How much can you really afford to pay for a new customer? The answer isn’t as simple as your Facebook ad spend. In this episode, Ralph Burns and Amanda Powell break down customer acquisition cost (CAC) and customer lifetime value (CLV) to uncover what businesses should actually be spending to scale profitably. They discuss how marketing costs go beyond ad spend, why your marketing team and operational expenses matter in CAC calculations, and how to use a 3:1 CLV-to-CAC ratio as a benchmark for growth. If you’re struggling with ad budgets, profitability, or scaling your business, this episode is a must-listen.

Chapters:

• 00:00:00 – Welcome to the Episode: How Much Should You Pay for a Customer?
• 00:00:44 – Why Knowing Your Customer Acquisition Cost (CAC) is Crucial
• 00:06:20 – The Simple Formula for Calculating Customer Lifetime Value (CLV)
• 00:08:15 – How to Calculate CLV Using a Basic Formula
• 00:10:45 – Breaking Down CLV for Different Business Models
• 00:12:10 – How Long Does It Take to Earn Your CLV?
• 00:14:50 – Fast vs. Slow CLV Payback Periods & What They Mean
• 00:17:54 – Transition to Determining Customer Acquisition Cost (CAC)
• 00:26:40 – Finding the Right Balance Between CLV and CAC for Growth
• 00:29:52 – Key Takeaways: The 3:1 Rule for Scaling Profitably

LINKS AND RESOURCES:

• Tier 11 Jobs
• Perpetual Traffic on YouTube
• Tiereleven.com
• Mongoose Media
• Perpetual Traffic Survey
• Perpetual Traffic Website
• Follow Perpetual Traffic on Twitter
• Connect with Lauren on Instagram and Connect with Ralph on LinkedIn

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

Tier 11 Data Suite

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Read the transcript below:

New Customer Acquisition: How Much Can You Afford to Pay?

Ralph: Hello and welcome to the Perpetual Traffic podcast. This is your host, Ralph Burns, and this is episode 299. And I’m alongside my awesome co host from Austin, Texas, Amanda Powell. And Amanda has been asking me this thing for the last month or so, which really bothered me that we haven’t talked about it here on Perpetual Traffic ever.

Ralph: I think maybe back in episode 106. He did a bit way back when, but the point is a lot of people have this question when they come to tier 11 and Amanda, this is a question that you’re being asked now with your new job over at Boss Babe, what is it that is stuck in your craw for the perpetual traffic listener?

Amanda: So I’m actually glad that Ralphie wanted to do this episode because I have been so curious around, obviously my whole world is surrounded by like organic content right now, so I have not been in the paid media space. [00:01:00] But during the product launch that we’ve been working on over the past month, we’ve obviously been leveraging paid media, just not in my department.

Amanda: And I am so curious on not just paid media, but like how much does it typically take to even acquire a customer through the right channels? Like when you’re looking for your clients. Uh, tier 11, what really goes into it because a digital marketer, you know, Molly historically actually built out like a calculator on like customer acquisition and how much you should be able to pay that obviously is not my area of expertise.

Amanda: So is it still the same? Has it changed? Like has the number of like what you should, you know, as a business owner, is there like a specific target that you should hit? on like, the cost of a customer? What is the cost of a customer, Ralph?

Ralph: Yeah, that’s a great question. And I think the way that I look at it is, I don’t necessarily look at it as advertising based.[00:02:00]

Ralph: I look at it as, what’s my marketing department spending? And that could be, like, I talk, I call that the Marketing Selling General and Administrative, the MSGA. Sorry, say that again. Marketing, selling, general, and administrative. So like on a, on a profit and loss sheet, on a P& L sheet, like I look at all our expenses.

Ralph: I look at our cost of goods sold, which for us is employees, people. But then we have a marketing line item, which is Typically under like selling general administrative like there’s COGS and there’s SG& A. I look at marketing selling general and administrative. I can say that quite correctly. MSG& A. You’re

Amanda: speaking gibberish to me, Ralph.

Ralph: But what that is like, you’re a marketing cost, for example, for Boss Babe. So let’s say you spend 100, 000 a year on SEO or on content marketing like that’s part of your acquisition cost like that is a cost that is associated with eventually part of your [00:03:00] profitability. But also like how much you can pay to acquire a customer.

Ralph: So I don’t necessarily look at as just advertising is advertising a big chunk of that. Absolutely. And I think if we go through it step by step, you’ll see how I think about it from a CEO’s perspective. And even though I run an ad agency, it’s not just all like what we’re spending on Google and Facebook and YouTube.

Ralph: It’s everything that goes along with it because that’s a cost center that we’re investing in order to create value later on for, you know, acquiring new customers that we can then help grow and scale their businesses.

Amanda: This is fascinating to me because I think it’s not just like you just said, it’s not just ad dollars, but it’s also.

Amanda: You know, people dollars to acquire a customer because I need people in order to market my product So how much am I paying for a person to then pay to then acquire the customer? I feel like you don’t really think about that but also that you don’t think about not just the people side of things of [00:04:00] like You know, even if it’s not costing you up front like what is it costing you to send to your list?

Amanda: And this is the wrong use of the word but like tire your list every time that you send an email So like what is that cost in terms of you know, making sure that? You don’t exhaust your prospects and all of that. I am very excited to dive into this.

Ralph: Yeah, that’s a tougher one to manage, but I think, you know, through this conversation, we can certainly get a ballpark on it.

Ralph: So I think maybe the best way to look at it is, you know, how much can you pay to acquire a customer? When I say pay to acquire a customer, I’m not talking about a CPA or a cost per acquisition on Facebook. I’m talking about Like what is your marketing expense like for you at boss babe or for you at digital marketer?

Ralph: You were part of the marketing department. You are a marketing expense So I would look at you and I would put you in a separate line item under my marketing stuff Not under cost of goods [00:05:00] sold which for us is you know, it’s people Like those are the people that fulfill. Those are the people that buy media.

Ralph: Those are the people that create our creatives, do our dev, you know, our customer success, all that stuff. So I put them in a separate bucket, but we’re a service based business. So my cogs are different than a guy who’s running an e commerce business versus a digital business. That’s only digital, just like digital marketer does with some, you know, live events and that sort of thing.

Ralph: So. I think it really, it’s your product mix is going to determine how much you can acquire a customer for, but also based upon your intended profitability as well.

Amanda: So it sounds like that’s the first step was like you start to separate, like, what are the different buckets? So it sounds like bucket one, step one is okay.

Amanda: Figure out your buckets. Number one. So like, what are your big, obviously people, obviously, you know, budget. And then where does it go from there?

Ralph: Yeah. So you can look at it any number of, of ways. So you can reverse [00:06:00] engineer it by figuring out what your costs are and what your profitability is and all, and then figure out what your CPA or what your customer acquisition costs should be.

Ralph: Or you can do it like front ways, figuring out what your lifetime value is. So let’s go through what you asked, which is okay. Let’s look at, overall, what are my expenses? So, that starts with the big conversation of, like, what is your customer lifetime value?

Amanda: Yes. I love talking about this. That’s a big

Ralph: part of it.

Ralph: So, alright, we’re talking about customer acquisition cost, but what is a good customer acquisition cost depends on this number. So, this is, uh, we refer to it as CLV. So, we’re going to use a lot of acronyms here. First off, customer acquisition cost is CAC. See?

Amanda: You have no idea how long it took me to learn these terms when I, I think I just finished learning them by the time I went to boss babe.

Amanda: I think it takes so long to learn marketing acronyms, but we won’t even get into that. Let’s continue. So true

Ralph: though. But [00:07:00] as a new hire, like if you talk to your boss in these terms, you will like be running that company. Yeah. And then like the next year. No, seriously. Pro

Amanda: tip for anyone getting hired at tier 11.

Ralph: Absolutely. If you figure out, all right. I got to figure out what your costs are and all this sort of stuff. So we increase our customer lifetime value, but a CEO would be like, Holy crap, like this is a dream employee. Cause that’s what you like. If you’re keeping your eye on that, you’re probably a pretty good, you know, entrepreneur because that is the thing that drives everything else.

Amanda: Yeah.

Ralph: And the finances drive everything else. Like we joke about a tier 11, the first email I. I open and the first channel I opened on Slack is always from my finance department, because without that, nothing matters. So having said that you need to know your customer lifetime value, your CLV to know your CAC, which is your customer acquisition costs.

Ralph: So how do you figure out your customer lifetime value? So really easy, the easy way to do it. And it’s what we tell a lot of [00:08:00] our businesses that we work with. That we don’t really know their back end. We don’t really know what their books look like. We just say, alright, let’s take an average of all your products.

Ralph: And let’s say they’ve got 10 products. And the average price point is 25 bucks. Okay? Just multiply that by anywhere between like 2 to 10. So let’s say times 5. Let’s say, start off there. So your customer lifetime value, just like, back of the napkin, like, this is probably not very accurate. 125 bucks, maybe 150 bucks, that kind of thing.

Ralph: You can start with a number like that, but that’s an okay place to start. It’s better to actually go a little bit deeper and go into your CRM, for example. So if you are a business and you have customers, or let’s say we’re going to use in this example, a business that has customers, and we just want to figure out what they can pay to acquire a new customer, let’s say.

Ralph: [00:09:00] You go back into your CRM for the last three, six, or maybe 12 months, 12 months is probably the best. And you get all your active customers and get that number. So let’s say, you know, you, uh, you have a thousand customers in the last year. These are new customers. They’re not duplicate customers, but these are customers who may have bought once, maybe about twice, maybe about 10 times.

Ralph: So we’ll break this down into individual models for e commerce for service and then for digital products. But just use this sort of an example to start off with. So you’ve got a thousand customers and let’s say to keep things really easy, you’ve got a million in sales. Like this is a typical kind of person that we would talk to at tier 11.

Ralph: They’re not quite maybe at the point where they could hire us, but they want to get to that next level. So I’m speaking to a lot of businesses probably just by mentioning this. So if you’re around seven figures and maybe less high six figures, figure out how many customers you have, figure out what your revenue is, and just simply divide your customers into the number.

Ralph: And [00:10:00] that then gives you. Your customer lifetime value or your CLV for the last 12 months, maybe, you know, your business, you know, it’s typically, it’s a three month lifecycle for a business. Maybe it’s six months, maybe it’s 12, maybe it’s 24, maybe it’s 36 months, you know, for us, for a customer, it’s sometimes up to five years.

Ralph: But the point is, if you start off with a year, you’re at least starting at the right spot. So in that case, you’ve got a million dollars in sales. All right, you got 1000 customers, what is your customer lifetime value?

Amanda: A thousand,

Ralph: a thousand genius.

Amanda: I’m a math genius.

Ralph: Amazing. So that’s your customer lifetime value.

Ralph: Now that is a basic way of doing it, but it’s a very easy way of doing it. And it’s a, it’s a, you can have your. You know, your financial person, your CFO, or just look into your books, look into your backend for Shopify, you know, whatever it happens to be, or your CRM. It’s typically where we will, we’ll do [00:11:00] it.

Ralph: We’ll actually do this through what we have two metrics. We know what our lifetime customer value is, but we also know what our, uh, average revenue per month is per customer too. So you can break this down into all kinds of different metrics, but anyway, if you understand what your customer lifetime value is, that’s the start.

Ralph: So, take your sales for the last year, take your number of customers, divide them, and then you get your CLV. And that’s where you start with this whole exercise. So now that you’ve determined what your customer lifetime value is, you also have to think to yourself, and this is something that a lot of people don’t think about, and whether this is step two or step 1B, I think it’s really important, is how long does it take to earn that thousand dollars?

Amanda: Yeah, that’s my question. So when you’re doing that from the get go, you’re looking at it for a year, but you would even said, you know, some customers take, you know, longer to [00:12:00] acquire than some customer retention is longer than others. So how do you take that into account?

Ralph: That’s where you have to do a little bit of a guesswork.

Ralph: So you could probably look at it, uh, how long have these customers been paying us, for example. So for us, let’s say we have, you know, half a dozen who are five years and then we have some who are brand newer, just new customers. So maybe they’re a month. And then you’ve got some others that are a year or so.

Ralph: You can look at all those figures, you know, figure it out by months maybe and just take an average. So, Five times 12 is, you know, 60. So we’d have five people at 60 and then we’d have, you know, 20 at 12. And then maybe we have, you know, 10 at three months. That is your average. The point is like, that’s how long they’re actually with you, but.

Ralph: The real case is like, if you have that customer lifetime value, what is the average? So for us, I think the average is probably about six months [00:13:00] is my guess. Anywhere between six to 12 months. If I looked at it that way, I think if you’re running a digital products business and you’re doing a continuity program, it might be anywhere between three to nine months.

Ralph: It might be 12 months. Take that average and figure that into it.

Amanda: Is that a healthy average based on like a Running a marketing agency and doing marketing services or any kind of like digital marketing service, like six to nine months, that’s generally a pretty healthy average. I’d say.

Ralph: I’d say it’s a, that’s a pretty good average.

Ralph: It’s going to depend really on the business itself. And I think there’s a business model. Yeah. We can go down, you know, individual rabbit holes for a lot of different types of customers, but the point is like, are you making money and how fast are you getting that money back? And, but I look at it. it in three different ways.

Ralph: So if you are, how long does it take to earn that entire CLV? If you want to earn it within one to seven days, like you need, um, [00:14:00] you probably have the least amount of cash on board in order. to make that up. So one to seven days. So that is somebody who is immediately profitable on day one. All right. I acquire a customer for, you know, whatever my cost is and I’m profitable and we’ll get into profitability next, but that’s a business that.

Ralph: Is very unleveraged. So those are the people that come to us and say, Hey, I want a five X ROAS on day one and all my ad spend my, you know, it does happen sometimes the ones who actually have cash in the bank and pay to acquire a customer or pay more to acquire a customer are the ones who ultimately win, like we talked about all the time.

Ralph: So fast is, you know, one to seven days. You need, uh, you probably have the least amount of cash because you’re, you need that cash for operations, maybe between eight days and 30 days. That’s about medium. That’s pretty good. Now I know digital marketer basically breaks even [00:15:00] on, you know, their marketing spend in their first 30 days is my understanding.

Ralph: So that’s fairly healthy. So if you can acquire a customer and you start making money on them after day 30, pretty good. You need a little bit more cash. Obviously on hand because you have to front that cost depending on how you’re leveraging your credit and everything else. But for those who have a slow win back between 30 and 180 days, for us tier 11 is in this category.

Ralph: So we’ll acquire a customer and we’ll break even or probably go a little bit negative on the first 30 days and then we start becoming profitable on day 60 to 90. Thereabouts. And I think for a service based business, that is.

Amanda: That makes more sense to me because you need those 30 days to ramp up even and get a customer settled.

Amanda: That makes complete sense.

Ralph: Absolutely. And for us, like we have cash on board, like we are not going to go, if we don’t make money on day one after we acquire a customer, we’re not going to go out of business. So we know that, so for those [00:16:00] longer timeframes, you typically will need at least that amount of time and cash to cover all your expenses, cover all your, you know, selling general administrative, your cogs, all this sort of stuff that we’ll go through here in just a second.

Ralph: So I think it’s important to remember that customer lifetime value is, is related to how fast that money actually comes in. Hey, it’s Ralph here. Let me tell you about a lifestyle brand that we recently worked with where they grew their revenue by 49. 8 percent year over year and hit eight figures in top line revenue for the very first time in their history.

Ralph: And they are now on track for 25 million in revenue. In 2025, we are so excited to be working with this company. And the reason why is they started using tier 11 data suite about a year ago. It re reduced their unattributed traffic by 90%. That’s right. They’re unattributed, direct, unknown [00:17:00] traffic that probably frustrates the hell out of you over in GA4 or one of those other crappy attribution tools.

Ralph: We reduced that unattributed traffic by 90%, uncovered 850, 000 in hidden revenue, and scaled their ad spend by over 3x. These results are not magic. They’re results of clean, accurate data and a system designed for today’s privacy world where everybody is trying to block your data. If you want to see these kinds of results for your business, reach out and let’s make it happen.

Ralph: Over at tier11. com forward slash apply and discover how tier 11 data suite can finally allow you to scale your business, acquiring new customers at a cost you can afford. Head on over to tier11. com forward slash apply. So that is customer lifetime value. That’s the most important metric that you need to figure out first and foremost.

Ralph: What can you pay to acquire a customer? So we want to figure out our CAC here, and there’s two ways of doing this. There’s the [00:18:00] basic way. Um, and then there’s the true way. So the price you want to pay to acquire a new customer is customer acquisition cost, and I think with most people, and. Like you’ve said here, Amanda, is that you think about this as advertising costs primarily, but it’s actually not advertising costs.

Ralph: There’s really two basic ways in which you can calculate this through marketing campaign costs, and then by total customers acquired, that would then be your customer acquisition cost. But what you really want to do is you want to add in your overall marketing costs, like your team and all the other things that go along with it, and that’s probably a larger number.

Ralph: So let me sort of back this out for you. So let’s say you spent 100, 000 this past year on Facebook ads and you acquired 1000 customers. So pretty basic. All right. I’ve spent that on Facebook. I’m not factoring in any other costs, but just [00:19:00] my advertising costs, but I acquired a thousand customers. So my customer acquisition cost in that case.

Ralph: Is 100 simple, a hundred thousand divided by a thousand equals a hundred, but your true customer acquisition cost is a little bit different because most companies have additional costs in addition to making marketing campaign costs. So. This might be wages of the marketing staff. For example, like your salary, Amanda, obviously, maybe you have a designer, maybe you have content marketing people, maybe you have writers, maybe have videographers, maybe you’ve got some software that you need in order to run your email marketing system.

Ralph: Maybe you’ve got. An agency that does certain parts of your marketing in one way, shape, or form. So a lot of this is like, for us, it’s like our marketing director and our sales guy, like, and our admins that go along with that. So for us, our marketing staff is part of this. Our sales staff is part of this.

Ralph: That means sales support [00:20:00] staff. It means. It means people who help us out with our content marketing. It means our marketing director’s salary. So all of that is factored in as well, because that’s part of your marketing costs. It’s not just campaign costs, which in Facebook, what you spent last month, let’s say in this example, you’re spending.

Ralph: Just for round figures, you’re spending 100, 000 on your advertising campaigns, but you’re spending, if you add everything up over the entire year, you’re spending 100, 000 on campaign costs, but you’re spending 100, 000 additionally on all these other costs. Your customer acquisition cost is going to be different as a result.

Ralph: So if you acquire 1000 customers, your costs are now no longer just 100, 000. It’s 200, 000, a hundred thousand for your marketing campaigns, your advertising, and a hundred thousand for all your marketing expenses. So your customer acquisition cost in this case is now 200. So if you look at customer lifetime value, CLV and CAC, [00:21:00] they’re the two biggest metrics and the most important metrics for you to figure out the next step is 200.

Ralph: So the next thing you need to do is you need to figure out, okay, you’ve got a thousand dollars customer lifetime value. Now you’ve got to figure out all your expenses. You’ve already figured out what your current cost to acquire a customer is. For, in this example, it’s 200. But. Out of that thousand, we have other costs, right?

Ralph: You’re running a business. You have other things that go along with running a business. It’s not just your marketing expense. You have to pay yourself. You have to have a building and all these other sorts of things. You’re virtual, you save money there, but the point is you have to figure out what your costs are.

Ralph: So first thing you want to figure out is your refund rate. A lot of people don’t think about this. So this is one of those things that you’re going to take away. These are now the expenses that they’re going to mount up to figure out whether our CAC of 200 is good or not. So let’s say just for the sake of argument, we have a 10 percent refund rate.

Ralph: Probably conservative, relatively speaking. So that is a hundred dollars off our [00:22:00] thousand dollar CLV. So now we’re looking at 900. Now you want to think about, okay, what’s my cost of goods sold. So whether you’re e commerce, whether you’re digital, whether you’re a service. This is going to vary and we can even go through individual models that will explain where the good cost of goods sold might be in your business.

Ralph: But the point is COGS is one of three things. It’s either if you’re an e commerce business, it’s your manufacturing costs, your shipping costs, your storage costs, the cut, the raw cost of actually, you know, acquiring or building that product that you then sell. So COGS is pretty specific there. Digital is less so if you’re a digital marketing business, you have your servers and your email, maybe that’s covered under marketing costs, but digital products are beautiful because they really don’t have a whole lot of cost of goods sold.

Ralph: This is one of the beauties of the model in a services business like us cogs for us is personnel. So people who [00:23:00] fulfill on the ads on the design, all that sort of stuff. So let’s say in this hypothetical model. You’ve got a refund rate of 10%. Let’s say your COGS is, will be a digital product. For example, our COGS is 10%.

Ralph: So now you’ve gone from 1, 000 customer lifetime value down to 800. Next is your overhead. So this is another expense that you have to figure out. So this is, let’s say you’re a digital company or an e commerce company. Overhead here is probably going to be your payroll in a services based business.

Ralph: Payroll might be part of cost of goods sold. So we’re moving the expenses around, but the point is overhead also includes accounting, your legal. Travel entertainment, as long as it’s not marketing related. So let’s say in our hypothetical example here, 30% of our customer lifetime value is spent on overhead.

Ralph: So now we’re down to $500. [00:24:00] Okay? So we’ve got $300 overhead, a hundred dollars of refund, a hundred dollars of cost of goods sold. Now you wanna figure out. The next step, which is your desired profitability. So part of this whole thing is actually just to turn a profit as a business, right? If you don’t turn a profit, you’re losing money.

Ralph: You won’t survive as a business. So 20 to 50 percent of customer lifetime value is a reasonable percentage for profitability. Probably higher for digital products, upwards of 50% e-commerce, maybe 10 to 20%. Maybe. In the service based business it’s 30 to 50%. So in our model here, let’s just use 20% or $200.

Ralph: So now we’re down to $300 and that’s all we got left. And that is. Your tolerable cost to acquire a customer is what’s left [00:25:00] over after all those expenses. So in our case, we figured out to start off that we were, our customer acquisition cost was 200, right? Just hypothetically. But, in actuality, based upon this model, I can pay upwards of 300 for, to acquire a customer.

Ralph: And that’s really how you figure it out. One of the parts that people never really factor in is desired profitability. You have to put in profitability as part of this whole equation. So, taking a step back, let’s look at it again. There’s a lot of numbers here, a lot of acronyms. We determined that our customer lifetime value is 1, 000, okay?

Ralph: We determined our refund rate is 100, or 10%. We determined our cost of goods sold was 100, or 10%. We’ve determined that our overhead was 300, or 30%. And we determined that [00:26:00] our desired profitability, in this case, is 200, or 20%. Which leaves us, if you do all that math 1000 minus 100 minus 300 minus 200 comes out with the magic number of 300.

Ralph: And that is what this hypothetical business can pay up to in order to acquire a customer. So that’s really how you want to look at this because you can pay less or pay half, but probably what you’re doing is you’re probably giving up sales on the front end. That you could be getting if you expanded your customer acquisition costs to the full 300.

Ralph: So let’s look at it from this perspective. If it’s, you know, if your customer lifetime value to your CAC ratio is one to one or less than one to one, that’s very bad. But if it’s one to one and then profitable on day 30, But if you’re two to [00:27:00] one, three to one, or even four to one, you’re in a very good profitability.

Ralph: standpoint, but I think the sweet spot is really is right around where our model is here is about three to one. My customer lifetime value is a thousand dollars. What I can pay to acquire a customer is about 300 and that’s going to allow me to really scale and grow because I know the finances are taking care of themselves and I’m also paying as much as I possibly can.

Ralph: Remember, he or she was willing and able to acquire a customer for more money ends up winning the game. And that’s really where you should be. If you’re at that three to one range, it seems like that’s about the sweet spot. You know, looking at thousands of businesses every single year here at tier 11. If you can figure out what your customer acquisition cost is, and it’s one third of your lifetime value, you’re in a pretty good spot as a business, all things being equal.

Ralph: Like, so in our hypothetical example here, we used [00:28:00] 30, we used 30 percent of our lifetime value, our customer lifetime value. That’s about right. If it was 33%, that’d probably be what more businesses are looking at. Now, a lot of businesses want less than that. They hire agencies like us to get it down to 10 or 20 or 15.

Ralph: The point is that if you know your numbers, you can scale by having the ability to pay more to acquire a customer. And that’s the key to scale is that when you’re a. When you’re a 100, 000 business, Amanda, like you might be at a 50 percent net profit, which is great. You know, you might be making 50K off that 100K.

Ralph: Well, if you’re a million dollar business, you probably aren’t making a 50 percent profit on that million dollars. Like you have to, as you grow, your costs expand. You might actually get maybe a 25 percent profit at the end of the day, but as a million dollar business versus a 100, 000 [00:29:00] business. If you’re at a 25 percent margin, you’re making 250, 000 in net profit as a 100, 000 business at a 50 percent profit, you’re only making 50, 000.

Ralph: So you’re making five X in real dollars. And this is what a lot of businesses really miss. But that is the key to scale as you grow. And we’ve done it here. As we scale and grow, we add more personnel. Our margins start to shrink. You know, to maintain competitiveness in the market. That’s just the way that it was.

Ralph: And when I explain those numbers, those aren’t too inaccurate from our lifecycle. As a business, when we were a hundred K business, we were probably making about a 50% net. I was keeping 50 k, but I wanted to grow it to a million, million plus, and then we accepted less percentage of profit, but it’s a larger dollar figure, which then drives that cash flow, drives the business forward.

Ralph: So in summary, the big. The big takeaway that you should remember as a business owner here is [00:30:00] customer lifetime value divided by customer acquisition cost, which we refer to as the CLV. CAC ratio should be around three should be at all. There’s going to be differences based upon your business, but in all actuality, that’s fairly healthy.

Ralph: If you’re higher than that, if you’re a four or a five, you should spend more on marketing. If you’re less than that, you should figure out ways to increase your conversions, reduce your costs in some way, shape, or form. The point is three is a good way to go. And I love the number three, Amanda. Anyway, just because it’s a good business number.

Ralph: Things come in threes, good things come in threes. The point is like, if you can do that, figure out customer lifetime value, divide it by your customer acquisition costs. And it comes out to a number that equals in and around three. You’re in a pretty good spot. So that is in essence how much you can pay to acquire a new customer.

Ralph: It all starts with CLV and CAC. And we’ll leave all the [00:31:00] references and all the goodies for this show inside the show notes over@digitalmarketer.com slash podcast. This has been episode 299. Until next week, see ya.