buying with their business is a onetime event and they live and die by how much profit that front end generates for them.
Then you’ve got a business that has a proper front end that is engineered in a way to convert as much traffic into leads and into customers as physically possible. They don’t care about how much profit that they make off on the front end, as long as they breaking even or they’re willing to even go into the hole and go into the red and lose some money over a certain short amount of time because they know that their back end is dialled in and they’re going to be able to squeeze way more profit.
So in a typical environment, who do you think is going to work?
Who do you think is going to win longterm with that business? The person that’s only cared about the profit on the front end? Or the person that’s got a very good back end dialled in, willing to give up all the profit on the front end to acquire as many customers as possible. It’s very, very easy to answer that question. The second business. Because the first business model, they have a mathematical disadvantage to how they’re going to operate. They’re only concerned with the profit on the front end.
So if you think about it in marketing terms, you look at that first business and it might be, for instance, their marketing budget might be $5,000 a month that they can spend on generating traffic and it costs them $1,000 to acquire a customer. So they get five customers coming in, and they might make off each customer $3,000. So they’re making $15,000 per month and they’re investing $5,000 in order to generate that and they’re getting five customers as a result of doing that.
Then if you look at that, you can kind of see the limitations of what they’re willing to spend $1,000 to kind of get a customer coming in. Then if you have a look at a close rate of 20 to 30% they only can afford to spend X on generating a lead to come into their business. And what happens when that number starts to climb up? Well, then you should start turning off traffic sources because they’re not going to make any profit and their business won’t be able to survive.
And then you take business number two. Same business, same price points, same everything, just a different mindset. And they’ve also got $5,000 to spend on marketing per month. And they also make $3,000 off customers. However, they also have a back end. So they know, for instance, that first sale is worth $3,000 on the front end, but then they have another product that they sell to that customer that they generate another $3,000 from.
So, therefore, the lifetime value of that client goes from being $3,000 per month to $6,000. And then so instead of being able to spend $1,000 to acquire a customer, they can spend $2,000, so then they can go out into that business and they can go and buy the best traffic. They can out muscle that person, they can outbid them in all the auction pools on Facebook and they can go and sustain a much higher cost per click and a much higher cost per lead and a much higher cost to acquire a customer.
Then what they can do is, they can further invest that additional cash flow back into their growth engine and they can start to ratchet up their marketing spend from $5,000 a month to $10,000 a month to $20,000 a month to $30,000 grand a month. And they just come into your market and they buy all the customers, they take them all from you. And then you don’t have a business and then you pack up shop and you complain about how all of your competitors are racing to the bottom on price. Or you know, you just can’t compete with them and you start to come up with all these excuses.
When the reality of it is that you are over-optimising for profitability and you didn’t have a back end and you were at a mathematical disadvantage from this person that came in with a proper back end to their business, they are willing to absorb those customer acquisition costs on the front end, liquidate that traffic cost and then have a really good back end business model.
And you know, people calling them tripwires and entry offers, this is just all the new shiny object shit. When this stuff has been around for centuries, like having a loss leader product on the front end and a proper back end on a business is a very sound business principle that has been around for hundreds of years, and it’s really like merchants were doing it back in the day with selling bread, rolls and then really wanting to sell you wine and all these other different stuff.
So all I’m saying is that you know that the only certainties are the competition in your market is going to get more fierce and your traffic costs and your cost to advertise your business is only going to get increased if you spend all of your time and energy only focused on how to optimize for profitability and make more money and spend less money to get those customers, you are fighting a losing war to somebody that comes in that’s got a proper business model with a sound back end.
And that’s really the thing that I really want to make this video and stress to you while everyone’s marketers and business owners are running around panicking about the cost per click on Facebook and Google Ad Words and all this competition and they’re starting to complain, that’s what a loser looks at. A winner is going to look at solutions and what are things that you can do to really engineer your business so you have a mathematical advantage over everybody else, and you can go out there and you can just win that market.
So wherever you’re at in your business journey, I really urge you to sit and just think about this thing and think about what other services that you could sell on the backend that you could sell that’s going to make your business way more profitable so then you can fuel more of your budget into actually growing your business.