Only 1% of Businesses Know Their LTV (Are You Guessing Your CAC?)

The Scaling Lab-Tried & True Media: What would you say if I told you only 1 % of businesses actually understand their true LTV? Well, that's what we're gonna be diving into today with our special guest and friend of mine, Tyler Ryan from LTV Numbers, as we talk about how understanding LTV is the real unlock to making your business resilient and succeeding in the future. Let's dive into the episode. Awesome.

So jumping straight into this Tyler, I'm not even going to give you an opportunity to introduce yourself. I want to get straight into this. Let's go. Yeah.

So you often say that only 1 % of businesses actually know their LTV and that everyone else is making million dollar decisions on guesses. Can you speak to that a little bit? Absolutely. Well, here's the way that I think about it.

I get to that realization through a series of questions that kind of come from a different angle. If our framing question is, you know exactly how much you can afford to spend to acquire a customer? And we come from that angle. Here's how it usually goes.

Say, okay, do know how much you can afford to spend to acquire a customer? They say, yeah, I think I do, okay. Do you know it for every product, for every funnel, for every traffic source, for every affiliate, for every ad campaign, for every ad set, for every ad? At some point, It starts to break down of like, well, I don't know what at that level.

I just kind of generally know how much I can afford to spend to acquire a customer. Then you go, okay, well, even within that, do you know how much your customers are worth after they make that initial purchase? Do you know how impactful the refunds are? How long they take to come in?

How many back end sales happen after that initial sale? All these things come back to what is required to actually answer the question, how much can I afford to spend to acquire a customer? So what I realized is if this is the question, do you know how much your customers are worth at every single day of the journey for every product, funnel, traffic source and affiliate? Almost nobody knows the answer to that question.

And I'll really drive this home with a story that I think cements this understanding. I was at an event back in 2018 and there was about 400 entrepreneurs in the room, all business owners, many of them doing pretty well. And there was a guy speaking on stage, his name was Joel Marion. And was giving a talk titled, how to scale your business 10 times bigger, 10 times faster.

And right at the beginning of this talk, he gets up, he goes, all right, how many of you know your average customer lifetime value? And out of the 400 people in the room, there were maybe about 50 hands. And he goes, okay, not bad. Now, how many of you know your customer lifetime value at day zero, 30, 60, 90, and 180?

And there were maybe about 20 hands at this point. He goes, okay, not bad. Now, how many of you know your customer lifetime value at day 0, 30, 60, 90 to 180 for every product, funnel, traffic source and affiliate? And there were four hands.

And this just burned into my brain because the room literally went from 400 down to four. And he goes to each of them, he says, how big is your business? 15 million, 25 million, 35 million, 50 million. And he just says, I'm not surprised.

And then he goes on to give the rest of his talk where the punchline was the business that knows the answer to that question is the business that's going to win. But only one percent of businesses do. Yeah, man, it's reflective of the conversations we've had in the past. I think your talk that I saw when we were in Mexico, you know, a deck that you shared with me when we had another call of just how granularly you think about this and how you've set up the software to think about that, you know, might be a spot for you to intro LTV numbers and just what it does.

Well, ultimately it's a platform that was entirely built around that singular question because fundamentally every business is a product of the relationship between customer acquisition cost and lifetime value. The entire business encapsulated in that one equation, right? But if you think about the fact that almost no one actually knows their lifetime value, then that means no one actually knows how their business is doing because they can't draw that relationship. And so LTV numbers was built because I realized that that level of visibility is what is required to actually make informed decisions.

And when the post purchase customer buying journey is a black box where you know your AOV and everything from that point on is kind of fuzzy, it's a very stressful place to make decisions from. It's why these business owners can be doing such tremendous volume. but lack so much confidence in some of these very, very basic decisions. Like, what do I set my CAC target at?

Is it 200? Is it 250? Is it 275? What am I basing that off of?

And they'll be doing these rough calculations like, ⁓ 250 AOV and a 10 % refund rate. And like, that's the math. But that math is going to get you into some really, really murky waters when things aren't easy, when everything's not working. And lately, that's kind of where the industry has been going.

Things have gotten harder. Costs have gone up. Profit margins are shrinking. People are feeling the impact of volatility a lot more, where every percent really counts.

And so at that point, if you're still making these decisions based on 250 AOV and a 10 % refund rate, when there's another company out there going, I know my gross profit per customer minus refunds at every day of the journey for every product, funnel, traffic source, and affiliate, over the long term, who do you think is going to win? And I just want to give people that visibility without needing to be a $150 million a year company that built all of this out in-house. Because traditionally, that was the only way companies got this level of visibility.

They just invested the $100,000 to $200,000 and the 6 to 12 months to do it themselves. But even then, that is a very, very few and far between success story. And a lot of people get it wrong. They go do it and they get it wrong.

Cause there's so much to get wrong. It's a big ball of yarn. Absolutely. And I'll never forget at the end of that Joel Marion talk where he gave this whole pitch on like, you gotta know your LTV.

Someone gets up at the end for Q and A and they go, all right, Joel, this sounds great, but like, how do you do it? Like, how do I get this? And he goes, I pay a developer and a data scientist 200 grand a year to make it happen for me. And you can hear the whole room just go like, Like that's not going to happen, right?

So my thought in that moment, that was actually like the origin story of LTV numbers, was like if I could have just had the thing that he could have said right there, ⁓ we just use LTV numbers. Like the whole room would have been rushing to the table, you know? But I mean, that was seven years ago. And now here we are, $2.

3 billion in data analyzed later. It's been quite a journey. Yeah, man. Well, I'll say like, you probably have most of that room and if...

And if not, you know, a big slice of the industry, because I know most of our clients work with you and I know a lot of other people that work with you that aren't our clients. And so when I talk to people and I'm talking about LTV, you know, one of my first questions is, are you, do you know, Tyler Ryan, are you working with LTV numbers? And most of them, I swear to God, most of them say yes. So, you know, I know you're bringing a lot of clarity to the industry.

It's fantastic when I hear that people are working with you and always recommend you when they're not. So I wanted to ask you if you feel like there's any verticals or niches that are most commonly making this mistake? Because I know we work with a lot of supplement companies, direct response, etc. But are you seeing any other verticals or niches given that you have just, you know, probably thousands of users at this point?

I really think there are like three distinct verticals that are far more about the characteristics of their customers buying journey, then the specific nature of what it is that they actually sell. So the characteristics of what makes for a good company to focus on this stuff is a company that's consistently acquiring a high volume of new customers. So meaning they're not like an agency that has 10 customers, right? They're bringing on a hundred customers a day, that sort of order of magnitude of volume.

They have a multi-product catalog that's conducive to repeat purchases. So a supplement company is a great example of that because they're consumable. People tend to reorder. They got other products they could buy.

But it could just as well be an info product business that has a $97 course that then ascends into a $1,000 back end coaching program. So that's the second thing, having a multi-product catalog conducive to customer journeys. Then the third is a paid acquisition channel that they use to acquire those customers. So in other words, they're playing the cacti LTV game from an economics perspective, whether it's paid ads or affiliates.

doesn't really matter so much. Both are equally viable because for both of them, you're paying to acquire a customer. So with that said, the three distinct verticals that I do see, direct response and a new trend particular, because that is where it's either paid ads or it's affiliates straight to a sales funnel. That's the LTV to cat game, multi-product journeys.

The second one is info. So that would be, I'm selling courses and I likely have some kind of an Ascension model. Maybe I have a free plus shipping book that I bring people in on, or I do these webinars. But the point is we bring people in through an entry level sort of info offer, and then we ascend them into more premium and higher engagement in offers on the back.

So that's like your $27 tripwire course into the thousand dollar comprehensive course. Then maybe there's like a $6,000 group coaching program sitting at the very end. Then the last is just pure coaching. So the people who Maybe have like a blend of info and coaching, but ultimately where they're all their roads lead to it's like these high end masterminds.

It's live events, but they have to start with usually it's like acquiring leads. So they might have lead magnets. they're paying for leads and making maybe zero or some small amount of money upfront, but they're trying to do the cost per lead to LTV game. And so it's a little bit of a distinct one because it's not customer, but it's the same math, right?

It's cost per lead or customer to LTV. So those are the three distinct ones that I see. So let's back up a little bit into your career because you have a fascinating career working for NASA, writing software. And so the way your brain works is going to be very interesting in how you solve problems.

So I'm just curious, How does that background influence how you're solving problems in business today? Great question. I appreciate it. I think for me, where the leap happened, if you will, is think about how well you have to know your numbers to land a spacecraft on Mars within a mile of its target landing spot.

Just like try and imagine how well you have to know your numbers to do that. And I got to see this firsthand because I worked at the Jet Propulsion Laboratory out here in Pasadena. And I was in the auditorium with the entire lab of 5,000 employees watching the Curiosity rover land on Mars. This was a project that 10 years long, $10 billion invested into it to land an SUV sized rover on Mars.

And I remember sitting there as we're getting closer and closer to landing. And you can just feel like the tension in the room, the energy. It was crazy because basically every single person in that auditorium had contributed to that project in some way. And also thousands of people who weren't in that auditorium too.

When that rover touched down and you hear the like, touchdown confirmed, I mean, everybody in the room just like immediately started crying. because it was like the culmination of a decade of just collective effort. just reminds me of like feeling of purpose. You know what I'm saying?

Of like what I've been contributing to means something because up until that point there hadn't been any tangible outcomes because that one outcome is everything that you were working towards. Yeah. Anyway, so yeah, I could imagine there was very high emotion in that room at that moment. ⁓ my gosh.

I mean, just, you know, hugging and crying and Champagne, champagne bottles. I mean, it was just like, I will never forget that moment. It was so emotionally powerful. coming back out of it, you just think about all the things that had to work for that outcome to be achieved.

And so that was kind of like my internal standard for how high the bar is to pull off something that is like, you know, humanity altering. And so with that standard in mind, it feels so weird to like go from that to now talk about like internet marketing and all of that. But when I, when I was getting into my entrepreneurial career and I wanted to start my own companies and I just saw how all of these great business owners who wanted to do such great things were so heavily constrained by a visibility gap that is totally solvable and for what many thought was too high of a bar of like, well, can't really know like exactly how much I can afford to spend to acquire a customer for all these different products and funnels and whatever.

I'm like, are you kidding me? We landed a Rover on Mars. Yes, we can. So to me, was like, if 99 % of businesses have this problem, and it's a problem directly related to the fundamental economic unit of their business, the most impactful thing that I can do to unlock all of these great business owners that want to do big things is to just solve that visibility gap.

Because by doing that, now all of the decision making can then follow. Right? Once you know that, then you can make a lot more informed decisions about every different area of your business because you know the fundamental economic unit. So there was a little bit of a long and winding road in between me actually working at NASA and starting LTV numbers.

But ultimately that was the common thread of how well you need to know your numbers to pull off something impossible, like landing a rover on Mars within a mile of its target landing spot, all the way to, well, how do we apply that same standard to the business world and have the most impact possible? Yeah, you have a really unique perspective that put you in the position to solve that problem where most people thought not possible. You thought this is just Internet marketing.

This is simple. Yeah, amazing. Pretty wild. what made you leave aerospace and go all in on business then?

You said there's that long and winding road. You clearly left. You were doing something that led you to LTV numbers. Can you speak to that a little bit?

Yeah, I mean, for me, I always had that entrepreneurial drive to want to start a business of my own. At that time, though, I didn't know at all what that business was going to be. I just knew that I needed to give it a shot. And so after I worked at NASA for a while, where I felt like I really got to see firsthand all these things that really raised my internal standard of quality and effort and what it means to play the long game and do big things.

I finally just looked at my bank account and said, okay, I can survive like a couple of years if I just go for it. There's never going to be a better time than right now. So I had a buddy of mine who we had gone to UCLA together. We got hired at JPL together and we were working on this thing nights and weekends.

We just made the leap. to go all in and try and start this thing. I mean, it was startup apartment, move in together, just working all hours of the day to try and pull this thing off. But ultimately we were just two engineers that didn't know the first thing about business.

And I really got a trial by fire where over the course of two years, I built all this really cool technology that nobody would pay for. And it was a document search technology and a software company. It doesn't really matter so much what it was. The point is I didn't understand how to build a business.

I just knew how to build technology. And that was a real wake up call for me that led to some real soul searching, like head on my desk crying sort of moments. Is this really what I want to do? And I took the remaining money that I had after my partner and I decided to shut that business down to join a coaching program and go to some live events where other entrepreneurs were.

So I didn't really have a network of entrepreneurs at that time. And just by throwing myself into those environments, That step by step got me to the point of doing some tech consulting to build out websites and sales funnels leveraging my engineering background. And then it was through that work a couple of years later that I was in that room hearing Joel Marion's talk, having heard my funnel clients expressing how many challenges and questions they had about their data and all the pieces came together in that Joel Marion talk that led to me ultimately starting LTV numbers.

Amazing. Amazing. You have that epiphany, that aha moment right there in the crowd. Yeah.

Amazing. I really did. That's awesome. Let's fast forward to what you're doing today and dig a little bit deeper into what a lot of founders, entrepreneurs just misunderstand about LTV where they're like, I think, I think I get it.

And you find out they have no idea. Hey, taking a quick break from this value packed episode with Tyler Ryan to let you know that if you are enjoying this episode, please consider subscribing on YouTube or if you're on Apple Podcasts or Spotify to give us a follow. And if you want to dive deeper into some of these topics, we've got our Scaling Secrets newsletter that's weekly insights of industry trends, direct response, and overall just growing direct to consumer businesses.

That's a great resource for marketers, CMOs and brand operators. There's a link in the description if you'd like to sign up. And with no further ado, let's get back to the episode. Yes.

The first thing is that LTV is not one number. And I think this is where a lot of people just fundamentally misunderstand the metric. You ask someone what's their LTV and they tell you a number back. That means that person does not understand LTV because you cannot say my LTV is $300 or $350.

It doesn't mean anything. What you have to ask back is at what day. That's the unlock. It's at what day, right?

Because every customer is on a different timeline. And if you line all those timelines up and start them at the day of first purchase, and then you look day by day from that point on, LTV has a different value at every single one of those days. It could go down because of refund. It comes back up because of a back end sale and it's a long and winding road of its own.

Not to mention that it's not just look at all of your customers as one single group. There's customers from Facebook. There's customers from YouTube. There's customers from this affiliate, from that affiliate, from this product, from that product, from this funnel, from that funnel.

They each have their own curve. So not only is it at what day, but it's also for what customer. Right? So I think those are the two big unlocks is LTV is not one number.

It's at what day. And then it's also for who, right? Is it these buyers? Is it those buyers?

And until you can get down to that level of detail, it's a meaningless metric. But when you get to that level of detail, it becomes the single most important driver of decision-making for a company who's trying to scale. And so you can see those lines of separation. they keep people from leveraging the metric because they confuse LTV with this single number that's kind of just like a, it's like AOV, right?

It's just AOV, but like a little bit bigger. But in reality, that's like the furthest from the truth. And so they think, ⁓ it's not really that big of a deal, but you get down to that level of detail. Now all of a sudden it drives all of your decisions.

Yeah. I think a lot of times people are making this assumption that LTV just means on a one year basis. So They either assume it's 12 months and that still means they're misunderstanding it because they're just kind of templating it. But the other thing that I wanted to point out is something that I started giggling to in your story there was a slide from your deck that you shared with me that was an LTV.

And I think I'm just going to assume it was a 12 month LTV here for simplicity that was actually lower than the front end AOV because they had high returns and those returns and charge backs dropped down their total AOV because we deduct that amount from their front end AOV. And what they were making on the back end did not recover that deficit. Is that right? Believe it or not, I've got it right in front of me if you want me to show perfect.

I was going say I didn't want to put you on the spot, but if you can screen share, I'd love for you to pull that up and then speak to that a little bit because I think that to me was a really big unlock that I wanted to have you speak to for the listeners. Of course. This one right here is exactly what you're referring to there, Jarrett. This is a what to me, unfortunately, is almost like a fingerprint of the direct response industry.

It's this LTV shape where your AOV starts wherever it starts, call it $240. It dips down precipitously over the course of the first 90 days as the refunds post purchase all come in and struggles to recover and oftentimes not getting back to where it started. So this is a case of 240 AOV, 226 12 month LTV. Yep.

All right. So it went down, but here's the other thing that gets missed in even a curve like this. There are also cost of goods and merchant processing associated with these sales. So not only is this not actually the full story that the real story is actually a lot worse than this because you might have a 240 AOV.

But when you take cost of goods into account, you take fulfillment costs into account, you take merchant processing into account, and then you layer it on a curve that looks like this, this 12-month number might be something like 190. So we've gone from what people use as like their current decision-making frame of reference of, AOV is like 250, all the way to the gross profit minus refunds that I keep after 12 months is $190. So if you knew that, you probably wouldn't be so comfortable spending $200 to acquire those customers.

Even though on the surface, right, you hear 250 AOV, $200 customer acquisition cost. Sounds fine, right? Doesn't sound so bad. But you see this of like, okay, well, wait a second.

We go from 240 down to about 215 just from refunds alone. Then you take our cogs out and our merchant processing, and now we're down under 200. We're losing a lot of money by day 90 on every customer that we acquire. And it takes us 12 months just to get back to a fraction of that loss.

So it really changed your perspective on what's actually going on in the business. That's why I call it here, the Holy Grail graph, the story of your business, where you start, where you go, and how you get there, all in a single curve. And then, so you've got the other one there in yellow that has the, obviously, the the surge and then there's the dip, but they do recover. And so that's just a better backend.

And what kind of business would you say that is? Cause I can see direct response and then subscription. I'm assuming the front one. I'm not sure what that first one is, what type of business that is, but if you can speak to those a little bit more.

Sure. number three here is really just number four with a call center. No, there you go. Yeah.

So because you see how there's this huge spike like right in the beginning, right? First seven days. That's the post purchase welcome call upselling going on. that value gain in this case is strong enough that it actually fully accounts for the dip that follows.

So you can see it goes up by enough that even when the dip happens, you see how the dip is about the same as when AOV was? Yep. And then when the backend sales do come in from this point, over the course of a year, they are enough to actually get past where we started because we had this refund mitigation lever in the form of this call center. So this in a very real That's crazy important.

Like that's crazy important just to sorry to interrupt you, but like crazy important to point out how these guys who think like my call center is making me a bunch of extra money. It's like, if you look at this graph, it's telling a different story. It's basically making you enough money so that once you account for ⁓ refunds and chargebacks, that you actually are making money on your back end and you're not just losing money the way we are in number four. Yes, exactly.

Or trying to claw back from the big loss, I guess. That's right. So like, there's kind of two sides of it. On one hand, it shows you just how impactful a call center can be.

in flipping the math, right? Because you can see this business, their backend over the course of a year is actually netting them a $14 loss. So that's saying that this point right here is $14 lower than the AOV was. But by including the call center, look, the backend gains went from 37 up to almost 70.

So now the backend net is actually $19 positive. So we had this flip. Right? From a pretty substantial loss now to a solid gain.

And that's the impact that a call center can have. At the same time, the difference between business three here and business one, because this is also a direct response business up here, business one, is that this business doesn't have a refund problem. So they get the seven day spike from their call center and then things just keep going up from there. This is what every business to me aspires to be.

I wouldn't guess that that was a direct response company because I always assume chargebacks and refunds. I keep laughing when you say 250 AOV and 10 % refunds or chargebacks because that's literally like the example that I hear all the time. Like on all the calls that I'm on, know, trying to help people or whether it's, you know, an intake call, a discovery call or whatever, you know, even just kind of almost like a free consulting call. It's always about 250, 10%.

I swear. Yeah. Unfortunately, the reality is actually often much higher than that. And 10 % is more of a...

It's kind of like a semantics thing. People say 10%, but they don't really know what they mean by that. And when you see it expressed like this, I mean, look, here's the real numbers. This business, 240 AOV, $51 refund loss.

That's actually over 20 % of the AOV. And then similar over here, 230 AOV, $49 refund loss. That's over 20 % of the AOV. And this actually to me is more common because we always look at refunds as a dollar amount, a dollar per customer amount.

I think the whole refund rate thing is kind of meaningless because there's so much ambiguity about what it actually means. But when I tell you, for every customer that you acquire, you lose $50 to refunds. It's like, It tells a different story. think people look at it as number of customers.

That's why they say 10 % because they're looking at it a number of sales to number of refunds and they're not looking at it as a dollar amount because it's like if you're getting a refund for somebody who took six plus six plus six, that's a big refund. Exactly. Not all refunds are created equal. Percentages are ambiguous.

This tells you the real story. when you see this, I mean, look at the difference between business three and business one. Business three, $50 refund loss, business one, it's half that. It's 26.

And so that singular difference erases the dip. Because now the gains that are taking place, the back end sales that are coming in, are actually outpacing the refunds. So even if the refunds are pulling it down, the gains are overcoming them. And so that's why this curve continues to go up.

So my real question to anybody watching this is, One, imagine how you would feel about your decision making in your business if you could see this. That's first. But second of all, think about how differently business one is able to operate and then business four. And set the AOVs aside.

Pretend that the AOVs were both $250. Just look at the boxed red number here. This company makes an additional $82 per customer in gains, net gains, after their initial sale. This company loses 14.

So what I would ask you is, when things are hard and costs go up and there's a lot of volatility, which of these businesses do you think is more resilient to all of that? And I often draw everything back to resilience because nothing is going to protect you from everything. But a business that has a strong LTV that goes up and to the right compared to a business that has a strong dip is far more resilient to the natural volatility of business. Costs are always going to be wild, right?

There's always going to be times where the costs go up. But the thing is when business one's customer acquisition cost goes up by 20%, they don't have to change anything. When business fours customer acquisition cost goes up by 20%, they might have to shut off their ads. And that's a really, really big operational difference.

So that's why LTV is so powerful. Are you advising them? know your visibility is what you're all about. So they can actually see this and see what's happening.

But as soon as they see the example in red, are you advising them as far as this is what we're going to do to fix this? like, are there a couple of things they can do quickly, like the call center? because they finally have the visibility and it's not great. Yeah.

mean, this is a, short answer is yes. I think the phrase I say all the time is all the data in the world is useless if you don't know what to do with it. Right. So even if I give you perfect visibility, you still might not change your behavior.

Right. Now in practice, what I can tell you having run hundreds of these calls where I'm getting to like do the grand reveal of like, you've never seen your LTV curve before. Here it is. And there's always this moment of like, The fog has lifted, like everything makes sense now.

So in that moment, there's a lot of authority to say like, okay, now that you see reality, do you see why we should maybe change our strategy a little bit? And people will definitely listen. But ultimately, you have to be, have to value the right things for this message to really land. And it also depends a lot on how much pain you're currently in right now.

Like if your business is scaling like crazy and you got like 15 % margins, there's a chance that you look at this and go, yeah, but like, it doesn't really matter. Like we're making money. We're good. And like, on one hand, I hear you on that.

On the other hand, you're essentially like a ticking time bomb, right? Because at some point, the costs are going to rise. At some point, you're going to hit a level of scale where the cost must rise no matter what you're going to hit that point. So unless you're okay, just kind of chilling wherever you're at, either this will creep up on you slowly or as you scale, you're inevitably going to hit this moment of like, okay, now I need to actually know my numbers.

But the thing is even the business who everything is all good, if they have this level of visibility, they'd be able to take their margins from like 15 % to like 25 % because they'd be able to cut all the stuff that's not producing the good LTV to CAC relationships and only double down on the ones that are. Not to mention, if they see their refund loss in the first seven days is really high, they can now deploy some tactics to improve that, mitigate some of that dip. And that's just like pure profit straight back into their pockets.

So it does really fundamentally change behavior if you will allow it to. But I think a lot of people kind of have this little bit of ego, if you will, on revamping the way that they approach their business because like, is what got me here. But the reality is. Everything is ultimately going to be going to become an LTV to cat game, whether it's in the short term or the long term.

And if you value building a long-term sustainable business, this is why I say it kind of depends on what you value. If you're trying to build something that lasts, this is a ⁓ critical requirement. If you're trying to just make as much money as you can in next three months and then head off into the night, maybe you could get away with not having this visibility. But I would still argue even for that person, the irony is the more they care about their LTV and their customer experience, the more money they would make in those three months.

So it's only gonna be a leverage point in the right direction. How much leverage is this for you? Depends on what you value. Yeah, I'm happy you mentioned LTV to CAC again, because earlier it sounded like you were alluding to the three to one CAC ratio as not being ⁓ accurate or not being the right way to think about it as a target.

So, you know, I'm wondering if that is by industry, if I was misunderstanding you. Because one thing that I see a lot working with e-commerce businesses and working with direct response businesses is that an e-commerce business might acquire for like 60 or $70. And let's say their average ticket is about that sick, let's say 60. So they actually have a little bit of a loss, but they know that each month that's 60 with let's say their front end plus upsells.

And they're really heavily pushing for subscription. So every month they're expecting to get another $50. they know based on how long a customer sticks around on average, let's say it's seven months. So they're fine with it because they acquired at 60, but that 60 plus another six months or let's say seven months of $50 gives them another 350.

That's 410 of LTV and they acquired at 60 bucks. So they actually could do a lot more if we're thinking of it that way, they could probably acquire for 120, $130. Right? And so they've got a lot of room to scale based on that, but that's e-commerce.

I think in direct response, there's a higher front end AOV and then they're acquiring a lot lower value on the back end. And so is it still the right way to think about LTV to CAC as a ratio three to one? I would say kind of like is an overarching theme of this discussion is that that's just too over generalized. Yeah.

Right. The reality is you have to get down to the offer and channel level because that's where you actually spend the money. Right. You spend the money on Facebook for one offer.

So if we're to have the LTV to cat conversation, first and foremost, we need to scope both the LTV and the CAC to something at that level of detail. Right. OK. So now we're talking offer.

and channel. Then it is all just going to be a function of your business's cash flow and the relationship between LTV and CAC over different time windows. And here's what I mean by that. If you are, and I'll just go ahead and I think the best way to explain this is just to share this screen again.

I'll even use the subscription example that you used because the point that I'm making is it's not like a direct response specific answer. It's the Same answer for every single business. If this is your LTV curve, because you run a subscription business and you can see it's got these nice staircases going up and to the right as the rebills come in every 30 days, you have to look at this curve and go, where on this curve can I set my customer acquisition cost to have all of the other cashflow considerations of the business still work?

And that number could vary tremendously. based on how big your team is, what your fixed costs are, and all these other things. Three to one might be good in many cases, but the reality is this business, depending on what their cash situation looks like, they might only be able to spend against their 30 day LTV. Because even though it keeps going up and up and up over time, the reality is they've got like a hundred grand in payroll that they got to cover.

And so they need the previous month's profit coming in this month to be able to cover all of that. And so I usually think about it in terms of, again, at what day? At what day on our LTV curve do we set as our CAC target so that all of the other math of the business makes sense? And if that ends up turning into a three to one CAC ratio, LTV to CAC ratio at one year, it kind of like doesn't really matter because what actually matters is how long it takes you to make your money back and where you set your customer acquisition cost target based on that.

That's really what's gonna drive your decision making. I wanna share an example. Well, I don't wanna share it. I want you to share it.

You're talking about how this is the most powerful metric and so maybe we can share like a real example, just showing how a business has unlocked LTV with scaling and how it's worked for them. If I could add to that, I love that question and I think what a lot of people want in this industry is aggressive scale. So just to piggyback on Kira's is kind of aggressive, but safe because they understand the numbers. Yeah.

Well, if you want what I consider to be like the real answer to that, I think a lot of it starts with the reality check that fast scaling and more scaling is often not better and actually not faster. So I'll give you two examples. One that I would consider to be like, A wild example that most people probably can't relate to, but is really good at illustrating the point. And then another one that I think is far more relatable, but I want to share both for a reason.

So the first one is a $300 million a year direct response mega conglomerate. So most of us can't really relate to that, but they've got 12 different offers that are running all over the place. Clickbank, Buy Goods, Digistore, they run paid traffic. They got internal media buyers.

They got external media buyers, they're working with agencies. It's like the whole thing, right? This company, every single one of their offers had an LTV curve that looked like number four. Down, big dip, struggles to recover.

So that business acquired over 500,000 customers in a 12 month period. 500,000. But their LTV curve looked like the one in the bottom, bottom right. As a result, they had to do that much volume.

just to make a few percentage points of net profit. So yeah, $300 million sounds like really, really, really impressive. But when you realize that the 300 million resulted in like five or $6 million in cash in the bank at the end of the year, like is it really all that impressive? Because that's a lot of operational complexity, stress, team, payroll, overhead, risk.

that most people probably don't actually want. Now that business had the resilience to like work through it, but that's not the business that most people actually aspire to build. But if I told you $300 million, 12 brands inside of it, you'd be like, that's my dream. And my point is like, no, it's not because that's actually what those businesses actually look like under the hood.

Not a great business to run. So they're... their path forward once they saw their LTV and knew what was actually going on is they actually cut half of their offers, dramatically scaled down their volume, and massively increased their profit margins. They put refund mitigation strategies in place and took that a lot more seriously.

They stopped being overly aggressive on their upsell flows to try and get people to buy 12 more bottles and then a call center to buy 12 more on top of that. They actually got a little bit less aggressive. a little bit more customer experience focused, a little bit more attention on refunds. And just by reducing their refund loss by 10, 20 bucks a customer and cutting their overall volume in half, they did twice as much in profit.

So that to me is like what's really going on. Like you think about the top businesses and what you think are the top businesses in the industry that you may aspire to be. Like these are the challenges that they're working through. And I think it really is very revealing about what actually matters.

that's one, right? That's amazing example. actually cut in half their volume to double their profit. Because think about it like this, like if your refund loss per customer is $50 and you acquire, I'll say 100,000 customers, that means you lost $5 million to refunds, right?

If all you did was take your refund loss from 50 to 40, that's a million dollars in net profit created. Just like that. And so if you actually did a good job, not just a $10 reduction, but you got it down to 25, you could cut your number of customers pretty dramatically and actually make a lot more net profit. And this is what the companies that I feel like get it are doing.

They're moving in that direction. It's not who cares 500,000 customers. What's the profit per customer? That's what ultimately matters because There's a lot less operational complexity when the volume is lower.

Your offer will last longer when the volume is lower. There's a lot of benefits to the volume being lower. There really truly are. So second example, to me, this is like the relatable one.

This is a business that launched an offer. They were stuck kind of in the 50 sales a day range. Couldn't really get past that level of scale, but they cared about all the right things. They're not trying to be black hat.

They're trying to build a lasting brand, high quality products, good customer experience. They're post purchase after the initial sale. They take care of their customers. They support them.

Facebook group, like all this stuff, doing all the right thing. And yet they're really struggling. That business was largely operating because of their lack of visibility from a place of fear because they didn't know what their LTV was. Many of their AOV was like 250, but man, I'm just like stuck around 50 sales a day.

When they actually saw their LTV, they were the business in the upper left, the business number one. Nice surge in the beginning, strong up into the right LTV trajectory. When they realized Their customers were worth $380 at the end of a year, and they were worth about 350 30 days after the initial sale. They completely changed their media buying strategy.

They were able to expand to more channels. They pushed their CAC targets up more aggressively, and they were able to break through to 100, 200, 300 sales a day. But this is after years of kind of muddling along. at 50, 60 sales a day and never really being able to get a strong foothold.

That's a business that prioritized what I believe are the things that matter most in today's industry to differentiate you from all the black hat actors who are just more aggressive marketing, more aggressive marketing. Pump and dump offers, cash grabbing. Yeah. It's brand, it's customer experience.

It's those things that really become your moats because those are the things that they're not doing. But when you have the visibility, it just changes the way that you operate. And so a business who was unsure about being able to spend more than like 150 bucks to acquire a customer started being comfortable spending 200 to 20. And because of that, their volume was able to double and they were able to do so in a very healthy way.

love that you said those things about customer experience and making the moat because that's very related to stuff that we've been talking about specific to the direct response industry and VSLs and not doing the pump and dump, cash grabs. on ugly VSLs that you can call lazy VSLs, voiceover, bunch of stock clips. Anyway, we don't need to beat that drum too much. We've done it in other episodes.

We may be able to link here, but I'm happy to hear you say that. I want to make sure we start to get into some tactical stuff here as we're coming up on time. Jumping in for another quick break to let you know that if you're interested in talking to us at Tried and True Media about how our agency approaches identifying the bottlenecks to overcome to achieve the next stage of growth in your business, You can use the link in the description to sign up for a free strategy consultation, fill out the form, and we'll be in touch soon.

Let's get back to the episode. Yeah, let's talk about leverage loops or maybe it's your leverage loop system. I just want to hear about like, what is that? Dig into it for us.

Okay. So this is as the name suggests, it's a cycle. It's a process that's designed to generate maximum leverage. And here's how the cycle goes.

The first piece of the cycle. I can actually pull up a visual for this one as well just to help solidify it and make it crystal You're amazing with the screen share. Anybody who's listening, anyone who's listening needs to jump over to YouTube. I'll explain it as well in case you're just listening.

But yeah, there's a visual on the screen right now that shows this leverage loop cycle. So the foundation of leverage loops is clear visibility. If you can't see LTV in the way that we described today, LTV starting from that initial AOV and every day of the journey thereafter. for every product, funnel, traffic source and affiliate, you have a shaky foundation that will make all of your decisions low quality.

So no matter how good you are as a marketer, you're just gonna make bad decisions, ineffective decisions, and that's not a place that we wanna operate from. So step one, get clear visibility, LTV it every day of the journey, just like we talked about. When you have that visibility, and now you can see, ⁓ my gosh, I'm business four, I'm losing $50 to refunds, and I actually lose so much money in the first 90 days, I can't even make it back in the rest of the year. That business is constrained by its refunds.

And when you know that, and not only just like I'm constrained by my refunds, but I can actually see when the refunds occur, when there's the most loss actually happening day by day, usually it's in the first seven days, by the way, I have something I can go attack now. So I get my clear visibility, that lets me know where is my biggest constraint? Is it refund losses? Is it my back end gains aren't high enough?

What is it? Is it gains or losses? And then I can use that constraint to figure out where to deploy maximum leverage. There's always a million things to do in our business.

We can go split test more stuff. We can work on our AOV. We can add in a call center. We can reduce our refunds.

There's a million things to do. This is gonna help you figure out what's gonna give you the most leverage, right? Cause you can see it clearly. So you deploy your resources, not at another AOV split test.

But to try and get that refund loss in the first seven days, down from $30 down to like 15. That's what we're going to focus on. That's $15 per customer in net profit back in our pockets that we can use somewhere else. So that's part three.

So we got clear visibility, identify the constraint, and we deploy our highest leverage action at that constraint. And then number four, we use our visibility to measure the impact. So if we were trying to reduce our refunds, from $30 per customer in the first seven days down to 15, gotta have the visibility to measure it, but you do because that was the beginning of this loop. So now you can see, all right, we got from 30, now we're sitting at 22.

We're not all the way there, but we're making meaningful progress in the right direction. So you come back to that visibility and you say, is this still our constraint or do we need to move on to something else? And that's this loop. And you wanna stay in this loop going after constraint, attack it until it hits a target.

that you're shooting for, and you just do that over and over and over again. And here's the key. If you got 17 offers, you probably want to do this on one of them, get it nailed, and then replicate it on every single other one of those offers. That's going to give you the most leverage.

Don't do a little bit of optimization across all 17 offers. Nail it on one. You could probably cut half of those offers anyways, from a profitability standpoint. And then deploy this profit win over to every single other funnel because it will transfer over in most cases.

Yeah. This is amazing. Would you start with this visibility piece? Step one across all of your offers when you're onboarding a new client so you can see what's worth focusing on.

So you aren't focusing on all 17. So what we usually do is we'll, bring in the data from all the offers. So that way we have the visibility and then For each of those offers, we'll look at the ones that are producing the most volume. So which ones are the highest volume producers right now?

And we'll benchmark it against these industry leading benchmarks. So one of my core principles is benchmark against leaders and not friends. A lot of times we hear our friends like, well, my refund rate is 15 % too. So you're just like, oh, I guess mine's fine then.

And like, that's the end of the discussion. And so you don't worry about your refunds because your buddy's refunds are just as bad. That's a bad frame of reference, right? Don't compare against your buddies.

You need to know what the industry leaders are doing and benchmark against that. So here it is. It's on the screen right now for a direct response and nutra type company. is minimum acceptable and target benchmarks to hit over the course of, of 90 days.

If your AOV is $200, we want our backend gain by day 90 to be greater than 20 % of that AOV. So in other words, we're making an additional $40. within 90 days. Okay.

We want our refund loss to be less than 7 % of our AOV or in this case, $14. So $200 AOV, we're losing less than 14. And then if you blend those two together, we're netting a gain of at least $26 or $25 for easy math. So on your $200 AOV, we want to be netting about a $25 gain over the course of 90 days.

What you should do if this is your business, is you should look at which one of these benchmarks between the gains and the losses in my farther from, right? And also, which one do I feel I have the most resources to deploy to improve? If you've never touched your refunds and you're currently losing $60 per customer, probably just focus on that, right? You haven't put effort into it.

There's a lot of opportunity there. You're way off the benchmark. But if you've been hammering refund optimization for the last six months and you're still off this benchmark, but you're way off on the back end gains, then what can we put in place, whether it be a call center, some kind of a post purchase customer journey, what can we put in place to get those gains up so that way we can get closer to the benchmark on that front? So in the leverage loop system, when you're identifying your constraint, you gotta have something to compare to, to really know what your constraint is.

So benchmark against leaders and not friends to get a true picture of what's actually going on. Man, for operators who are watching or listening to this, it really feels like that's the playbook for what you sit down and do tomorrow, right? That five step process, get those optics, the visibility, as you said, across your highest leverage offers, and then run that loop on where you identify your biggest opportunity. Yep.

And then once you do, replicate that win on the other next highest opportunity offers. Excellent. Sounds easy. Yeah, it seems easy, right?

Totally easy. Well, here's the thing. The visibility piece is the hardest part. I swear.

This is what people need to understand. I think taking away from this discussion. If you had all the visibility, you would know what to do. Yeah.

This is the key takeaway. It's not like some magical, I don't know enough about marketing or strategy to figure out what I should do strategically. Or that I have too much to do. Yeah, often it's that you lack the visibility to make good decisions.

So you're flailing, doing a bunch of things to try and optimize. You're way too busy doing too many things that aren't impactful and are low leverage. And what you really just need is enough visibility to know where to focus. And once you have that visibility, what to do often becomes unambiguously clear.

It's just obvious. And so If you consider yourself to be like a 10 out of 10 marketer or a nine out of 10 marketer or whatever, understand that if you're visibility constrained, you're effectively operating like a four out of 10. Not because you're not great at marketing, but because the probability of you making good decisions is really low. It's all based on gut and intuition and experience, which is valuable.

But I don't think that's how most of us want to run our business. When we make these really important decisions, we want to have high confidence. So there are other six out of 10 marketers out there with this level of visibility who are operating like eight or nine out of 10 marketers. And so they're running circles around you, not because they're better at marketing, but just because they have better visibility.

And so if you solve the visibility piece in a very real way, you just become better because your decisions are far more likely to be good. And while nothing is guaranteed, we should stack the deck in our favor in every way that we can. to give our decisions the best chance of being good ones. And most people, in my experience, about 1 % of businesses have that visibility.

So solve the visibility piece tomorrow. LTV numbers would do that, but solve the visibility piece tomorrow and everything else will become quite obvious from that point on. I love how that 1 % is a callback to the Joel Marion story. Yeah.

Nice, man. Close the loop. Well, I know you got to get running, so I want to ask two more questions. One is just kind of fun question and then one is a final reflection before we sign off.

Does that sound good? Sure. Let's go. What should founders stop bragging about?

Easy. Customers per day and revenue. Nice. I think the reasons why.

should be quite obvious at this point. at this point we've talked about it. Sky-high revenue and thin profit margins, meaning little profit. Your example of the $300 million business with $5 million profit.

⁓ I mean, that's it, case in point. I love that. You should be bragging about profit margin and profit dollars. Profit for customer.

I love what you said there. If your volume is low, who cares? That's an easier, lower stress business to run. That's like the ultimate flex.

It's like, how low can my volume be? with my profits being the highest. that to me is the ultimate business right there. Super lean.

Nice, man. Well, then the final reflection for the audience is I'd like you to answer what uncomfortable truth do you think that operators need to sit with after this episode? I feel like you've already dropped many of them, by the way. Yeah, to state it clearly, what do you give one more?

Yeah, stop blaming others. Because almost certainly, if you could see it, Your LTV curve would be like a punch in the gut because in a very real way, your LTV curve is the numeric reflection of the quality of your business. And if your curve goes like this, down dips, it's not a great business. And if you're pointing fingers at your agencies, at your affiliates, at everybody else, you're never going to solve the problem.

Because the real problem is your LTV curve is broken, which means your unit economics of the business, it's like fighting an uphill battle. And so if you can just take care of that first, your agency will just perform way better. Your affiliates will just perform way better. Not because they did anything, but because you did.

And if you take that ownership and stop blaming others, it will be the thing that unlocks your business's ability to scale. But it's more comfortable to be like, We've done everything that we can do. Our AOV is $300. It's like, well, hold on a second.

You'd be in a really different position with a $250 AOV with $50 in gains on the backend, not a $300 AOV with $75 in refund losses. But that's the thing that most people don't want to confront because they're a hammer and everything looks like a nail and they just want to acquire more customers. The reality is the business that is going to win is the business with the best LTV. And you've probably been neglecting your backend and your LTV this whole time.

there you go. Amazing. Nailed it. Speaking of hammer and nail.

Yeah. Tyler dropping value bombs left and right. That's going to do it for this episode of the scaling lab. If you are watching on YouTube, please subscribe, hit that bell icon.

So you get notified anytime we drop new episodes. And I guess before we sign off, Tyler, where can people find you so that they can connect if they're interested in working with you or if they want to hear more about LTV numbers or just to follow to see the content you're putting out because you've got a wonderful mind. I appreciate that, Jared. Thank you.

LTV numbers.com and I'm on Instagram Tyler underscore LTV numbers. Always putting out customer journey, LTV related content. Yeah, we'd love to help anybody watching solve that visibility constraint because when you solve that constraint, everything else unlocks from there.

And it's real honor to be able to do that for people. Excellent. So if you have any questions, drop them in the comments or find Tyler online and DM him. And you can also find him at LTV numbers.

com. That's right. Yep. And we will see you in the next episode.