Why Your Business is Destined to Fail (Paid Traffic Unit Economics)

Nick Kozmin

Transcript

Alrighty. So in this video, I'm going to walk through a model. I'm going to explain why most businesses, most entrepreneurs they're pricing their products, improperly, and they're going to fail. And most entrepreneurs will go through like three years before they figure this out. They wasted three years of their life and tons of money. And they realized that their business was destined to fail from the very beginning. But it doesn't have to fail if you understand this stuff properly. So why do the businesses, why do most entrepreneurs businesses fail when they, when they come out of the gate, why does it not work? Why aren't they making profits from day one? Why aren't they able to grow? Without raising tons of money from day one while the, the key is pricing and entrepreneurs don't understand that a product's price is actually a function of the channel.

Not only just the channel, but the competitors in the channel and the gross contribution of the competitors products. Now, what do I mean by that? So let's say we are going into a market that is selling to, let's say for financial advisors, I have tons of experience selling to financial advisors. Now, people who are selling to financial advisors, they're usually big advertisers with big pockets and the cost per click and the cost per impression is usually pretty high. Why? Because the gross contribution of the product that they're selling to financial advisors is large. So let's say someone is selling something for like a hundred thousand dollars to a financial advisor. Well, they can afford to spend a ton of money advertising. So it actually forces the cost per impression, up in the market. Okay. Now let's say you're selling to something. You're selling someone to someone who's just broke as rocks, and they're like 18 years old.

They don't have two nickels to rub together. Well, obviously the cost per impression to market to that person is going to be low because the people that are marketing to those people have lower gross contributions and lower ticket prices because the market can't afford what they have. So you have to realize this connection between, you know, the market and the price. Now this is where most entrepreneurs mess up. So some entrepreneurs, they come into a market and they don't understand other advertisers in the market. They don't understand other people up, the other people that are marketing to their market. And they come in with something that's like $500 or a thousand dollars or even $3,000. And they think they're going to be, their business is going to work because there's no competitors, but they, they realized very quickly that they can't get the market's attention at a price.

That makes sense. And it's because they don't understand the other competitor. So when you're, when you're building your business and you're looking at these, these fundamental things you want to do, you want to understand this from the very, very beginning. So if you're going to be going after market, you're going to have to re you're going to have to go out and see what the cost per impression is on some of these networks. And what, what is the cost per click to get someone to your site? Now, I made this little model that breaks down this the ROI with a paid traffic funnel. So we have a click to a landing page, turns into a lead, the lead watches, a little VSL. They get warmed up, they book a demo, they show up for the demo and then they close on the call. So this is a little bit this is a little model.

Okay. And actually I'll go into my own. I'll go into my own advertising account and I'll show you how this works. I'll show you how these numbers are determined. Okay, so let's take this let's go to the month of January. Okay. So in the month of January, this is just the Facebook advertising channel. I spent $27,000. So 24,000 plus 20 let me just make this a little, I'll move this up a little bit. I spent $27,000 on ads. I generated a thousand leads, 200 quizzes, 164 demos and paid about $165 a quiz. So are $165 a Devon. So what I, and we'll, let's take a look at the cost per click. So the cost per click, let's see here, cost per click was on average, about $6 and 37 cents. So let's call this $7.

Okay. Now the opt in rate is the amount of leads divided by the amount of clicks. So if I take a look, there's about a thousand divided by 4,000, so we'll call it 25%. I'll just keep it 20, or I'll call it 25%. Okay. So the cost per lead is around $28. In my little model, does the calculation on trout $28. Now this, this calculation, the sales page conversion rate, which is the demo conversion rate. Now, let me just walk you through this funnel. So you guys know what I'm talking about. This is whoops, this is the fun. Also a Facebook ad goes to this opt in page. They click the they click and they submit their information. They watch a little video and then they go to a quiz and then they go to the calendar booking page where they book a demo against the calendar.

So now we're going to take a look at the demo conversion rate. So the lead or the demo to lead conversion rate. So that is 164 divided by about a thousand leads. So it's about 16%. And I put 15% my model, I'm going to put 16% here. So the cost per demo is about $175. Now the typical show up rate is around 70%. So people that book a demo against your calendar with paid traffic, inbound traffic is usually about 70%. And a typical close rate on paid traffic is usually around 20 to 30%. So I'm going to use 20% as a little benchmark. So now we do a little bit of math. We just divide a few numbers by this, a cost per click, and we can clearly see that the cost to acquire a customer just in ad spend no coffee machines, no rent, no CRM, no sales people's commissions, no salaries, nothing just ads is $1,250.

Okay. So that's the, that's the cost to acquire one customer in this particular market. Now imagine we're selling to some like C level executives. Well, that cost per click could jump up to like $13, $14. You're probably at the higher end. If you're a big swinging advertiser, you might be able to spend like $15 a click. Okay. And there's people that do that. And all of a sudden your cost to acquire customers is going to be like $2,600 just in act. So that's just ad spent, okay. That doesn't account for the, the amount of money you have to pay the salesperson. So let me go back to my little model here. $7. Now, usually the, the amount that you pay, the sales person is a function of the gross contribution of your offer. So gross contribution is basically the sum of, for the year, the sum of the gross margin.

So if you're selling like SAS, but like $10,000, there's usually like an 80 to 85% gross margin on that thing. So it's like eight point $5,000. So you usually pay the salesperson about 15% of the gross contribution. Okay. So let's take a look at this gross contribution. Let's say in this world of this particular model, I'm selling something for $10,000 that has an $8,500 gross contribution. And I collect let's say I collect $8,500 upfront. So this is the cash collected in day one. This is very important because if you don't pay attention to this, you're going to jail. You're going to go into what's called a cash trough. Okay. So let's take a look at this model. So I'm saying I'm paying something, I'm paying my I'm selling something for 85, let's say 10,000 SAS. And there's an eight 85% gross margin for the year.

And I'm paying the sales rep 15%. So my total, my fully loaded cost per acquisition with this model is $2,500. And let me just zoom in a little bit here. Let me zoom in so you guys can see this. Okay. So my let me zoom in a little bit more here. Okay. 200. So my total fully loaded cost per acquisition is $2,500. My gross contribution is 85, a hundred. And so my return on, on revenue is 236%. Okay. That's really good. My return on cash 230, 6%. And this is in the year, this is in 30 30 days. So this model works. Okay. So this business works. All entrepreneurs need to do is do a model like this. And they'll realize if what they're selling is priced properly, or if their business is going to work. Okay. And these are standard.

You just need to be good at marketing good at sales. And you can get these conversion rates. These are pretty standard. Okay. But here's what happens. Let's pretend that you're in a really expensive market. You're selling to somebody who, when you're competing gets these big heavyweight advertisers that you don't even really understand. And for some reason, your cost per click, let's say it's $10, but your, but you did price your product properly. Didn't understand the market properly. And let's say you're only selling something for like $2,500 for the year. And let's say, you're only charging $200 a month. This is where people get in big trouble. So you think, Oh, I'm a sass entrepreneur. I'm going to make tons of money selling this thing for $200 a month, but you don't understand how this works. Look, if it's $10 a click and your and you're only selling something for $2,500 in the first year, and you're only charging $200 a month, it's going to take you 11 months to recoup that cost per acquisition.

Okay. And you're only making a 15% ROI ROI. And after you pay your developers and all the other stuff, like what is the fricking point of doing this? So you're not like there's no, you're just putting, you're just burning money where you're not doing much. You're just state. You're not moving ahead. Okay. Now this gets really challenging. Let's say, and this is the best, best case scenario. This gets really challenging. If the close rate dropped to say the close rate drops like 10%, all of a sudden the business breaks. Okay. There's no margin for error here. Okay. let's say optin rate drops like to 10%, all of a sudden the business breaks. Okay. Does that make sense?

So that's the, this is the, these are the consequences of not fully understanding the market that you're advertising to and how to price your product accordingly. Okay. So when we work with clients, we most, we almost always push the push the the ticket price up and we help them collect upfront deals. And sometimes you're going to have to up the price, but in order to justify the price, you're going to have to create more value. So that's how we think about it. So it's not just up in the price for no reason. A lot of times we have to up the price because if we don't, we're going to die. And the only way to justify that price is we're going to have to go back to the drawing board and start adding some new features, adding some more value. Okay. So that's kind of how it works.

Now, let's say best case scenario 10, that, okay, let's go to the best case scenario. I know, I know we're talking about the worst case scenario, best case scenario. Let's say you're selling some into a market that's decent. And all of a sudden, we have clients that are doing this. Their gross contribution is like $20,000 a deal. And they do upfront deals all day. This is a, and the reason why $20,000 is nice is because $20,000 you can get in less than two weeks sales cycle. They don't need board approvals. You don't need all this. You don't need to write a letter to the queen to make, to get $20,000. Okay. For a hundred grand for two hundred thousand three hundred thousand, yes. You're going to need a little, it's a little bit of a longer sales cycle, but 20,000, 15,000, 20,000, you can get those deals done in less than two weeks.

And that's, that's where it's really nice to play in that area. Okay. So best case scenario, let's say it's like $7 a click cost to acquire customer just with ads is 1500. You gotta pay your salesperson three grand to close a nice little deal. So all out full out acquisition is like five grand, 4,500. You're making 20,000 up front. That is a nice return. That is a nice return. Okay. So my point is that if you're going to be going into a market, you want to know who else is playing in that market, because that's going to determine your cost per acquisition. And you're going to have to price. Typically, you're going to have to price your product high in order to get the business working. So if your business isn't working, it might be because your price is too low, your not collecting cash up front.

You're so close rates too low. Your opt in rates too low. Your D your lead to demo schedule or lead to opportunity is too low. There's tons of moving parts in this machine, but this is essentially what the machine, this is just a paid traffic inside sales model. Okay. And this is the one of the hardest ones to get, right. But if you do get it right, you can scale up into the millions really fast. And without any outside capital, you can do everything properly. If you're collecting cash up front, you don't need to weather this cash trough, and you can do it really quickly. So if you need help doing this, if you're an entrepreneur you're serious and you want to grow really quickly, and you want to build an engine where you put a dollar in and you make $3 back who wouldn't want to do that. Right. Then book a call with me or one of my team members we'll get on the phone. We'll, we'll talk about your specific situation. We'll talk about your model and see if we can come up with a solution for you. All right. Well, I appreciate the time and we'll see you in the next video.

 

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