Imagine this:

You have no idea what you’re doing, but you KNOW you need customers. You hack your way through internet marketing 101 info and start dumping $600+ per month towards Google Adwords…Before you have a single client.

Today’s Topic - Client Variables

The Four Building Blocks

In last week’s newsletter, we covered the Four Building Blocks of the solo business model.

1. Net Revenue Target

2. Time Targets

3. Fixed Expenses

4. Client Variables

This newsletter takes a deep dive into Building Block #4.

Now we dip our toes into some philosophical arguments and take some hard stances.

Definitions

Let’s define two key terms that are variables in your business model

Average Client Value (ACV) and Client Acquisition Cost (CAC).

Average Client Value: We’ll define this as the revenue generated for an average client over a 12-month period.

Client Acquisition Cost: We’ll define this as the percentage of revenue required to acquire that average client.

Example. Your business generates $100k over the last 12 months while servicing 20 clients. Your ACV is $5,000.

You spend $10k on advertising in order to acquire that revenue.

$10k / $100k = 10%

So CAC = 10%

Philosophical Stance

Imagine these two polar opposite mindsets:

“I need to generate revenue so I can afford to spend money on ads.”

VS

“I need to invest in customer acquisition in order to generate revenue.”

The problem here is mentality. One mindset imagines their marketing budget as a “cost.” The other mentality views it as an “investment.”

This isn’t a chicken/egg problem. The marketing investment clearly precedes the revenue. Viewing it as a “cost” drives us towards minimizing it.

Viewing it as an investment helps us understand how we utilize it to saturate our business.

If you’re doing content marketing, it’s intuitive that you have to invest time up-front. For some reason, we view spending cash up front as less intuitive.

Regardless - you have to invest TIME and/or MONEY today in order to generate revenue in the future.

How the Math Works

In addition to ACV and CAC, we also need to consider our lead-to-client conversation rate.

Our funnel drives people to reach out to us (send an email or book a call). Some percentage of those leads become clients. That’s the conversion rate we’re considering.

Let’s assume the following:

• ACV = $5,000

• CAC = 10%

• Conv Rate = 25%

The Big Spreadsheet does all the heavy lifting for us - but here’s a simplified breakdown.

Imagine our GROSS revenue target for the biz is $150k. Using the numbers defined above, we can calculate:

• Clients Needed = $150k / $5k = 30

• Leads Needed = 30 / 25% = 120

• Marketing Spend = $150k x 10% = $15k

• Cost-per-acquisition = $15k / 30 = $500

• Cost-per-lead = $15k / 120 = $125

Remember last week we calculated our time budgets. Our baseline allocation for “Business Development” hours was 1,840 × 20% = 368 hours.

In this model, we have 368 hours to convert 120 leads into 30 clients.

Sound reasonable? Absolutely. Time for 1-hour consultations + time to generate proposals and follow up.

Now imagine doing the same math for a $1,000 ACV. Everything is multiplied by 5x.

Now you have 368 hours to convert 600 leads into 150 clients. One-hour consultations are now out the window.

See how this is now a completely different way of doing business?

Neither way is wrong - but you can see clear differences in how you’d need to operate.

This is why we learn the math first

How many consult-style calls do you want to be on per week?

How many clients to you want to manage at once?

Maybe you prefer a high-volume, productized model that will be easier to outsource and scale in the future.

You can’t assess these questions intelligently before you understand the math and how it impacts your business model.

ACV will be the single most critical variable in designing your business.

Viewing client acquisition as an investment

Before I go, I want to jump back to this topic.

When I launched, I started investing $600+ per month in Google Adwords. I had no idea what I was doing, but I knew the only way to learn was to spend money.

In the mature state of my business, I’ve narrowed it down to a handful of excellent recurring clients.

EVERY single one of those clients found me because I viewed client acquisition as an investment with a return.

For every dollar spent in advertising, I generated 8-12x as much in billable project work over the following 12 months.

If someone asked me what’s the ONE thing that made the difference in my early success, it was a willingness to invest in customer acquisition from day one.

Make this your takeaway.

Until next time - LFG.

-Zack

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