In part one of this two-part episode, Ralph and Lauren are talking about New Customer Acquisition Cost (NCAC). Sure, the mention of math might send some of you running for the hills, but hold on—this is the math that matters. Ralph compares finding your NCAC to searching for buried treasure, while Lauren reminds us that chasing vanity metrics like ROAS alone is as useful as an umbrella in a hurricane.

Learn why NCAC is the North Star of scaling a business, how to measure it effectively, and what tools can make the process manageable. Ad platforms love to boast about their results but your bottom line—and how much it costs to add a new customer to it—never lies.

As Lauren puts it: “Fake numbers might make you feel good, but they won’t pay your bills.”

Chapters:

• 00:00:00 – Math That Matters: The Secret Ingredient for Scaling
• 00:00:24 – NCAC: The Metric That’s Cooler Than ROAS
• 00:01:42 – Why Calculating NCAC Feels Like Cracking a Cold Case
• 00:02:42 – Scaling Secrets: Unlocking Business Growth with Math
• 00:03:47 – The Real Cost of New Customers (No, It’s Not What You Think)
• 00:06:10 – Lifetime Value: Measuring Love from Your Best Customers
• 00:09:28 – Practical Math: When Numbers Lead to Dollars
• 00:12:45 – Refunds, Returns & Regrets: Subtracting the Pain Points
• 00:15:30 – Hidden Costs Unveiled: Shipping, Storage & Surprises
• 00:18:05 – COGS: Decoding Cost of Goods Sold
• 00:20:50 – Gross Profit: The Halfway Mark to True Success
• 00:23:15 – Profit Checkpoint: COGS, Gross Profit, and What They Mean for You
• 00:34:10 – A Special Perk for PT Fans: Wrap-Up & Surprise

LINKS AND RESOURCES:

• Tier 11
• Mongoose Media
• Tier 11 Jobs
• Perpetual Traffic
• Get Your nCAC Calculation Guide Now!
• Marketing Performance Indicators™ Checklist
• Perpetual Traffic on YouTube
• Tier 11 on YouTube
• By the Numbers
• Connect with Lauren on Instagram
• Connect with Ralph on LinkedIn
• Follow Perpetual Traffic on Twitter

Thanks so much for joining us this week. Want to subscribe to Perpetual Traffic? Have some feedback you’d like to share? Connect with us on iTunes and leave us a review!

Mentioned in this episode:

AppSumo – 13% off with code traffic13

AdCritter for Agencies

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Read the Transcript Below:

The 5 Step Formula to Determine Your nCAC

[00:00:00]

Ralph: Hello and welcome to the perpetual traffic podcast. This is your host, Ralph Burns and the founder and CEO of tier 11 alongside my amazing co host

Lauren: Lauren E. Patrullo, the founder of Mongoose Media.

Ralph: so glad you joined us here today. Today, we are going to talk math. We just lost 99

Lauren: to the most exciting episode

Ralph: Uh,

Lauren: the year

Ralph: See the rate and see the, like the ratings just go, you know, it’s just like right off a cliff. Yeah, absolutely. It’s like, you know, March of 2000 when the internet bubble like burst. Uh, no, this math is actually good math. This is the kind of math that we talk about things that are relevant.

Ralph: And we’re seeing on a daily basis, and this is one of [00:01:00] the most important, if not the most important, in my opinion, metric in marketing, especially in digital marketing, because a lot of the platforms that you’re spending money on for media are. As we’ve said many times before, are going to give you what you want, which is row as the appearance of actually getting new customers, great performance, when in fact, the true measure of whether or not you’re growing your business or not is.

Ralph: How much money you have in the bank, how many new customers you’ve acquired and at what cost you have acquired those customers. And that is the purpose of today’s show is to talk about that metric. I was googling this this past week, like how to determine your NCAC, which is new cost to acquire a customer Our new customer acquisition cost, however you want to do it. There’s not really a whole lot out there. It’s how do you determine it in retrospect, like after you’ve already spent money, but how do [00:02:00] you actually determine it is really complex. And it’s not an easy question to answer. And today’s presentation, we’re actually going to talk about this and I have a feeling we’re probably going to be a two parter here.

Ralph: We’re going to get into it and I’d love to get your thoughts on it as to how you calculate it or what success metrics you use in order to scale up your clients as well. Well, as your individual businesses for us, it’s NCAC, and that’s what we’re going to be talking about here today. Thoughts, comments.

Lauren: For those that are wary of the math, this is the math that makes you money. This is the math that matters. So if you are still listening, good job. If you ditched early on, well, you’re enjoying fake numbers, and that’s only going to last you so long. So sorry about it. Sorry, not sorry. But no, everything you’re talking about makes so much sense because when people come to us and want to scale, we’ve seen when we audit accounts, campaigns that were scaled because of the appearance of it working really well.

Lauren: And then when you look at it from a longer Time frame or you bring in another outside party tool like a third party tool like a wicked reports or something [00:03:00] to that effect You’re like, oh no

Ralph: Yeah, no, everything isn’t as it appears to be. Yeah.

Ralph: So this was brought about by, we have a large eight figure business in the e commerce space, hundreds of SKUs, lower priced products, sort of on the front and we’ve had a real challenge. That we just keep asking, like, what’s your NCAC? What’s your NCAC?

Ralph: Like, what’s our goal? what makes you successful? How much can you pay to acquire a customer? Can you pay more than X amount that we’re getting right now or less? Because ROAS, and if you look inside all the metrics inside all the ad platforms, ROAS is going to be mostly based upon warm traffic.

Ralph: That’s not why they hired us. They hired us to get new customers for their product and get them to buy over and over and over again. Get them to buy more and more frequently. There’s three ways you can grow your business. Get more customers. Get them to buy more frequently and get them to buy more stuff when they buy it.

Ralph: Those are the only three that I know of. The point is, is the first one is the most [00:04:00] challenging one. Cause once you actually have them in your ecosystem, you have email, you have, they now know who you are. You have some level of brand awareness. So, as I’ve said, a gazillion times, my team used to zoo on me for this.

Ralph: You gotta crack the code on cold

Lauren: wait, did you just say zoo on you or they like making monkey tiger noises like what does do I mean like

Ralph: Yeah, they would make monkey noses. They would. I’d be, yeah, every time I would say got to crack the code on cold trap. We actually had a meme of me saying it inside slack. That’s how many times I used to say it. So I’m bringing that back and hopefully I’ll get sued on for it this time.

Ralph: Cause that means they’re actually paying attention and understanding. So, but this is math. It’s not that complex. The math, it’s just addition and subtraction really at the end of the day, There is a certain element of the business owner making a distinction and making a judgment call as to how much they are willing and able to pay to acquire a customer.

Ralph: Makes sense.[00:05:00]

Lauren: Yeah. And it’s, I think Dan Kennedy said it best of whoever is willing to pay the most will win every time. So it’s like knowing how much you’re willing to pay to acquire a new customer, knowing what your average order value is going to be. And then knowing the lifetime value of that is going to be mission critical for you to know what you’re willing to pay the first time.

Lauren: Cause if you’re willing to pay 75 first time in your lifetime value of 60, you have a loss of 15 without even factoring in COGS. So that doesn’t work.

Ralph: That doesn’t work. So we’re going to get into that, right here.

Ralph:

Ralph: Hey, so before we get into today’s show, you can get the download for these slides over at perpetualtraffic.

Ralph: com forward slash NCAC. I highly recommend that you watch this over on our YouTube channel, which is perpetualtraffic. com forward slash YouTube, but you can get the download of the slides for free at perpetualtraffic. com forward slash NCAC.

Ralph: So I highly recommend that you watch this over on our YouTube channel at perpetual traffic dot com forward slash [00:06:00] YouTube. If you don’t know what that is already, please subscribe. We’ve got a ton of videos over there, especially when we have

Ralph: John Moran on, we do a lot of screen sharing. So make sure that you do subscribe to that. So this is how to calculate your new customer acquisition cost, otherwise known as NCAC, and this is for an e commerce business. We’re just going to use this. I did not use like a digital products business.

Ralph: I didn’t use a service based business. E commerce is just so. Straightforward when it comes to this. And I think there’s a lot of factors here. We will comment on digital products and service based businesses as we’re going through this here, but just for purity and for simplicity, we started really with e commerce.

Ralph: all right. So the first thing is, is what is new customer acquisition cost or NCAC? It’s the total cost of acquiring a new customer, obviously. Why is it important? Understanding NCAC is essential for making informed marketing decisions. If you don’t know what your NCAC is, you can never really. Truly scale and you have to be able to find what the NCAC is.

Ralph: And we’ve [00:07:00] had many shows here on how to determine that. And in the ad platforms, there is a certain level of the ability to know. Which campaigns specifically, which ad sets, which ads are actually getting new traffic or traffic that has already been on your site, even with exclusions.

Ralph: Have you found the exclusions improving? Getting worse, like what’s your sense over on Metta, Lauren?

Lauren: As much as I like which exclusions were better, the reality is, is that with, the algorithm doing everything they can to find your customers, they’re going into your audiences that are Have been excluded and the reason that we have seen this is because I’ll use an e commerce example We know who our customer lists are and we import them in from Klaviyo and then we’ll be able to track back An existing customer who bought from a retargeting campaign that excluded customers And I’m like, okay, cool.

Lauren: that didn’t work. So anyways, the exclusions are good as a reference point, but they’re not [00:08:00] something to be a hundred percent reliant on metal right now, just in full transparency,

Ralph: I mean, there is a drop down menu inside ads manager where you can actually look for new and returning. However, I would take those with a grain of salt. I mean, you really do want to focus on obviously cold traffic is that are the people that have never seen your stuff before. exclusions as much as possible.

Ralph: Can it’s not. A perfect solution. However, you can get upwards of 40, 50, 60 percent cold traffic specifically. if you do certain types of strategies, which we’ve talked about here in the past, we’re not going to get into sort of the ad side of it quite as much, but that is a problem. It’s like, how do you actually find those new customers That’s a whole

Ralph: challenge unto itself.

Lauren: we should do that as a separate episode, if people want that. And I’m going to say, like, I know that we’re like figuring Spotify out and like with how they do all these comments now, I mean, of course we obviously have our telegram group, which is like, blowing up lately. I’ve been seeing a lot of really good stuff, from the Google side and people helping out a lot, but.

Lauren: If that was something ways that we [00:09:00] penetrate new audiences for brands that feel like they’re tapped out for their campaigns. I would say that if people want that, I’m willing to share my, I’ll spill my secrets, Ralph, if you spill yours.

Ralph: Yeah, absolutely. Let’s do

Ralph: that as a

Lauren: but like someone has to ask for it.

Ralph: Yeah, well request it. Ladies and gentlemen, who are you listening out there? So before you can do that, you need to know this stuff though. So this is a five step formula. very simple, but not simplistic by any stretch. So the first step is three ways to determine what your customer is worth.

Ralph: So actually, it’s, I shouldn’t say this three ways, it’s actually five ways. but we only included four here. so three plus a bonus. so this is the most important thing. So CLTV or LTV, we know what that is. That’s lifetime value. The question is, is what is lifetime value for you? And your business, and that is a big question that we’re going to face here is what’s your look back period.

Ralph: How do you actually go back in [00:10:00] time and determine whether or not your LTV is 3 months, 6 months, 12 months, the entire time that you’ve ever been in business. That’s the big question. That’s sort of a business question, which we’ll sort of get to in just a second. So the first way to figure this out is this is the easy way.

Ralph: If you have a daily analyst, just ask them to figure it out. it’s pretty easy peasy lemon squeezy. This is a. Simple, simple way of doing it. If you’ve got a data analyst, great. I’m going to assume that you probably don’t, and you’re going to have to calculate it on your own. So like I said, there’s a lot of different ways to do this.

Ralph: You can certainly look this up. We’ll leave some links in the show notes for this as well. Two things you need to know for me, this is how I figure it out. And we just actually did a live with John Moran. He figures it out a completely different way, but they’re both right. So two things I look for is how many customers bought your products.

Ralph: How many unique customers now if you go back in your Shopify database, let’s use a 12 months look back period. Let’s just use that in our example here. That’s what we use. That could be a whole show. It’s like when you [00:11:00] actually determine this. What is your look back period? And I think in most cases, 12 months is good, but it also sort of depends on how many times they buy from you.

Ralph: What type of product you have, for example, a 12 month look back period probably isn’t very helpful if you’re manufacturing, I don’t know, baseball gloves, and you have a huge surge of buyers in February, March and April when the baseball season begins, and then you really sort of have a drop off the end of the year, and then they buy again.

Ralph: You see another surge might be buyers coming back, buying a new glove, maybe getting a different glove. Maybe they outgrew their season. Previous glove. So it’s going to depend, let’s say you’re a supplement company and you sell a recurring, you know, a CPG product, which, let’s say it’s a protein powder, that’s going to be very different.

Ralph: So you buy the protein powder once, obviously you want to have, we have a customer that their average lifetime value is once they get the customer, they buy seven [00:12:00] times on average, pretty good. So there. And it would is higher all things being equal than maybe a supplement company that only purchases two or three times.

Ralph: We’ve had clients that have done that. They’ve had a really hard time scaling up their spend. So it depends on your product in so many different ways. So calculating on your own is a couple of different steps here. So how many customers bought your products? You can go back and do Shopify and you can look for this.

Ralph: And then you figure out how much revenue you generated over that period of time. And you basically just divide the numbers. So total revenue divided by unique customers equals LTV. And some people call this CLTV, LTV. This is a marketing performance indicator, of course, which you can get over at perpetualtraffic.

Ralph: com forward slash MPI, if you haven’t gotten it already, and it goes into this even further, but, calculating it on your own, that’s a simple, simple way of doing it. The third way. Oh, actually, here’s our example here. So we have an example of a million dollar business, million rev, 2000 unique customers [00:13:00] through Shopify.

Ralph: We went back through it. So we figured out, okay, their LTV over a 12 months look back period. Like I said, it’s going to depend on your business here, which is using 12 months as an example, their LTV is 1, 000. And that’s the example that we’re going to use throughout the whole presentation here today. The next one is estimate it.

Ralph: I don’t highly recommend this, but I have seen this, especially with businesses that just don’t know yet. Okay. starter businesses, lower ad spend, if you can’t do number two, it’s okay. A good bench to start. Is anywhere between two and eight times the price of your initial conversion value. So let’s say your AOV, for example, sticking with our previous example, the company’s first conversion value is about 250.

Ralph: And there’s a client actually I modeled this after they’re much larger than a million dollars in revenue, but their first conversion value, like for NCAT customers is about, a 250. It’s about anywhere between 200 and 270, so we’re just using [00:14:00] 250 as a round figure here. So high value e commerce in this particular case, yours could be 25.

Ralph: It could be 50. Just figure that out. So as an example here, a good benchmark might be actually to start anywhere between 500 and 2, 000 for your CLTV. Like I said, this is an estimate. So let’s just use somewhere in between there, two and eight about four. So we’re using 1, 000 customer lifetime value.

Ralph: So that’s the estimate method. Obviously, when we actually went through it and determined this for this, this customer, It was a thousand dollars or thereabouts in customer lifetime value over a 12 month period.

Ralph: So pretty good business here. The fourth number, this is sort of the cheat code. This is actually an app that you can sign up for, get the free trial, determine it inside your Shopify store. If you’ve got a Shopify store and you don’t know what your LTV is, you don’t know NCAC, you don’t know any of the stuff that we’re talking about here, This app called by the numbers it’s by the numbers app.

Ralph: com. We should be affiliates because it’s a tremendous program, [00:15:00] sort of got a little cheat code in there. You just tie it into your Shopify store and it calculates all of this for you. And you can figure this out really quickly. So you can figure out how many times your average customer buys when they buy, how much do they buy?

Ralph: Obviously, that’s a O. V. And then obviously, lifetime value is a multiplication of how many times they buy in a year and what their average order value and then you can obviously you can do a lot of different notations and so forth. This is like I said, you can buy it or you can get it for free, determine it and then cancel it.

Ralph: I’ve seen clients do the same thing, so I’m going to stop there for right now. Before we go into step two, everything I’m saying so far, making sense. Do you look at it the same way? How do you sort of determine it when we just sort of talk about LTV?

Lauren: So can you actually go back a picture, a screenshot, just for those that are listening to the screen of By the Numbers, just because if you’re not watching on YouTube and say you’re running and you’re just viewing the screen, I wanted to just go through first and explain some of the slides or [00:16:00] the images that you’re sharing.

Lauren: So if you go back to the By the Numbers,

Lauren: So I just wanted to show on here for those that aren’t watching the screen, like to show a little bit of some of this that’s coming up. As you’re able to see some examples of this number of the integrations you have synced. So here you’ve got Klaviyo and TikTok.

Lauren: You can see 3, 400 lifetime value average over 116, 000 orders. You’ve got. Best customers group, a loyalty group of 8500 of those customers that you’ve also got some graphs here that are showing your dormant ask risk and deeper understandings of information on the customers. Just This was really impressive, Ralph.

Lauren: And I just wanted for anyone that was, not watching YouTube when you’re express explaining the by the numbers component, If you have a chance switch over, if not, there’s a lot of information that can be made available and there’s no affiliate commission whatsoever, but this is, if you don’t know a great place to start, the only thing that changes from [00:17:00] our side of where we go is for us, the 12 month period is shorter period than we would look at for a lifetime value customer, but that depends on the price point of the products.

Lauren: So again, you talked about like the recurring side of supplements, a hundred percent. I actually, Would keep it at a six month period, depending on what is your average subscription size. But then when you talk about the glove example, I wanted to introduce a third example, such as like a single purchase, one time big buy, like a mattress. When you bring in those, your look back period to be like 7 to 12 years. And if you’re a newer e commerce brand, you may not have that data available to you. So that number two example you showed of that gut, we actually always start there because when we’re in conversations, we want to ask the owner if they don’t know, what do you think?

Lauren: And they’re not often that far off from what we can find. Within Shopify, if you collect, if you connect your analytics, and if you’re using UTMs, you’re actually gonna be able to see a lot more inside of it. Then [00:18:00] if you have to bring in a lot of these third party things, but you said you would do almost eight times.

Lauren: So your repeat purchase rate is different. Other ways that we like to look at it is, I’ve said before, our email lists are set up into three people. There’s a subscriber side, they bought from me once, and they bought from me more than one side. So what we’ll actually try to do is look at who bought from you more than once, and then we’ll look at that in a 12 month period

Ralph: Hmm.

Lauren: before looking at just everyone in a 12 month period, because we want to isolate the best part of your customers, because that’s the lifetime value of someone that you’re winning with, because if you have someone that’s bought from you once, And they didn’t buy from you again, that’s where marketing and sales comes in because you’re earning their loyalty.

Lauren: You earned their first buy, but now you have to earn their loyalty. When you’re looking at someone who’s bought from you more than once, you’ve established your loyalty and you’ve got them. It’s yours to lose their repeat purchase. But that’s why I like looking at lifetime value of those who bought from me more than once, because that’s the aspirational side that you could [00:19:00] be looking at, which since we talked about 10x is better than 2x.

Lauren: Now that I’m like, actively in this book and super into the Michelangelo side of it, it’s if you want to work towards that, I’m just bringing the principles of that book and that’s where we would look at it because that’s the lifetime value that we actually care about. Because when we have done it blended, pulling in subscribers, single time purchasers, sometimes people look at data that’s from five years ago and your brand was in a completely different position then, and you’re diluting that data.

Ralph: Yeah. That’s why the look back period is really, is challenging. I don’t think there’s a right answer per se here. I mean, you know, for a supplement company that. you know, in this case, like I went high on the eight X because I think of one example that that one supplement company, which is, you know, tens of millions of dollars, valuated hundreds of millions of dollars.

Ralph: The point is, is they’re so good at the recharge element, which is basically is the recurring revenue component of it. And They [00:20:00] also have Amazon completely dialed in. It’s like a really smart business. So they’re upwards of like eight X potentially, but then again, you bring up a great example of like a mattress company.

Ralph: Like I remember when all those mattress companies were coming up, out of the blue. Like purple and, we bought one. geez, I forget what it is like ghost or something like that ghost bed. Like i’m like, how are they figuring this out? And a lot of them disappeared because they had no idea that this was a one time purchase and that was it The venture capital money went right out the window.

Ralph: They had no idea of this stuff and it’s amazing to me How few people really? Really dissect this and think about it. And then at the end of the day, like you said, sometimes it is sort of a gut feel. It’s a bit of a guess. And chances are why I put this in as option three here is that if you know your business well enough, you’re not going to be too far off from this.

Ralph: maybe it’s three X your AOV and you say it’s four X in actuality. [00:21:00] So think there’s a big degree of, some subjectivity here, but at the very least, at least you’re looking at this because this is one of the most important metrics for scale

Ralph: Hey, just as a reminder, there’s a lot of information here today. So make sure that you do download a free copy of today’s slide presentation over at perpetualtraffic. com forward slash NCAC. That is perpetualtraffic. com forward slash NCAC.

Lauren: so on that with the supplement side or any that has a recurring subscription model like beauty, right? All day long.

Ralph: all day long. Yeah,

Lauren: retention period for that subscription. So if it is four months, double that and look at that period. If your average subscription. Period is four months, double that and make that your eight month look back period.

Lauren: and then if you’re in a seasonal space, you’re in the weddings or the baby space, you have to look at what is the timeline. if you’re in the baby space and you have a product that goes until talking, [00:22:00] then you’re looking at two years. You know, the lifetime of your relationship with that customer because once they’ve aged out of your products, they’re moving into a different space.

Lauren: And similarly, if you’re in like the wedding or time sensitive space, you’re probably looking at nine months to a year and a half. And that way you’re just trying to take in the whole customer cycle because there might be repeat purchases within that period, but look at the time of when they can buy from you.

Lauren: That was just the one other caveat I did.

Ralph: it’s great. And we’ve got a couple of wedding brands right now that are Shopify based. That’s why by the numbers is so good. This was just like, this will get it so accurate. Especially if you have, like, we’ve got a wedding company that sells through e commerce and also does wedding planning and they’ve been in business for 10 years.

Ralph: So they’ve got a tremendous amount of data. They know these numbers so well. And I believe they actually do use by the numbers, um, you know, to calculate this. But I mean, like, this is a great app here, especially if you’re in the Ecom space. So it’s sort of the easy buttons, the cheat code [00:23:00] to a certain degree.

Ralph: But then again, you’ve got to really think about your business and you know, what is a logical look back period based upon, you know, how your business operates. So that’s sort of step number one is figuring out that CLTV. Okay. Not everybody who buys wants to keep your stuff. So this is something that I see a lot of people forgetting, and it’s an important step.

Ralph: So you gotta subtract refunds and cancellations. And you sort of look industry wide, we’re just going to use sort of a round figure here. This might be less or more for you. It might be insignificant or it might be fairly significant. We once had a client that was about 25 percent on refunds. Just because there was, especially on the second purchase, they had a forced continuity that we didn’t know about.

Ralph: Yeah. And they were also selling through a lot of affiliates and those affiliates were doing forced continuity. I

Lauren: such a [00:24:00] high refund.

Ralph: yeah, it’s a

Lauren: their Stripe account, I mean, I bet you they had a lot of chargebacks too.

Ralph: Yeah, though. Oh, absolutely. Yeah, charged back big time. So that was a huge number. So like, that’s sort of on the extreme. I think, you know, in our, for our purposes here, we’re talking about a company that’s a million dollar company. Pretty good. You know, their, their LTV is 1000. So we’re just going to use a conservative benchmark for this.

Ralph: If you don’t know what this is, once, once again, by the numbers, we’ll figure this out. Inside Shopify, you can figure this out very, very quickly. We’re going to use 10 percent as a conservative benchmark. So now that you actually have this, a lot of people call this net LTV or NLTV, which is, let’s say, uh, in step number one, we figured out the LTV for this, this e commerce client, 1, 000, 10 percent of that.

Ralph: Now you’re down to 900. So your nine, 900 CLTV, or actually 900 net LTV and LTV. And you might sort of hear it that way as well. So, uh, a lot of things [00:25:00] right there that I think just an important step, the lower this number is obviously the better. So make sense so far,

Lauren: Everything makes sense. I just ask you then on the, the refunds cancellations, a question that will get asked where I, I can’t wait to hear what you, your reply specifically, but where do you fit on shipping and shipping insurance?

Ralph: uh, that is going to be covered next.

Ralph: Because stay tuned. Subtract, subtract, subtract. See, I knew I didn’t do these, these slides here, of course, subtract, subtract, make sure you subtract cost of goods sold, cost goods sold, which we do include, uh, shipping costs in that. So you can put that as a separate line item.

Ralph: Some people do list that out. And they also put in the processing fees here. We’re just going to lump all that into cost of goods sold. I

Lauren: do too, by the way. We do too. And people are like, can we [00:26:00] take out shipping? I’m like, no, because they’re, it’s still for the consumer, they’re paying for shipping and you have the ability to remove shipping as a discount and then you’ve all the ability to also make money on shipping because they’re shipping and handling.

Lauren: So depending on how you do that, we roll it up, but I know that other people don’t want to include it. I just think that it gets. Two locks in the minutiae that you’re missing the bigger picture. So I was like, please say you also include shipping. I would say the only thing I would potentially take out is if you’re doing shipping insurance, because that’s not money in your pocket.

Lauren: That’s actually going to another third party solution. So a lot of brands will partner with like an aftership kind of company where they’re just making that guarantee. So I do not include shipping insurance. But I’ll include shipping all day long, shipping and handling. Yes,

Ralph: Yeah, for sure. Because it’s a cost that’s associated with the delivery of the goods. So if we look at, I don’t think we actually have the definition of cost of goods sold [00:27:00] here, but that is basically what cost of goods sold is. So subtract amounts of cost to actually manufacture and deliver your goods. So shipping and handling manufacture and deliver.

Ralph: Shipping and handling are part of that. So yes, shipping specifically handling can be a profit center. You might be able to even make back some of your shipping costs in the handling portion.

Ralph: All right. So cost of goods sold. So if you’re manufacturing, I think there’s an important part to this too. so if you’re a digital products company, this is where digital products, and software to a certain degree, man.

Ralph: Great business models. I know software and digital products have their downsides for sure. However, your cost to get sold are going to be very little by comparison to the physical products company.

Lauren: And you don’t have perishable products.

Ralph: yeah,

Lauren: have to toss inventory

Lauren: because of expiration or. It went bad because of poor, storage. I think there was like one client of ours, their, 3PL damage. They had like too much lighting [00:28:00] exposure and it ruined their entire beverage supply. So.

Ralph: Oh, geez.

Lauren: I know. It happens.

Lauren: It happens. They have insurance. That’s what it’s for.

Ralph: all right. So if you’re manufacturing goods, cogs, so we do do the definition of cogs here. labor, is the cost of labor to manufacture the goods, the materials. The physical costs of the materials, as well as utility costs, what it actually costs you from a power, water, if applicable, are also included in COGS.

Ralph: And don’t forget to include the cost of shipping. So see, there you go, Lauren E. Petrillo, right there, all together. So the people that are on your manufacturing line, the people that are actually doing it, if you’re outsourcing this to a third party, those are all your COGS. And storage is also Like warehousing costs that is part of it as well.

Ralph: So cost of goods sold for e commerce and for physical products. You can see the advantages now for digital products, which are basically ones and zeros and hosting costs. so that there’s definitely advantages and disadvantages here. But the [00:29:00] point is, is that this is sort of your next step minus your cost of goods sold.

Ralph: And so what I used here for our calculations. is sort of the industry wide average, this was variable. So we used a 40 percent of LTV, which is, I think, a bit high. we have customers where it’s anywhere from 10 percent cogs, to 40, 50%, 50 is about the highest, which basically means you’re two to one.

Ralph: That’s really high.

Lauren: There’s no margin for marketing. There’s no margin for profit. You’re

Ralph: not a whole

Lauren: sweating it up. But to have 90 percent margin after COGS, that means they’re manufacturing at a high volume. And they’ve been doing this for a while. we’ve had clients that like their COGS is 8 and they’re selling products at the 90 price range.

Lauren: It’s amazing. There’s lots of flexibility for coupons.

Lauren: There’s flexibility for marketing and there’s flexibility for profit. A lot of brands will try to make their price point. without considering their [00:30:00] margin. So yeah, if you’re at 50%, like woof,

Ralph: Tough.

Lauren: but 40 percent high target should be, it should be 30%. Like you really want it to be like 15 to 30%.

Lauren: The lower you can get it, the more you’re winning, but you have to make sure that you’re offering it a price that’s fair. And if you’re Selling at a price that’s superior than your market, you better have reasons why you’re justifying this being the most expensive glass, which you absolutely can do.

Lauren: That’s what luxury branding is about. But if you’re doing, for the first time, we say 15 to 30 percent is what you’re targeting. So I agree. 40 percent is high.

Ralph: 40 percent is high in our example here, though, we’re using a very high for a relatively small business. It’s a million dollar business. We’re just using this as round numbers here. Okay. There’s no exact actual example. We can actually do this for an exact actual example at some point in time, but a million dollar business, your LTV is a thousand dollars takeaway refunds, and you’re at 900.

Ralph: So that’s a, that’s a [00:31:00] fairly good LTV for a million dollar business. Like I said before, the point is, is that 40 percent cogs a bit on the high side, but I also wanted to make this example here a little bit more instructive so that people can really sort of look at things and make sure that they are doing the math.

Ralph: And I think your cost of goods sold, there’s a lot of folks in a lot of businesses that we’ve discussed this very concept with is they underestimate their cogs. Because they don’t factor in warehouse

Lauren: time

Ralph: all the time, the cost of shipping, just like what you said,

Lauren: storage, like the storage solutions, even if you’re storing it in your house, I will say, like, if you don’t factor in that, space, the reason why, somebody like, Oh, I’m doing it on my garage. I don’t have to pass. Like, you have to factor that in because when you scale, you will have that cost creep up on you and you’re going to do the wrong thing.

Lauren: We worked with a beauty brand. They literally went through this and they were bankrupt within two years because they expanded and bought a [00:32:00] million dollar It’s distribution center where they could do all the manufacturing in a kitchen that they owned when they went from doing it in their own home and they had no accountability or accounting for that increase of COGS.

Lauren: So they scaled incorrectly the wrong way. So Count it, even if you’re doing, you need to put in what that cost would be if you’re using a 3PL or some sort of storage facility. Because the other way is you have to factor of like, what does that mean to your mental health, to the relationships? If you’re sharing a home, and you have all your inventory in one single spot, and you’re not factoring in the cogs of like, maybe your kids are helping you do shipping, maybe your partner’s helping you, all those other things, if you don’t factor them in, it’s going to hurt you really hard when you try to scale, and you’re not going to understand what the biggest disruption was.

Ralph: yeah, a hundred percent. And you bring up some good examples here, which we’re going to talk about. I’ll reference that in a future slides here, but you know, cost of goods. So people are sort of [00:33:00] fixated on cogs because then they get gross profit. And in this particular case is if we do the calculation once again.

Ralph: But, you know, we’re using a year look back period, which may or may not be applicable for you. We’re using a 10%, refunds and cancellations. And then our cogs in this particular case are 360. If I’m not mistaken, at 40%, 40 percent of 900. So you get 540 left and that is your gross profit. So. A lot of people, a lot of businesses will say, okay, well, my GP is 540.

Ralph: So my NCAC is probably in and around that number, which we’re going to get to in other slides. That is probably the easiest way to go out of business very, very, very fast. but this is gross profit. And I believe this is the question that when I first did this on the show years ago, I actually did include SG& and that’s basically overhead.

Lauren: On this

Lauren: [00:34:00] episode, talking about the NCAC lead magnet, and like, whether you got it or whatever that kind of component is, you have to comment on the thing, and then we can go through their NCAC number specifically with them,

Lauren: first we’ll automatically get it, and then we can randomly choose another person to get a second half hour, and then we can go through their NCAC number specifically with them, and then help make sure that they understand it personally.

Ralph: All right, done. All right. So the first person to comment on Spotify, just to summarize here, gets the checklist obviously, but they also get a free 30 minute consultation with Lauren and myself. To help you determine your NCAC or talk about whatever you want to talk about. So really appreciate you all listening here today.

Ralph: wherever you listen to podcasts, make sure that you do leave a review and a rating and a comment. Of course, especially on today’s episode and all of the resources that we mentioned are over at perpetualtraffic. com. So on behalf of my amazing cohost, Lauren Ipatrullo,

Lauren: Who will also be talking to you on one of two calls, because [00:35:00] the first person guaranteed gets it, and then another person will also get it.

Ralph: until next show, see ya.