The Hidden Place Your Business Is Losing TONS Of Money transcript

foreign [Music] to the Andrew Ferris podcast thanks so much for joining me for another episode of the show I want to tell you today how you are losing money in your business in a weird and surprising and hidden place this is a little bit of explaining it necessary here but I believe that the vast majority of brands have a major significant cost center in their businesses that they simply don't see I'm going to show you what it is and how I get there [Music] hey before we jump in today I want to talk to you about my friends at more Staffing if you are looking to grow your team with overseas help high quality professionals who will make your business better not just hiring overseas on the cheap people you don't know and you don't trust and you're not sure about but actually trying to find professionals but still a much lower cost than hiring that employee in the US or wherever you are go check out my friends at more Staffing as they say virtual assistants can be helpful in your business 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today more now dot Co I'm gonna try and explain this as clearly as possible here there's going to be a little bit of a screen share in a minute because I really want to make sure that you don't miss the detail that I'm getting at here but let me just start from the start which is that the place that I believe that businesses are are losing money is in their return on ad spend in their ad account as they scale towards their targets now let me explain what I mean almost everybody set the Target in d2c in e-commerce in their ad accounts by finding some kind of Target typically based on a profitability threshold of some kind or another so they they say like okay I look at my unit economics and this this is good by the way that they do this and my LTV and I say like okay every I need a two row ass let's say let's just say theoretically I need a two row ass I need two dollars back for a one dollar I spent and if I get a two row ass I am generating The Profit that I want on every single purchase and so I want to acquire customers by spending one dollar and getting and getting them to spend two dollars on my store and that will leave over enough margin either now or later depending on all kinds of factors that will then give me uh positive contribution margin and that will put money on the bottom line and if you're running a business and you're trying to be profitable this is sort of the way that you obviously think about this now I want to pause here and note that I just made a big assumption about the kind of brand that I'm thinking of now this is the vast majority of d2c Brands and certainly people who are listening to me I think but it's still worth putting my finger on I am thinking here of businesses that are optimizing for bottom line profit even if you're optimizing for bottom line profit and growth right you want to grow and generate profit like I'm still thinking of of businesses that are primarily thinking about generating profit not businesses that are sort of acquiring customers at massive scale where that's like the main thing growth is overwhelmingly the priority and they're oh they're willing to sort of quote unquote overspend for a little bit to make that happen but actually even for those customers there is some Threshold at which for those clients the the return on ad spend would be bad enough that they would say stop spending even though we are prioritizing growth over profitability right now that's a little too much we're going to run out of money if you spend bad money like that so there's some Threshold at which profitability is no longer in play and that concept the concept of threshold is really important for what I'm about to explain because the whole idea of setting a target a roast Target in your business really it doesn't have doesn't matter if it's meta ads could be any any dollars you're spending in marketing the whole idea of setting a profitability threshold is that at some point in your business it is no longer a good use of money to spend money to acquire a customer that customer is actually a cost center in your business not a profit Center and as soon as that customer becomes a cost center and not a profit center that is what they are they are now detracting from the profits in your business now you again now you can calculate that any number of ways and I actually don't want to get caught up in that issue here whether that's LTV based or you're giving extra credit to Walmart or Amazon or Target or word of mouth or whatever right like it doesn't matter wherever you set that threshold you're setting it based on some sense of where profitability is and is not in your business and so you build your Target off of a threshold and that's the notion okay above that threshold if I pay if I pay a CAC above that threshold uh or let's let's use it in row ass terms a little bit easier to think about so if my row ass is under that threshold then I'm losing money on that customer if it's above that threshold then I'm making money on that customer and so that's the case Okay so that concept is the basic idea I hope everybody's sort of with me on this point now here's the reason that I bring this up because if you have that threshold in mind then it is almost certainly the case that you are losing money by spending to that threshold let me put that another way whatever that roast Target is that threshold is if you have a threshold of profitability for your customer you should never hit it and the reason why is that threshold is an average by definition it's an average and the average does not reflect the total of the production of your spend let me bring in another concept here and everybody understands us who works in digital advertising which is that the more money you spend on the same ads and the same audiences okay the less efficient that ad spend will be so so if you are spending let's say a hundred thousand dollars out of three return on ad spend three row ass right then you would expect that if you spend 150 000 your row ass is no longer going to be a three unless you generate new creative that gets you there but let's let's leave new creative out of it for a second let's talk about instead the notion that is about the way of course how most of us are trying to expand or spend by sort of by continuing to be able to spend while maintaining a roast number that we want to hit and we know that the way to do that is more creative and more products and better landing pages and all those kind of things that you're doing to try to get your take your spend further and further and further because you know that if you keep spending on the same ads your return on that spend is going to get lower over time there is an inverse relationship right between spend and profitability so spend goes up profitability goes down spend goes down profitability goes up pretty much everybody understands that so what that implies then is that the average that you get at the end includes some spend that is producing a return ad spend that is actually under that average and so I've actually tried to put this this is where I'm going to go to a screen share and if you're just listening to this then I'm going to do my best to explain this concept to you so so you can hopefully still follow along okay and and hopefully at this point you you kind of track what I'm saying so far but let me let me let me explain this concept right here okay so imagine that you have the scenario that I just laid out a hundred thousand dollars in spend three hundred thousand dollars in revenue for a three row ass okay that's your let's say that's your spend right now and you know let's say your target is a two row ass okay anything above a two that's your threshold that we talked about earlier so you look at your hundred thousand dollars and spend your 300 000 in revenue and you say okay and this could be over any time period you want by the way and you say great I have some more room in my spend that's possible for me I have more profitable customers still in front of me and so I'm going to spend further so that way I can acquire more customers above my target roast right so that's the notion if you get a if a two row has your Target and you're currently hitting a three then you spend more because that means there's more profitable customers in front of you so you spend 125 000 and you generate 360 000 total in return now your OS has gone down to 2.88 so you spent an additional twenty five thousand dollars and you got sixty thousand dollars in return and now your total Blended Ros is a 2.88 and you could keep spending and theoretically let's say you spend an additional and I'm sort of making this up now you spend an additional hundred and seventy five thousand dollars on top of that 100 000 initially spent so now you spent 275 total and now let's say you've produced a 1.95 row ass and so you're kind of flirting with that Target now I'm I've actually created some buckets of spend on the way there on the way from 100 to 275 okay now I I'm gonna tell you right now that I am essentially making up some of these numbers I don't actually know how the degradation of that spend plays out exactly it probably changes from account to account I don't have a clear model in my head of how this works but let's think about this from from that path to 100 000 out of three row ass all the way down to where you generate a two row ass all right so I thought of this in twenty five thousand dollar buckets or chunks or tranches however you want to say it okay and what I'm going to call that is your incremental spend your incremental revenue and your incremental raw so let me explain if you are at a hundred thousand dollars in spend in a 300 000 in Revenue and that's producing a three row ass then maybe you raise your budget by twenty five thousand dollars you go up by 25 in spend you get an additional sixty thousand dollars in value that's your incremental spend is twenty five thousand dollars your incremental revenue is sixty thousand dollars and now your incremental row ass on just that bucket of spend is a 2.4 and this is the key distinction what I've done is I've I've degraded the the revenue there and that bucket of spend by eighty percent okay so I said if you're getting a three to one row ass on your first hundred thousand dollars in spend then let's say on your next 25 000 in spend you're gonna get eighty percent as good of a return as you got before because again we all agree that efficiency degrades over time so if you're getting eighty percent of a three to one you're now getting a 2.4 on that spend okay so again if you've got twenty five thousand dollars an additional spend and that's going to come in at eighty percent of the row ass if your Blended average raw us and that first hundred thousand dollars then that incremental row ass on the next 25 000 you spend is a 2.4 so you produce sixty thousand dollars in Revenue great no problems you're still above your two threshold okay but let's say on every next bucket of twenty five thousand dollars you spend you keep producing eighty percent of the previous total roasts there's going to be a problem here because let's take that first example actually which is that means that that if you produce a 2.4 on your second bucket of spend on your next 25 000 spend so you produces sixty thousand in Revenue that incremental roast on that spend is a 2.4 but your total Blended average Ross is a 2.88 so what that means is if you're just looking at your Facebook ads dashboard or Google ads dashboard or whatever that 2.88 that you have there is going to tell you keep spending keep spending keep spending you're way above your target you still have a bunch of room right but actually the the last twenty five thousand dollars you spent actually only returned for you at 2.4 Ross and so it's it's actually quite a bit closer to your threshold of profitability than before and if we take that to the next step and we maintain that Euros is 80 as good as your previous rows and now again that number's made up this this threshold I'm going to give you an answer to how to think about this in a little bit so um so you'd actually don't have to do this calculation okay but if you keep degrading by 80 on every uh by or by 20 let's say of roast on every 25 000 you spend then what's going to happen is very quickly you're going to get to a place where your incremental roast is below your Target and this is the key idea so okay so let's say you spend 125 000 you get 360 Grand in return right so now you're at a 2.8 Blended we said that's a 2.4 on the incremental return okay now let's say you spend your next point five thousand dollars because you're still above your target now your next 25 000 if again your spend the grades the same amount produces 48 000 in Revenue that's a 1.92 incremental Ross on that next bucket of twenty five thousand dollars now by the way these buckets are all made up they themselves actually have their own sort of range of outcomes right it actually is probably five thousand dollar buckets where it you know where the where the spend the grades but that's okay we'll just take in these larger chunks so now your Blended roast if you spend another 25 000 and your performance degrades again which we all agree is what happens on Med ads or Google ads or anywhere pretty much okay now your incremental Wireless on that spend is 1.92 and that means that even though your Blended Ros is 2.72 because now you've spent a total of 150 000 for 408 000 in Revenue 2.72 OS okay now your incremental spend has actually started to produce a roast underneath under your threshold and you are starting to spend money that is a cost center in your business of potentially a significant cost center in your business now I am making the Assumption here that you have a sense a real sense of what your OS is relative to your attribution and all those kinds of things so again we will leave attribution discussions out of this let's just assume robots in this case is completely accurate so whatever however you measure that exactly leave that for another time okay but for right now what I'm saying is this the key point is each dollar you spend is the average of your total spend is not the same as the performance of your increased most recent spend right it's not it's not the same thing the average total is different than your incremental return and so if it's the case that acquiring customers under a two is a cost center of your business you are now generating a huge amount of cost in your business okay now again there may be all kinds of reasons why you actually want to generate a lower return at more volume and all those things and that's fine that just means your threshold is different than you first thought it was okay but this is the key point that you you need to know where that Target is where that threshold is because if you can think about that then what you can also do is begin to eliminate those cost centers in your spend and instead if you're optimizing for bottom line profit or put another way optimizing for Max maximum contribution margin on your spend then thinking about the distinction between a blended average rows across your whole account and the incremental roll-ass of the money you're spending separately is really crucial and here is the beautiful wonderful glorious thing I am doing all of this work to sort of explain this and create this model for how spend degrades over time and I mean it would be very hard to actually go through your account and figure this kind of thing out and find the right threshold there's a much simpler way to approach this problem than actually only trying to do that work and it's this set a bid cap this is one of the key reasons to use a bid cap and not a cost cap in your meta ads okay so now I'm talking about ads specifically because a bid cap is going to bid at or under your threshold of profitability a cost cap is going to give you an average is going to give you an average so a bid cap is going to build the target based on the threshold that you set not an average of the threshold that you set and it will only enter your spend will only you will only enter into auctions that Facebook's machine learning believes can get you at or under that CAC Target that you set with your bid cap okay so to put this another way let's say let's say your CAC is 50 let's say your threshold is fifty dollars and that's that's the CPA you can afford to pay for a new customer that's what's going to produce that two to one row ass let's say your average order value is 100 bucks right when you bid a 50 bid cap because that's where your threshold is that's what you've decided basically unit economics your LTV your goals all those things now Facebook will only spend your money but things can get at or under that Target which means on your incremental spend it will not continue to spend to get you to an average number at the end of the day it will instead only continue to spend if it's going to get you at or under that Target now a cost Cap's not going to do that cost cap is going to bid dynamically to try to produce for you the average that you are setting there and that distinction is one of the main reasons that I prefer bid caps as a bidding method because if you know where that threshold is then you can optimize your contribution margin by saying I only want to take purchases out or under that threshold now that means setting your threshold is a really really important job understanding something around attribution and what the relationship is between what meta reports in a dashboard versus what you're actually getting is really really important it means understanding the distinction between the roast that you're getting on the optimization that you're building say one day click or seven day click or seven day click one day view or whatever it is understand the distinction between that and the total value of your spend that happens is people click today and buy in two months or whatever there's all kinds of other details here for how to set that Target but once you have as much information as possible and setting that Target then that's going to be the thing that's going to help you stay as profitable as possible on your spend now I want to make one other point here okay and that point is that a lot of the reason people struggle with spending on bid caps like for me the the whole the whole value of this then is that big caps build profitability into my Targets in a way that nothing else does like there's just no other tool quite like it to say like I'm going to optimize for contribution margin quite like bid caps too it completely solves this incremental rough problem or at least close to completely solves it as well as any sort of forecasted machine learning based auction system like this could could solve that of course sometimes it will be wrong but in its forecast of what auctions to enter and what it wants not to but within reason within the ability to forecast this sort of thing it does the best job possible so but I want to come back to this people ask me all the time because they know that I like running bid caps for my ads people ask me all the time well that's fine Andrew but I can't get my bid Caps or even my cost caps to spend and I think that this is the fundamental reason why but I'm laying out here the reason why is if you are if you are mixing your spend between auto bidding and and bid Caps or cost caps then what you are functionally telling meta is you must spend the first x amount of dollars that you need to spend and once you spend those amount of dollars then with what's left over enter the auctions that you can with bid caps and cost caps let me give you an example somebody uh somebody came to me actually and had heard me sort of promoting bid caps as a bidding method and they said okay let me show you an account what would you do here the bid caps are not spending and I can't get I can't get any volume here and so it's not worth running more bid caps for me and they showed me an account where they were spending fifty thousand dollars a day for a client a big massive account and when they showed me that account they said we're spending fifty thousand dollars a day and that fifty thousand dollars was Auto bid and they had a row ass Target they had to hit or whatever and they were spending as close to fifty thousand dollars a day as possible and they were spending right up to that roast Target that they needed to add I don't remember it was a two or what but let's just call it a two just to make it uh just to make the math easy okay so they're spending right up to let's call it a two on that fifty thousand dollars right and they said okay so then they set their bid cap to get them a two as well and said okay but it won't spend why won't this bid cap spend if it's supposed to be so good at generating money at or under my threshold and the reason is because of this incremental roast situation it's because if you're already telling Facebook you must spend fifty thousand dollars a day then the meta ads tool knows okay it has to get through fifty thousand dollars and spend and it's gonna try and spend that two thousand dollars as efficiently as possible and all you're giving it for the bid cap is the leftover bottom of this but what we know here is that the leftover bottom of this is not going to produce anywhere close to that two to one that you're asking the the two to one return that you're asking Facebook to get for you because actually the bid cap is only going to get the leftover spend after that first fifty thousand dollars is spent which is to say the incremental spend and that incremental spend is going to produce much less than a two to one because your average right now that you're getting is a two to one in fact they weren't even I think quite getting a two to one in the account or whatever the target was I really can't remember what the target was so if all you're asking the bid cap to do is get you some additional spend at the bottom of your spend then almost for sure you're going to have to set your target higher than you otherwise would like to because it is it is uh only going to be spending on those incremental dollars which are less efficient than the Blended average you're getting before I hope that makes sense but I believe this is the main reason people's bid caps won't spend it's because they're trying to blend it with auto bidding and they're trying to use it as a scale mechanism on the back end of auto bidding instead instead the way to think about it is as the main way to spend your money and this is the thing that people don't want to do and I understand why but it's hard it's hard to make a commitment it feels like you're jumping off some kind of a ledge to go move your whole account towards this but you could actually do this incrementally just back your auto bidding off you're spending let's say you're spending ten thousand dollars a day on auto bid ads try and spend seven and see what happens if you run bid caps for the last three or whatever by the way if your bid caps will not produce or under your Target on those on those last three grand of your spend that you're trying to get through each day it's probably because that three grand was actually never producing money at or under your target the incremental value of that three grand was actually under your target all along you just couldn't see it because you were looking at a blended average all right I've that's a lot and I've tried to explain it as clearly as possible because this gets into the weeds a little and and so uh so please if you have questions about this thought I would love to hear from you I always try to uh I always try to say this at the end it's for the outro of the episode but but I think this is one of the main issues going on where people are losing money like I said and people cannot get bid caps to work in their ad spend so trying to illustrate that as clearly as possible I think that's I think that's that's the best way I can say it so far but if you have questions if you have thoughts please tweet at me at Andrew J Ferris email me podcast.jfgrowth.com I would love to hear drop in the comments on this YouTube video if you're watching on YouTube I would love to hear from that from you there and see if this is coming across because I think you can open up a ton of contribution margin in your business by getting this concept right and you will end up spending much better dollars producing a much higher contribution margin and ultimately produce more profit at the bottom at the bottom line [Music] please [Music] just as I was finishing talking in this episode I realized just how fast I was talking trying to get through all this information and explain it clearly so I did my best I know I've had some people tell me they listen to me on you know one and a half speed or double speed or whatever it is and I'm always amazed that because my biggest problem when I'm doing any kind of public speaking or even on the podcast is is speaking slowly enough I tend to tend to rush so sorry I'm working as hard as I can to make this as clear as possible again I'd love your feedback on this episode if you like this episode a couple things you could do right away send this to somebody who's struggling with their bid caps and cost caps and trying to understand this that would be a huge help to me and hopefully it helped to them as well I really do want to be as helpful as possible of course subscribe on YouTube subscribe wherever you listen to this podcast as well as as well as rate and review and do all those things that really does help me quite a bit I have a couple of episodes coming up that I want you to know are going to be awesome I'm very close to finishing an episode where I actually got uh to work with somebody where we basically did an almost two hour coaching call where we opened up the entire books of this of this person's business and she she said okay I'll tell people really honestly where my business is at and you we can record it and you can tell people what you would do with my business so really cool building and public kind of thing where you can sort of listen in on what I would tell a business that's like seven figures trying to get to eight and and how would you try and grow that business from there and how do you think financially about it Etc going to be a really really really cool episode you are not going to want to miss that particularly on YouTube because there's a bunch of screen shares and a bunch of document sharing and all that stuff so make sure to subscribe to me there if you are not already and uh and a bunch of other good stuff coming as well of course still have an episode that has a firestone upcoming so lots of good stuff make sure to subscribe that's it that's enough for today I think you've heard everything that needs to be heard thanks so much for listening for watching I appreciate it so much [Music]