Episode 692: How to Acquire New Customers Profitably Using The nCAC Calculator

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Ralph Burns welcomes Nick Miller, the Head of Traffic at Tier 11, to unpack the most important metric you’re probably not tracking—nCAC (New Cost to Acquire a Customer). A former professional musician turned media buying maestro, Nick walks us through the evolution of the nCAC calculator, the metric’s massive impact on client results, and why ROAS is no longer king. You’ll hear the behind-the-scenes of how Tier 11’s top media buyers use this tool to optimize spend, scale smarter, and avoid misleading metrics. If you want a better way to judge your ad performance—and a free tool to do it—this is the episode for you.

Chapters:

  • 00:00:00 – Kicking Off Another High-Impact Episode of Perpetual Traffic
  • 00:01:10 – Meet Nick Miller: From Shredding Guitars to Scaling Brands
  • 00:02:09 – Why the nCAC Calculator Will Transform Your Growth Strategy
  • 00:03:48 – Breaking Free from ROAS: The Rise of Smarter Metrics
  • 00:06:01 – Inside the nCAC Calculator: Your New Secret Weapon
  • 00:11:41 – How to Actually Use the nCAC Calculator (Without Guesswork)
  • 00:26:00 – Media Efficiency Ratio: The Overlooked Key to Profitability
  • 00:26:57 – Crunching the Numbers: Step-by-Step nCAC Calculation
  • 00:27:19 – How Paid Media Spend Impacts Your Bottom Line
  • 00:29:57 – Unlocking Growth Through Lifetime Contribution Margin
  • 00:30:54 – Why You Can’t Trust Ad Platforms at Face Value
  • 00:32:02 – Building a Retention Strategy That Fuels Lifetime Value
  • 00:32:51 – Scaling Smart: Where Profitability Meets Performance
  • 00:41:08 – Crafting the Perfect Traffic Mix and Targeting Your nCAC
  • 00:49:30 – Measuring Effective Cost Per New Visit (And Why It Matters)
  • 00:50:54 – Wrapping Up: Your Action Plan to Acquire Customers Profitably

LINKS AND RESOURCES:

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READ THE TRANSCRIPT:

How to Acquire New Customers Profitably Using The nCAC Calculator

[00:00:00]

Ralph: Hello and welcome to the Perpetual Traffic Podcast. This is your host, Ralph Burns, founder and CEO of Tier 11. Not alongside my amazing co-host, Lauren e Petillo. She is on a beach somewhere again, now actually, she’s at a conference again traveling. So in her place. not quite as good a hair.

Ralph: I would say neither one of us really for that matter, like the glowing blonde locks of Lauren Petrillo to guys that have receding hair lines or shaved heads. We have the replacement today, but not only replacement for Lauren, but somebody that we’ve been pumping up here quite a bit over the course of the last couple of months.

Ralph: I don’t know if your ego has just like been just blown up sort of, spontaneously from all dimensions on perpetual traffic, but, yeah. Well, I’m sort of the hype man here anyway, so I’m not really [00:01:00] known for like, chunking people down with a couple of notches. But anyway, if you already guessed the voice that has been on this show now three times, which I totally forgot the first two by the way.

Ralph: We have head of traffic at tier 11, Nick Miller. The best guitar player. I know, by the way, like puts everyone that I know to shame because you were at one point in time, like a professional guitar player. Like you got paid to play guitar and you are absolutely like you are. So lights out. Good. It’s unbelievable.

Nick: my for a long time. got into marketing through music, believe it or not, it was a segue from music, you know, and discovering the power of meta ads from promoting my band’s music and my music and thought, wow, I really like this. I want to maybe try it with some non-music at businesses.

Nick: And there we go. Fast forward. And then I discovered Perpetual Traffic as a longtime listener, third [00:02:00] time co-host, or at least third time. This is first time co-host, but Third time guest.

Ralph: you know, you used to listen to this show, now you’re on the show. I like, this is very cool. So I would love to have you back on as a regular guest, but I guess I am your boss technically, so I can say I need you on, but I really would like to have you on, so we can bring more of these types of shows to the perpetual traffic audience because we have been talking about you and your calculator, the NCA calculator, for quite some time now.

Ralph: And we’ve been giving it away, which by the way, Nick is gonna do a screen share today. So there’s two URLs that you should, make note of. First off. Check us out over on our YouTube channel so you can see this actually happening, how we use the NAC calculator. And if you don’t know what NAC is and you listening to this show, we’ll shame on you.

Ralph: ’cause it’s the NAC new cost to acquire a customer. It’s everything. It’s the most important metric for us, for our clients here at your 11 makes everything go around. The point is, is watch this [00:03:00] over on our, YouTube channel@perpetualtraffic.com slash YouTube. Make sure you subscribe and then of course, you can get the calculator over@tiereleven.com slash nac.

Ralph: So if that isn’t enough buildup and enough big ego, I’ve called you like, you know, brilliant media buyer, you know, guitarist, the inventor of the Inca calculator. I don’t know. I gotta work on my hype man skills, I guess. But, tell us about like the evolution of this thing. ’cause we had been batting this around for a while, you and I, and then obviously with some of the other folks inside tier 11.

Ralph: Talk to us about that just a bit.

Nick: Yeah. Of, course. And it’s hard to believe a calculator could be something so exciting that it is, it’s something that

Ralph: We’re

Ralph: just nerds anyway though. Really?

Ralph: Yeah.

Nick: Exactly, exactly. But talking to the evolution, and the reason that it’s exciting is that as we’ve gone through the shift, and this is coming from a recovering ROAS addict, and we know we have quite [00:04:00] a lot of content talking about this, the evolution from ROAS

Nick: you know, I think we always knew that we’re doing what we’re doing to actually have an impact, positive impact on our clients’ businesses.

Nick: and look for a long time in platform, ROAS was a reliable way to measure that. But you know, as the years progressed, we got omnichannel, there was a divergence and ROAS became less and less of a reliable metric to use for building a business.

Nick: And so I think there’s been enough content to cover that. So as we, you know, working with John with you and just our overall strategy, what are the most reliable metrics that we can start focusing on to really have that clarity, have that confidence that we’re using, that paid media investment that we’re entrusted with to create more profit for our customers, to really help ’em profitably scale.

Nick: And one of the [00:05:00] main. probably the main leading indicator that you’ve mentioned was ncac. So great. Okay, let’s start focusing on that. Some clients, we ask them, what is the profitable number for you to acquire a customer? And some clients are like, well, it’s $50 or it’s 80. Other clients are

Nick: like,

Nick: no idea.

Nick: We think it’s this.

Nick: Okay. You know, are you sure? And, these clients, and again, coming from recovering ROAS addict, these clients needed our help to work through their numbers to identify what, what this is. So we started building models. I started tinkering away, and the first prototype of the calculator we’re about to share was.

Nick: Way too complicated was all on one sheet, you took a look at it. Nowhere near as pretty as it is now. And I’ve gotta actually give credit to our marketing and sales team for making this look much better than my version. But the functionality is still the same. [00:06:00] That’s the most important thing. And, another important point, this one here, is for, primarily for e-commerce. So identifying Inca, if you’re selling digital products, it’s very similar or you are a, service lead generation business. There’s just some nuances there, which later versions, for, digital info products and for lead gen are coming.

Nick: But this one we’re gonna share today is primarily intended for e-commerce. Just going through that process and going through where the name for this is actually unit economics. And going through this process of identifying the unit economics based around customers and using historical data from your business where you can make confident estimations as to if you acquire a customer at a certain cost, what does that mean?

Nick: What’s is that likely going to mean for you in three months time, six months time, 12 months [00:07:00] time? What’s is that gonna mean for your revenue? But more importantly, what’s that actually gonna mean for your profitability?

Nick: So, the key to making this work was to really break it out into a sequence as the sequence to this, it’s actually quite simple.

Nick: First step is what’s your average LTV. How much do customers spend on average over a period of time? For this calculator, we’ve used 12 months. The next step is to identify your costs of sales. So these are your costs and expenses that are going to move with your sales volume. If you doubled your sales tomorrow, what expenses will also rise based on that? Other expenses, your direct costs. We call them o opex, or we call ’em, you know, costs, overheads, and those costs.

Nick: If your sales double overnight, those are the costs that wouldn’t

Ralph: Mm-hmm.

Nick: even identifying those, [00:08:00] breaking down those costs of sales, I mean, you’ve got costs of goods sold, costs of delivery, shipping costs. You’ve got cost for transaction, transaction fees, pick fees with your your three pl.

Nick: But that’s for another sheet. This sheet here is going to assume that you’ve done your calculations and you’ve identified what your costs of sales are and, your opex, that’s actually optional. You can include your opex so you can see what impact that’s gonna have on the estimations. Or you can actually that blank just to see, what’s gonna be the impact of acquiring customers and.

Nick: And when you go through the sheet, this will be more clear.

Ralph: Yeah, absolutely. So that’s sort of a high level overview of it and there’s a lot of factors here and we’re doing an entire video series on this called the Chalkboard series, which are over on the tier 11 YouTube. By the time this goes live, there’s probably gonna be even a more on there, which talks about really all of this stuff, and this is something that we’ve reiterated a number of times because you said something that was super important [00:09:00] is that when we would used to start with clients and we’d ask them that question.

Ralph: Like how much are you willing and able to pay to acquire a customer? Or better yet in maybe some cases, like what are you willing and able to pay to acquire a lead that then turns into a customer? So then you need like that conversion metric between leads and actual converting to sales. it’s all marketing really is math at the end of the day.

Ralph: Like it’s not driven by math, like the things that you do day in and day inside Ads manager or the Google MCC isn’t math, but it is math. It’s based upon math. And the thing that was why are we getting to this point where clients are like, yeah, you guys are doing a great job, but we’re going outta business.

Ralph: Or not that that ever happened, but it’s like we’re not making much profit here, or it’s not as profitable as we thought it was going to be. It came back to this question and we realized this probably about a year and a half ago, and now it’s integrated into our process. And I’m not saying like it is the only way, but what we find is.

Ralph: That without it you are flying [00:10:00] blind. So that’s why it’s so important and so many businesses don’t know how to calculate it. ’cause they don’t know, they probably don’t have a calculator to figure this sort of stuff out. There are some that do. I was on two calls just today, literally. I asked them that question.

Ralph: We were just on a group call and they talked about this. They knew exactly how much they could pay they knew like 50 bucks, you know, or I can pay 150 for a lead, provided that I have a 3% close rate. Great. Okay. So that averages out to 3000, $2,500 per sale point is, is like, if they don’t know it, like that’s what today’s show is for.

Ralph: Or if you do know it, double check it against the NAC calculator. But that was the big discovery I think that we all had. It was like the light bulb went over our heads and John Moran was right in the center of this whole thing and we’re all like, why haven’t we been doing this all along? ’cause every business needs to know it.

Nick: and I think that’s the key that for those who [00:11:00] have not approached their unit economics in this way, to identify a profitable customer, acquiring a new customer. It’s a feeling of clarity and confidence that you may have never experienced before in what you’re getting from your paid media investment.

Nick: So as we know, the ad platforms are designed to make us spend more money. They have their own internal reporting metrics such as roas. And again, enough content we’ve covered that. But identifying your profitable cost per acquisition will give you that clarity and confidence. If you haven’t done this before, that again, you maybe never experienced before.

Ralph: All right, well, let’s stop talking about it. Let’s just show it with an actual example. So Nick is gonna share his screen here. Like I said before, if you, are. You’re walking the dog or you’re on the treadmill, or you can listen to this on your iPhone, or your mobile device, definitely check us out over on the YouTube channel so you can [00:12:00] actually see this being done over@perfectivetraffic.com slash YouTube.

Ralph: and also the calculator, check it out. Oh two eleven.com/nac. It’s completely free. Nick’s put in like a hundred hours onto this thing.

Ralph: Debating our CFO O for like

Ralph: what

Ralph: goes

Ralph: where, and he’s got like this, you know, very prestigious British accent. So he has lots to say about everything that we’ve talking about here. So he used to work like there. Here’s a cool thing though. He’s sort of a pain in the ass when it came to this. Quite honestly. I love Adrian, but you know, he was like, well, you know, there’s so many different variables. He used to work at KPMG. Like, he’s like a CFO nerd of nerds. He does all our acquisitions here.

Ralph: Like he, he knows this finance stuff inside and out, we got his blessing, so we know it’s not crap. We know we’re not making it up. Like we actually have an adult in the room as opposed to me. And you just like, yeah, just get it out

Nick: Adrian. I mean, that’s the thing. I mean, he’s, brilliant. He’s like, well, [00:13:00] if you spend 100 K on paid media today, that’s not gonna be like spending a hundred K in two years time because of inflation. And maybe you’re better off taking a, you know, a business loan with a balloon payment at this interest level and writing and like, it’s just, you know, it’s absolutely brilliant.

Ralph: and annoying at the same time. because we just wanted to get something out anyway. we’re giving Adrian a lot of crap here, but he deserves it.

Nick: and this calculator is intentionally simple. It’s functional, and it’s an effective estimation tool. There are four tabs, which are separated by the four steps we need to take. So we’re gonna go through each of the four steps today, each of these tabs, and end up on the most important one, which is the estimations tab, where you are gonna be able to see the estimate of the impact the paid media spend will have on your net profit or net loss if you’re acquiring customers at too [00:14:00] high cost. And based on the NAC target that’s been identified. So let’s go first of all to step one, which is the LTV. How much do customers spend with you? How much of their money do they spend buying your products over time?

Nick: And we have these six cells here where? FTOV. This is average first time order value. And then we have the average amount spent by month three, month six, month nine, and month 12. Where can you get these numbers from? If you’re on Shopify, these are going to be in your customer cohort analysis where they’re going to have the month.

Nick: zero, month three, month six, all the way up to month 12. For today’s example, we’re gonna be using the Tier 11 data suite, which is also another source where you can get your LTV numbers if you are set up on the data suite. So this is an actual Tier 11 client where we have [00:15:00] our new customer cohort set up here.

Nick: As you can see, we’ve got cohorts by month, but the data suite will actually average these out to average customer value at day zero, which is first time order. We have month three, month six, month nine, and month 12. So I’ve taken these and entered these into the LTV values here.

Ralph: I love that graphic too. So that’s the interface of Tier 11 data suite. If somebody does not have tier 11 data suite, where do they get that LTV number? And what we’ll explain like why we’re using LTV in just a second here. But, for those of you who don’t know what it is, it’s a lifetime value of a customer.

Ralph: But here it’s very clear, we see it flattening out in and around month six through six or seven, which is kind of what you’re looking for. But like, if they don’t know that, like, do you know, like, let’s use Shopify as an example. I would say just go in the backend of your Shopify, you should be able to find this.

Ralph: No problem. But it’s, in your CRM. You should [00:16:00] be able to figure this out fairly

Nick: exactly. Yeah. And if for whatever reason you’re not on Shopify, you’re on another platform there, as long as you have lists, you know, your database of customers and you have their first order date and their last order date, there’s ways to crunch this in, spreadsheets to look. It’s obviously more involved, but much easier if Yeah, you’re on Shopify or in a Tier 11 data suite, which we’ll do this for you too.

Ralph: All right. So LTV, first step. let’s just talk about that.

Ralph: Like why do you use LTV to start? Like what’s the rationale? ’cause we’re sort of assuming people understand that to begin with. Why is LTV such an important

Ralph: first step in determining Inca?

Nick: it’s, the basis for, everything else to have that estimation based on historical patents with your customers on average, how much they’re gonna spend. Okay? Because before you can identify you know, the revenue from every customer, how much out of that revenue can you spend on paid [00:17:00] media?

Nick: Okay. it can’t be all of it because you’re gonna, pay your vendors to buy your products and you’re gonna have other costs involved too. So starting with LTV gives us that top line, you know, breaking down the average revenue per customer over time. That’s our starting point.

Nick: Cool. Now what are we gonna do with that revenue and, work out how much we can afford to pay for new customers. So that’s why we start with LPV, because I found if you start with the costs or the cogs or you, you start with the other steps, you’ve gotta go back and get the LTV anyway. So, we went through this several times.

Nick: As I mentioned, the, the original sheet started with, the cogs, and it was in all these different sections. And I was like, hang on, hang on. This, this sequence isn’t right.

Ralph: That doesn’t

Ralph: make sense. Yeah.

Ralph: . So we start with LTV makes a whole lot of sense. You know, for a lot of people they don’t realize like that’s, I’ve seen a lot of ways to do this and a lot of times it does not start with LTV, but from our standpoint it’s like, why wouldn’t it?

Ralph: It makes a whole lot [00:18:00] of sense. The question is, is your look back period. So I have a question for you on that. Like, we did a look back period of 12 months on this particular client, but also know, at about six to nine months that LTV starts to flatten out a little bit. Why did you use 12 months here as opposed to either six or nine in this example?

Ralph: ’cause that’s a big question we get. How long should I look back and it, I say it always depends, but like, what’s your

Ralph: answer there?

Nick: yeah. and this is where you know, the average order frequency. It going to vary and play a big part in, in this. So some businesses you know, you may have, your customers buy, you know, once a year. And in this case, it might look something like this. You might have a very small, this might plateau out in month three.

Nick: And you know, that’s okay. you know, some products and some businesses are set up, you know, to not have as much recurring revenue. It just means you have to be. Profitable on the [00:19:00] first time order. You’re not gonna be able to afford a higher end CAC and rely on that repeat customer business or even acquire customers at a loss.

Nick: You’re gonna have to get that first time profitability. So in this case here, there’s still, this is not a huge amount of, returning, repeat customer or order frequency.

Nick: However, in the later stages we’ll see that this is still very powerful in the way this compounds more over time. So,

Ralph: How it

Ralph: compounds right? And profit at the end of the day, right? So for those of you who are listening who aren’t seeing this, it really is like your first time order value is $99 months. Three, it goes up to 1 0 4, 1 0 7, 1 16 months, 12 at around 122. So there is an escalation over time for LTV, but basically it’s in and around like the 120 mark Now, based upon risk of the client, like a lot of clients will say, well, I want my money back sooner, so I wanna [00:20:00] lower end C so I’m profitable on month one.

Ralph: Because we actually factor in, there’s another way of doing this, which I think I’m sure you’re gonna exemplify here in today’s show, is factoring in what your desired profit margin is. So just because you’re. paying, you know, whatever our calculation is, the lower that number is, the better off you’re gonna be from a profitability standpoint.

Ralph: But also that might limit your scale. So there’s always this kind of balancing act and we’ll get into that. But like one of the examples that we used on a show just previously, we’ll leave links in the show notes, is that they have customers that stay with ’em for 5, 6, 7, 8 years and that just compounds their, so where do I stop?

Ralph: Like should it be three months, six months, 12 months? Should it be three years? Well, that’s a decision that you, the business owner have to make. I would err on the side of shorter rather than longer just being a little bit more conservative. But in general, I think a 12 months look back like this, an analysis like this gives you a pretty good [00:21:00] idea of where that LTV kinda levels off.

Ralph: Is that safe to

Ralph: assume?

Nick: yeah. that’s exactly right.

Ralph: So we take LTV and then step number two, we got that.

Nick: Yeah. Yeah. And, and another reason, just to, as to why starting with LTV, another way I like to think about this is when you look at the p and l statement, there’s always that top line revenue at the top. And you can think about this as like top line, LT, V. So now we’re gonna go down through the line items and go like into the costs.

Nick: So going to step two is where we’re going to enter our costs. And first of all, we have a percentage setting here from direct costs from sales. So these are the costs we talked about earlier where if we doubled sales tomorrow, these are the costs which would move with that sales volume. The second

Nick: variable here, the second sell here, these are the direct costs from overheads, which is a set.

Nick: Numerical value, [00:22:00] which is a set amount, which again, all things being equal. On average, how much does it cost to keep the business running? If sales stops tomorrow for whatever reason, and you had to keep the business running, how much would it cost to, you know, payroll, keeping, you know, storage, whatever the office is.

Nick: Everything that, you know, is just the opex to run the business. So for this example, I’m actually gonna set this to zero because then we can come back and see the impact on this, estimation. So for now, I’m actually just gonna set that to zero. With this client, we’ve identified that their total direct costs, on average, their gross margin, basically 62%.

Nick: So their direct cost from cost of sales are 38%. Let just flip that around. And this, is a gotcha that can be quite common I’ve seen it’s quite common to only enter costs of goods sold here and underestimate the other costs involved, such as shipping, cost of transactions, et [00:23:00] cetera, it’s quite common to add another 12 to 15% to the overall costs.

Nick: So make sure here you are going through and breaking down all those costs associated with, you know, when you actually sell a product, when you actually have an order come in. have all of them put into this percentage. So in this case, we’re at 38%.

Ralph: Okay, so COGS really is like, this is what gets your gross profitability. So cost of sales, cost of goods sold, all basically the same thing. It’s a variable number with volume. The more you sell, the more of this you have, the less you sell the less. And so it’s completely elastic with revenue as opposed to inelastic, which is sort of like opex, which always stays the same until a certain point that you know, if you sell too much, then you have to buy a new warehouse and you gotta get new leases and all these other, we’re gonna set that stuff aside.

Ralph: This is what Adrian, our CFO would always sort of nitpick on, but like C That’s one of the questions like warehousing and storage. [00:24:00] Do you include that in your cost of sales, in your cogs? Because the more stuff I sell, the more warehouse I actually will need more warehouse space, all these other sorts of things like, and then the labor that’s involved with doing the pick and pack, and then maybe somebody who was on assembly line, like their wages, like where do you sort of begin and end, at least in your mind, where it sort of starts to creep into

Ralph: opex as opposed to just

Ralph: cost of sales or cogs.

Nick: really really great question. And that’s where, I mean, it’s gonna vary with each, you know, individual business. I would err on the side of, you know, if it’s not going to change drastically with sales volume, for example, a new warehouse that’s gonna be a one-time event. So that may mean that instead of 40,000 a month, you know, if you’ve expanded by a great amount, you may be adding an extra 15,000.

Nick: And that would mean that at some point your opex is gonna go from 40,000 to say 55,000.

Nick: it’s gonna [00:25:00] be an extra expense added to, those operating expenses you hire, you make a new hire. And this is where it gets really interesting with marketing too, because if you hire an SEO, if you hire an SEO company to, you know, do your SEO, that’s usually a fixed monthly retainer, and that’s not gonna move with more sales volume.

Nick: And so you’d actually put that particular marketing expense could go in your opex because it’s more, you know, more set.

Nick: So this is where, you know, these direct costs, it’s gonna be very much related to more sales. those costs are gonna rise with that, you know, in fall, if there’s less sales, that’s where, you want to break these apart.

Nick: But it’s a great question. And, it’s gotta depend on the business and. you may decide, well, email marketing for example, do we spend more on email marketing? If our sales rise? Maybe not. So even email marketing might go in here, agency fees, you know, likely here in the opex.

Nick: So yeah, that’s, my take on [00:26:00] that.

Ralph: So there is some gray area there, like for example, we can probably do a whole show on media efficiency ratio or marketing efficiency ratio. A lot of people say media efficiency ratio or marketing efficiency ratio. I look at it like. Marketing, I will lump in all of my staff into our at Tier 11.

Ralph: Like, that’s a hardcore way of doing it. But like, here, it, really is a judgment call whether or not you put something into COGS or whether you put it into opex, I think, you know, every accountant would argue on that point, like one way or the other, like three pls obviously is, you know, that’s a fulfillment cost, you know, all these things like, just think about it as it’s a variable cost that rises and falls with sales just plain and simple.

Ralph: And that’s really a good way

Nick: Exactly. Yeah. So that’s step two. You’ve got your direct costs from cost of sales, and then optional For now, we’re leaving this blank. But that’s where you can put in your direct costs from overheads. so let’s move to step three where we’re going [00:27:00] to get a preliminary NAC target. The only two variables we need to enter here are paid media spend At the moment. This is on average how much this particular client is spending on their paid media. I’m gonna leave this at zero for now.

Nick: This is actually not where this is gonna end up.

Ralph: Okay. For those of you who are listening, though, Nick’s talking about the third step here, which is paid media spend. He’s got 150,000 in monthly spend, which is about average for this client. And then your desired profit margin, you just have a zero. You can enter whatever you want. Any of the blue spaces that are inside the NAC calculator, which of course you can get@tiereleven.com slash nac, are where you would enter your own numbers, where you would actually pull this data from.

Ralph: So.

Nick: right. Yeah.

Ralph: I have people who are walking their dogs complain about this sometimes, Nick, so I’m explaining it this way. Then I will

Ralph: interrupt you occasionally. So anyway, go ahead. You’re doing great.

Nick: So, [00:28:00] apologies, those who are walking your dogs, you know, I can relate. I listen to a lot of content while I’m walking my dog and walking my, six month old baby pushing me in the stroller. So, I’ll attempt to be much descriptive as I can be. Alright, so here we have now in this cell here, This is our max allowable nac. If we were to take all of the profit from every new order, if we were to take all of that gross profit and redeploy that only to paid marketing, and that was our cost for acquiring a new customer, in this case it would be $61. Because we’re taking the first time order value of $99 and we’re taking out this 38% cost of sales, which is gonna be going to buying the products and paying for the transaction cost, et cetera, et cetera.

Nick: And we’re not worrying about the overhead cost for now. Now, keeping in mind too, that this is based [00:29:00] on averages. So some customers are gonna spend more for their first order, some are gonna spend less, but we’re taking historical data and starting, you know, using it. This average is a starting point. The cells over here, this is where it gets super, super interesting.

Nick: You’ll see these numbers, but month zero, we’re not making any profit.

Ralph: this is gross profitability, so it’s sales minus cost of goods sold, or cost of sales equals

Ralph: gross

Ralph: profit.

Nick: we’re taking that $61 from these new orders, and we’re gonna redeploy that. into our paid media to acquire more customers. It means we wouldn’t take any Gross profit in month zero. So we’re at zero here at month one And there is sometimes a case for this if you have very strong, you know, repeat, average order frequency.

Ralph: a hundred percent. And in highly competitive spaces where you’re bidding out a very hefty competitor. We see this happen all the time. They might actually go negative their first

Ralph: month,

Nick: what we have here is lifetime [00:30:00] contribution margin. so in contrast to if you think about that PL statement, the top line revenue, now we have a lifetime profit contribution on average per a customer. And we see here this still. doesn’t look like a lot, but on the next page when we get to estimates, we’ll see how this compounds over time.

Nick: So this is, by month three, that $3, that gross profit that you are getting from a new customer. You don’t have to pay for that anymore. There’s no paid media spend involved to acquire that customer. So this is where over time, as we’re gonna see this returning customer revenue starts to compound.

Nick: Now, I just wanna pause there. if there’s any questions about this particular before we go into the estimates,

Ralph: I think a super important part to this is exactly what you said. You don’t have to pay anymore ’cause you’ve already paid to acquire that customer. This is where the ad platforms might really screw you because if you use [00:31:00] Advantage Plus and Performance Max, you know, just on those two platforms, obviously on Meta and Google, they’re gonna go out and find customers who’ve you’ve already sold to.

Ralph: and we know that to be true no matter what. Whether it’s Meta, whether it’s Google, whether it’s TikTok, I don’t care what it is. They’re always going to include people who have potentially bought from you before and or familiar with your brand, however. What you really need is you need a tool that teases out those new customers, the ones who have never bought from you before.

Ralph: And sometimes that’s a very low percentage. Like we’ve done tons of tier 11 lives where John goes through this and it’s only 38% or maybe 40% of it, 20% new customers. He’s like, that’s okay, I understand ’cause I, my an CAC is the thing I care about the most. But just keep in mind that if you’re using, you know, the ad platforms to make these determinations, you might be led astray.

Ralph: ’cause you’re paying double, triple, quadruple sometimes to acquire the same customer over and

Ralph: over again. [00:32:00] And that makes your media very inefficient.

Nick: there may be a whole other episode on retention strategy and life, cycle marketing and this is, again, is a, conversation. Hot topic right now, my take is paid media is primarily for acquisition. That’s where you’re gonna get your best bang for your buck and trying to run ads to, you know, get the people who’ve already bought from you to buy more.

Nick: Just because they’re seeing the ads, there’s probably better ways to get them to buy more. But, So in this case, as you mentioned, this lifetime contribution margin, this repeat revenue is the customers are coming back and we’re allocating our paid media spend to acquisition.

Nick: So in this case, we haven’t, baked in any additional profit. So a month one, we are at zero profit. So I’m now gonna go to step four, where we’re gonna be able to see impact, what that looks like for profitability and the potential [00:33:00] impact on the top line and bottom line for this client.

Ralph: So, just to pause there for a second, so you’re saying you’re breaking even, but in actuality you’re actually at a loss business wise. ’cause you’re still paying your

Ralph: opex, like your op, your salary is your rent, your, know, your management layer, your attorney’s fees, like all that stuff that you have to pay

Ralph: out, like you’re not actually breaking

Ralph: even.

Ralph: So

Ralph: hence the reason for step number four here, and not to overly simplify it, but yes, like you do need to figure out like what is your desire to profitability and. make it realistic to a certain degree, especially. And then once you know that, then you can work on all the other sorts of things, which will have you back on the show about like, how do you increase average order value?

Ralph: How do you increase LTV? Like, there’s so many different factors here. We’re really just focusing in on cost to acquire that first customer the first time. What can you pay for that? And that’s what this calculator’s all

Nick: A hundred percent. Yeah. Alright, drum roll. [00:34:00] Let’s go to our estimate screen. Here we go.

Nick: So assume our paid media spend will be flat in this row here, 150 K per month. And this is what the revenue’s gonna look like only from these new customers that we’re, paying for.

Nick: So, that’s a key distinction here. But as we can see, for this particular client, it’s actually

Ralph: new

Ralph: revenue. New revenue. Not all

Ralph: revenue, Got it.

Nick: so our new revenue from our new customers who acquired would be this number here.

Nick: I’m not including any returning revenue. Existing returning revenue. So again, this is only from those new customers, but here we have our direct costs from cost of sales and our paid media spend

Ralph: so for those of you listening, it’s 241,000 and new revenue, thereabouts, 9 35, and then direct cost of sales is 91,935. Okay. And then your ad spend is 150 K. [00:35:00] So at that point, like you are paying to acquire a customer for zero gross profit, so you’re breaking even gross profitability, even though you’re probably at a loss because of

Ralph: your opex.

Nick: we can see here that month one. We’re at zero net profit based on this investment in, you know, acquiring new customers. Month two, we’re starting to see some returning revenue coming in, and it’s a small number to start with, but then this starts to compound over time.

Nick: On average. So by the time we’re, you know, getting to month six, month seven, month eight, if we’ve been acquiring these customers at $61, you’ll see our N mer stays the same. So that’s gonna stay a set 1.6, but our MER starts to compound over time. And this,

Nick: this media efficiency ratio. And this is the power of when you’re acquiring customers at a profitable cost, then this [00:36:00] MER starts to compound over time.

Nick: What can happen when you’re only looking at MER and you’re not looking at new verse, returning revenue is you can start to chase MER by pulling back on ad spend and

Nick: your MER goes up, but then you are acquiring less customers. So that can turn into a cycle where over time you’re acquiring less customers.

Nick: And what does that mean over time, there’s less repeat revenue.

Ralph: This compounding effect, is the beauty of knowing these numbers. And we’re looking at zero gross profitability here. And still you are starting to make profit at that 150 k spend. Like it’s not significant, but it’s like $3,700, month two, all the way to, you know, 30 4K at month 12, which is very conservative.

Ralph: But keep in mind, we are not factoring in any, profit margin at all here. So this is a really sort of

Ralph: a, harsher model, but still you can see the compounding effect of those new customers as they buy [00:37:00] more from

Ralph: you over time.

Nick: So now what I’m gonna do, I’m gonna go back and add in a $30,000 opex cost. Let’s make it 40,000.

Nick: And now we can see the impact that has on the estimates. And as you can see. If opex was at 40 k, then acquiring customers at $61 is in the long term. I mean, yes, that this, you know, profitable, but it’s gonna be too much of a length of time to make sense for this business.

Nick: So this would actually, from that paid media investment, there’d actually be a $277,000 loss because every month we’re going into the hole. And taking into consideration, there is likely gonna be existing returning revenue that would push this into to net profitability. However, it’s still, not the ideal scenario.

Nick: we’d be basically asking the client, okay, if we acquire a customs at $61, this is what it’s gonna look [00:38:00] like. Can you afford to, you know, do you have the cash runway? Do you have the reserves to shoulder a $40,000 loss in month one, 36,000 in loss? Two, do you have enough repeat customer revenue to cover this?

Nick: Because it looks like this is not gonna be profitable until next year sometime,

Nick: and they’re, gonna be like, this is not gonna help us grow it the way we want to.

Nick: So here’s where this client, We’ve actually. Want to bake in 15% upfront into every new customer acquired from that revenue.

Nick: So this is, the ideal scenario because if you are profitable on first time acquisition, then you’re immediately able to, you know, redeploy that profit into other areas of your business while still then, you know, using that profit to go and acquire more customers. we can see here with this opex, this is looking much, much better.

Nick: And this is going to add [00:39:00] 361,000 in net profit to their bottom line, you know, by the end of the year. And if they keep acquiring customers at maximum $47, because we’ll always want to get this as low as possible, this will. Allow them to scale profitably and then, the marketing is not going to be the bottleneck to the scale.

Nick: and this is where, you know, confidently is N cac, are we acquiring customers at $47? Yes. Great. Okay. Maybe we can now afford to scale even 5% per month. And now, you know, that is what the net profit estimate looks like by the end of the year.

Ralph: Which is almost $600,000. If you actually add in your growth rate of 5%, like you’re adding more ad spend, you’re hitting that NAC number. You’re also factoring in opex here. And then it compounds even more depending on how fast you scale. So you can really start to see [00:40:00] these numbers taking off.

Ralph: As soon as you sort of put in the different variables in the blue section inside the NCAT calculator here, let me ask you this question. The 15% that you came to, and this is the question that ‘ cause the average e-commerce store is anywhere between 10 and 15%, I believe, based on Shopify statistics. So it’s about 12% or so.

Ralph: How did you arrive at 15%? Is this something that you got from the client? Like how does somebody determine what should I want from a profit standpoint? ’cause everybody wants like 90% profitability, but it’s like that ain’t happening.

Nick: you have to look at, where has your end cac, where is it right now? And, you know, and that’s where, for example, you might find. your end CAC is much higher than, you know, you thought in this case it was $90. It’s like, oh, okay, well that’s a big delta from where it needs to be because the beauty of this is you can identify your profitable acquisition target.

Nick: As though you’d never even [00:41:00] heard of meta or Google ads, this can be done without even opening up the ad platforms and it’s gonna be based on, you know, what your business needs. So that’s where you need to compare at what cost have we been acquiring customers. And that’s where going into the analysis like we do here, we look at, okay, are we overspending on Google brand because ROAS looks good, in some cases, you know, we talk to clients who are on Amazon ads and ROAS in Amazon always looks fantastic and just as often there is overspend because of that, it’s like we need to spend more on Amazon because the ROAS is so high.

Nick: So you identify these areas of overspend, we usually see underspend in meta because as you scale in paid social and meta ads, usually looks worse in platform. Now with the data tweet, you can help to mitigate that with the. Technology we have to strengthen, you know, the attribution signals. but even then, you know, your attributed NAC in the data suite may be higher than your target, but as [00:42:00] long as your global NAC is on point, then know, you’re good to scale.

Nick: and this is where the analysis of the traffic mix and going into what’s it look like historically and what does it need to be? And that’s the most important thing. What does the business need? And okay, you know, some cases you might find, well, whoa, I, it may not be possible to. Only tweak the ads to get the NAC where it needs to be.

Nick: that’s what else in the business then can be adjusted. Do you need to increase the A OV? there’s different levers to increase LTV, so then you can afford that higher nac. But this is a process, and what I love about starting here is it identifies what the target needs to be, and then you’re able to see how close you are to that right now.

Ralph: Right. so one of the questions that we oftentimes will see is you’re calculating sort of company or global NAC here, what if I focused on my most profitable product? [00:43:00] Maybe I have a product that is 75% gross profitability or 80%. You know, we’ve seen clients used to have a client years and years they were, 5% cogs on their product.

Ralph: Like a hundred dollars product cost them $5 to make it. Like, that’s great. That was in the supplement space. The point is, is that that’s kind of rare. the bigger point is, okay, well your most profitable products, it would make stand to reason, especially if they’re your best seller, is you wanna sell that

Ralph: stuff first as like your first

Ralph: sale instead of looking at global nec.

Ralph: So how do you kind of

Ralph: channel that and how do you sort of decide when you’re

Ralph: making the media decisions?

Nick: This is where, starting here with a global NA is a starting point. Within that global nac. And when you look at your product portfolio, there are gonna be products that are more profitable for you. And when you look at those products, on average, when they are the first product purchased, [00:44:00] will, usually there’s gonna be some products which result in more repeat purchases.

Nick: So this is where you use a portfolio management approach to segment, identify, say, you know, your top 10 to 20% of products. And in a lot of cases, as you mentioned, they’re gonna be generating most of the revenue. take that approach to your customers, there’s gonna be your top 10 to 20% of customers who spend more, who buy more, who really are your most valuable customers.

Nick: And that’s more where you want to adjust your marketing message. But for the product portfolios, yes, this is where you wanna identify. you know, why is that NAC profitable? Why is your LTV the way that it it is? And as you do that analysis, you’ll see it’s gonna make sense to focus more spend on certain products.

Nick: You can actually do duplicate these sheets, this calculator, if you have different product categories that are quite different than have [00:45:00] different customers. So you can actually then do this NAC targets per category. So this is a starting point and, it’s a very useful starting point and some businesses, this, you know, will be enough of a starting point to set that as a target and keep going as long as, you know, we’re always watching the products, which are the top sellers and we’re looking for changes there.

Nick: You know, we track first time order value. If first time order value changes significantly, we know that’s a signal that, oh, people are buying something, different. Or if a OV changes in general, so this is the tip of the iceberg, but if you get this right, it just has a domino effect of everything else that happens afterwards.

Nick: And that’s like I was talking about that confidence and feeling of clarity that may have, you know, not been there before, can start by doing something like this.

Ralph: Yeah. No, I think the calculator here is, killer. Especially, you can vary it based upon your business and once again, you can [00:46:00] get this over@tiereleven.com slash nac. And there’s protected fields in this. Somebody downloads it, they,

Ralph: a lot of people are like, I don’t wanna touch any calculator because I’m gonna screw it up.

Ralph: Like, no, there’s protected fields. And it’s pretty clear like how to actually use the whole

Nick: I’m just going to do something here, which is quite cool to show. But what this is, is I’ve set the additional desired profit margin per new customer to a negative to minus 20%. So this is where if this business was acquiring customers at $81. Then we could see that they’re losing money, you know, they’re paying too much and on every new customer acquired, they’re losing money.

Nick: And not in a way that’s profitable because they don’t have enough returning volume to make up for that. Now, what I’m also gonna do, I’m just gonna put in some exist. I’m gonna put in 200,000, returning revenue. Existing returning revenue, okay? So that’s what we haven’t [00:47:00] added until now, but you’ll see that the MER here is 2.6.

Nick: So what can happen is in order to chase MER, we can start reducing ad spend. So I’ve got, you know, minus 10% reducing ad spend. This is pretty extreme, but you can see that MER actually starts to increase when you do that. However, we’ve got less new customer revenue too. So this is this cycle that can be set in place where overall mer can be improved by reducing spend and great, you know, we’ve got our ad spend efficient again, but it gets hidden so much that that sets in motion this, compounding spiral where you’ve just started to slowly kill your new customer acquisition.

Nick: And we see that, and then we hear, you know, exact words from one of our clients who as well of, you know, we’ve never actually looked at new verse returning revenue before. We’ve just looked at [00:48:00] overall MER versus ad spend.

Nick: so this is where I, forget how I did it, but I was actually able to do this the other day, which showed merr increasing, but then starting to decrease as well as ad spend decreased. I forget the exact settings I put in here, but it is a phenomenon that that happens and it’s like that short term hit of me because the returning revenue starts to prop that up, but then that hides the declining new customer acquisition and the declining end meer and, oh, it’s like over time sometimes we are clients coming to us where that’s been happening for three years and we need to fix this immediately.

Nick: And then it’s like, yep, we can turn this around, but we’ve gotta, you know, build back up through acquisition or some other levers. We, we can’t run ads to the people that bought from you three months ago and just. Get them to buy more because we, would run ads to them.

Ralph: right. it’s super interesting. What we see a lot too is, when a client comes and we do an audit, we see just a lot [00:49:00] of retargeting going on they’re just continually cycling through the same clients over and over again, or customers over and over again. And that’s usually at like a 10 to $30,000 a month ad spend.

Ralph: It’s like once you prove yourself past that point and you start to go profitable, we’ve sort of realized that that’s sort of a nice benchmark. But in most cases, like most meta ad accounts are just, churning through

Ralph: the same people and, you know, the frequency is super, super high.

Nick: yeah, the cost per new view. And this is where the platform metrics, like cost per click. can mask what’s happening with what you just mentioned because, you know, a cost per click, lower cost per click, higher CTR in general, you know, a media buyer would say, okay, this creative is working well, it’s got a higher CTR, it’s got a lower CPC with the data suite.

Nick: Sometimes we’ve checked some of those creatives and we’ve seen the cost per new visit is over $10. and the new visit percentage on [00:50:00] the account in general is, less than 20% sometimes

Nick: and increasing over time. So you think what your conversion rate would have to be, which I love this metric in, uh, the new visits to customer, to new customer conversion rate is just, you know, such cool.

Nick: Development’s happening there. I’ll wait till that loads. But you know, imagine the conversion rate you’d have to have if you were paying $10 every time to get a new customer to your site. And you think about on average, a good conversion rate, is 3%.

Nick: So doing the maths there, the conversion rate would just have to be astronomical. and these are some of the hidden bottlenecks to scale that, we uncover. So, you know, here we have a pretty healthy E-E-C-P-N-V. We have a dollar 80 here, which is, not bad at all.

Ralph: Yeah. Which is effective cost per new visit, which is a metric, which is another

Ralph: MPI that is, performance indicator that you get inside data

Ralph: suite.

Ralph: well, we will leave all of that for the next time you come on. Hopefully we’re gonna schedule this out in maybe a couple of [00:51:00] weeks, We’re using this as a base or in calculator as a base, then how do you actually use it to make really data-driven decisions? Everybody says they make data-driven decisions, but they actually don’t ’cause they’re using data that’s faulty or erroneous.

Ralph: So it’s actual data derived decisions. That’s sort of the next phase of this. But the foundational concept here is figure out what you can afford or willing to pay to acquire a customer with a profitability that works for you. And you start there and you start it over at, getting the NAC calculator@eleven.com slash nac.

Ralph: So, we’re gonna have you back on and go through this a little bit more, especially how this all integrates into data suite and how people can do it without data suite too. I think that’s super important, to be able to look into your Shopify or your CRM and determine a lot of these numbers. We’ve given you a really high overview here, but at least it’s the starting point.

Ralph: For you so that you can be on the path to scale. And like we say, like these are business metrics that matter to produce [00:52:00] growth that actually really scales. And that’s the key ingredient here. If you don’t have this, then you really are not able to grow as an organization. You can’t do it profitably unless you’re like completely flying blind.

Ralph: And the ANCA calculator certainly helps with that. So super appreciate you coming on. I know you’re a busy guy. You’re managing a, a massive team at Tier 11 and, super appreciate you putting all this together. Nick Miller of course. And we didn’t even talk guitar

Ralph: here barely today, so we’ll have to talk about that next time. But anyway, so make sure that you do leave a rating and review wherever you listen to podcasts. If you like today’s show, we’re also on Spotify.

Ralph: Leave a comment over there. All the links that we talked about here today are gonna be on the show notes over@perpetualtraffic.com. And if you did listen to the audio version and you need some visuals, head on over to our YouTube channel, which is perpetual traffic.com/youtube. So thank you so much, Nick Miller, head of all Things traffic [00:53:00] at tier 11 for coming on to Perpetual Traffic.

Ralph: And until next show, everyone see ya.

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