The Profitability Equation

Summary

If you want to know how to spend \$1,000,000 on paid ads and generate \$10,000,000 in new sales.

This video will show you the fundamental math behind how to make that happen.

My team & I call it the Profitability Equation.

Here is the math:

Average order profit (AOP) > Cost per acquisition (CPA) = Guaranteed Profits

To learn how to leverage this fundamental math in your company watch the video above.

– Paul Xavier

Transcript / MP3

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It’s literally just two numbers that we’re paying attention to that if we get right, we’re going to be producing a return on investment for our clients. And that’s it. That’s our focus. So let me go ahead and share my screen real quick. And you guys can see here, this is one of the documents we provide to all of our next level creators clients. So we’ve got our KPI legend here, sort of our profitability equation. Then we have all of our different sales funnel breakdowns where everyone can pretty much just plug in some numbers depending on who their client is and it spits out the other side, hey here you’re going to be profitable or not. Um, but at the end of the day, here is the equation that will tell you whether or not you’re going to produce profit. Okay. So I’m going to talk about a couple numbers here and some acronyms that we use with advertising.

The really simple, so don’t get nervous because yes, it is a little, it’s a new language, right? You have to learn to speak this language of business now to grow a company with predictability, but once he do, um, it’s something that will always be with you. You’ll always be able to do this for yourself, for your clients, businesses, you’ll, you’ll have it. Um, so the first acronym is average order value. Now, what I see as a huge mistake for a lot of people, especially if you’re working with companies like you’re producing videos, you’re trying to produce video ad campaigns for companies and you’re working with someone who, let’s just say it has a lot of offers. You can be working with a doctor and they do, you know, they do surgeries for a specific shoulders. They also help people with Botox. They do some other things, or like a dentist, right?

Dentist teeth whitening, and they do caviar placements. Then they do root canals, right? So businesses with lots of different offers. What I see people do is they go, when they try to create a video and then market a video. That’s just for the dentists as a whole. It’s for the doctor as a whole. It’s for the plastic surgeon as a whole. It’s not talking about a specific offer or procedure. Okay, well we want to do is we need to be focused. What are we actually trying to market with this particular video in this campaign? Because by being specific, we can call out to people with those specific problems. But let’s just, I mean, imagine if you’re sitting there on Facebook and you see an ad for a doctor, right? And it says this doctors, the best doctor ever, he could solve anything that doesn’t talk to me.

It doesn’t talk to my needs, my problems, my wants, my desires, my fears, what I need. And a doc, it’s just talking about this doctor. It’s talking about his office and talking about how nice it is to sit in this waiting room. Like, I don’t care. No one cares. Okay. But when we get into a particular procedure or we get into a specific offer that clients thought that particular doctor or dentist is talking about, we can talk about, hey, if you need a root canal, right, or if you’re struggling with this, that, and the other thing and you have these symptoms that are common amongst route could ask, we can get people to tension, we can really call out to them and then track them to this specific offer that we have. Okay. So that’s first rule, kind of have this marketing and advertising is we needed to find what’s our offer that we’re actually marketing here and then what’s our average order value for that offer?

Um, so you know, if you’re selling a product, oftentimes products have fixed prices. So it makes life a little easier, right? Like, I’ll look at this thing, this is an external hard drive that we have. This costs probably about, you know, 150 200 bucks or something right here is like four, eight terabytes. I don’t know what the going rate is for him anymore. Um, but overall it’s a fixed price. Now if you go into a dental office, right? Again, some root canals may cost more than others, right? Some services have had varying scales, right? Based off of what it is, right? Sometimes you’ll be charging \$1,000 for this root canal. If it’s a, you know, this back tooth over here, maybe it’s a little bit more, okay, so the price point, if you’re getting a teeth replacements, like dental implants, right? That price point depends on how many teeth you’re replacing.

Okay? So the price point will shift there. And because of that, we need to know what is our average order value, not just the standard value, but the average cause that matters a lot. What’s the lowest end of the spectrum here? Is it \$500? Is it \$100 and what’s the maximum? The maximum could be 50,000 a hundred thousand and then what’s our average in that window? In that range? Because at the end of the day, um, when we’re advertising and bringing people to this company, there’s going to be an average there. And that average is what matters when it comes to advertise and wanting to know, well, what is it that we can expect throughout the course of the year if we keep bringing you new clients? Make sense? Okay. Hopefully everyone gets that. Then we have in some businesses, the lifetime value of the client is what we’re advertising.

So again, for like dental veneers, oftentimes it’s going to be kind of a one and done thing. You Go, you just have the meeting, you pay for it, it’s \$5,000 in total and get the new veneers put in or implants or whatever it is. Then you walk out the door and you’re good to go. Okay, good bye. That’s it. But if you’re working with a, um, a gym, that gym has a monthly fee of \$100 a month, \$150 a month. Right? Okay. What’s the lifetime value of that one, Jim Client? Well, it could be thousands of dollars at that person stays there for years. And how many people leave? Gibbs’ you know, most of the time retention is quite high. So, with that being said, the lifetime value is what we’d be marketing and advertising on behalf of with the gym versus uh, just the fixed average order value if it’s a one time service or one time product sale type of company.

All right, so with that, again, this is why it’s so important to understand. You don’t want to just create these general videos for your clients. You’ll just want to create the general real estate video for the person. I’m a real estate agent. Here’s what I do, here’s who I am. It’s like, no one cares. Okay, let’s get down to, I help people buy and sell houses. Which one in particular? I help people sell houses. Okay, what are the problems of people who are trying to sell their houses? How can we resonate with them, connect with them, give them information that’s valuable so that way they pay attention to our videos because they want to get value, they want to be entertained and they’re thinking about hiring someone to do this. Okay? So we’re attracting those specific types of people by calling out to them with our video messages.

Okay. And at that point, once we understand what we’re advertising for average order value or lifetime value, then we have something that’s called cost of goods sold, okay? And cost of good sold. That is the expenses related to a specific product or service or offer, right? So you know, when you buy a, I’m looking at a Canon camera right in front of me right here for my setup when I buy this camera from cannon, okay? Uh, if I spend \$1,000 on this lens, cannon built that Lens and sent it to me and there’s cost of good sold to build that Lens. Cost of good soul could be \$500 and they could be profiting \$500 off of that sale because believe me, the business is profiting off of it some way, shape or form. All businesses are that it stays successful. They’re making a profit. So there’s a cost to good sold associated with manufacturing.

We’re getting the materials with assembling them, right? And that’s what created that Lens. And then there’s a profit on top of that. Okay? But we need to know what are those costs of good sold for this product or service because we’re going to subtract that cost of good sold from the average order value and that’s going to give us our average order profit. I, here’s the thing, I’ve studied with a lot of really smart marketers and I’ll just go, um, let’s see here. Well, I exit out of this. There we go. Um, I’ll bring this back in on me for a second here because I think this is really important to talk about. Um, I’ve studied with a lot of really smart marketers, people running seven, eight figure ad campaigns, um, and they’re profitable, very profitable. The secret here is that they understand the basic math behind these campaigns.

You can’t just go and be the person who only thinks through the vision of the video. Okay? You can’t be just the person who’s thinking of the audience for this video can’t be taken to the message for the video. You can’t just be thinking about how high quality, what kinds of cameras are going to use, how many hours you’re going to spend, what your team’s going to look like. All that stuff matters, right? Because at the end of the day, if your message sucks and it’s boring, no one pays attention and you don’t get any sales, but you need to be preparing yourself before you even jump into creating your message, creating, you know what this campaign, what the storyline for it’s going to be, how we’re going to get people in, get their attention and bring them in. Before we do any of that, we need to know what are our, what’s our profitability on this particular product?

And then the most important question here that we’re going to be asking is how much are we willing to spend to generate one client? One, that’s it. Okay. If you can spend money to get one client profitably, what happens when you decide to spend more? Okay, we’re just getting one more client and then one more. But at the end of the day, it’s all just once we’re getting one client profitably that we want the next client profitably and we want the next line profitably, and to get those clients we have to spend money for getting our videos. We’re getting our messages out there in front of people, okay? To attract people to your business. All right? That’s how advertising works. Advertising works by investing money, right? If you can’t do this for free. So with that really simplified understanding here, we need to figure out how much can we spend to acquire one client if we don’t even know the average order profit of a particular product or service or offer, what are your chances of tracking things properly?

What are your chances of creating a commercial campaign, a video campaign that actually works very low? I see people making the mistakes all the time. They’re just not focused. They don’t know what they’re supposed to be looking for. And for that reason, they just do what they think. Like just random stuff. They just create random videos. They create random content. They’re talking about, you know, uh, how awesome someone’s Jim is, how great someone’s, you know, manufacturing company is from a branding perspective, whatever the heck that even means. Like sure you have a nice company, you’ve got nice employees, use nice machinery, but as the end client, what’s your product even what, what are you doing with this machinery and what is your company all about? How, how can you help me, right? Because that’s what people care about when they’re watching these videos is what does this mean to me, especially with marketing.

So we need to create a specific offer, go very focused with that, understand our numbers and then create a campaign based on that particular offer that offers profitability and attracting people to it at a profit. And so let’s switch back here. Let’s take a look at our numbers and these metrics again. And then we’re going to end with this cause this is really important is once we determine what’s the average order profit, there is a simple way to always make sure you were producing guaranteed profits. I mean that’s guaranteed profits. Here is if you were average order profit AOP is less than your cost per acquisition, your cost to acquire one new client, you have guaranteed profits coming out the other side of this campaign. That’s the math. It is that simple. Folks, and I learned this from some really brilliant marketers, people who are running those really big campaigns, you know, they, it’s, it’s so easy for us to think, well this is just so simple.

Of course, like if you spend less than you make in profit, you’re, you’re making guaranteed profits. But then you go out and you look in the marketing world about how many people actually know these numbers, how many people know how much profit a specific product or service is for one sale. And then how do people know how much they’re actually spending to acquire one client and produce those guaranteed profits for your clients. It’s almost nobody, right? Aside from people in next level creators practically nobody is doing this. The basic underlying fundamental math that makes these campaigns operate and work at a very high level. Okay. So whenever you see, and I show behind the scenes of my campaigns that I’m running for myself and my clients know that what we did at a very route fundamental level was we just went in and we defined the numbers.

We said, well, what’s our average order value? What’s the lifetime value of a client to our business? You know, how do we make these numbers bigger, higher if possible? What are our costs of goods sold? So the expenses and then in terms of those three numbers, what’s our average order profit out the other side of this? How much do I actually make per sale before spending any money on advertising or marketing? Once I get that and I have that solid understanding of my average profit, I figured out what I want to spend two, we’ll get a client. What, what am I willing to spend for a cost per acquisition? And at this point, uh, I think again, kind of just to go into, um, psychology here, what’s important to understand what this is, that’s subjective. What someone’s willing to spend to acquire one new client, completely subjective.

Um, if you’re, if you’re a chiropractor, okay. And your lifetime value is, uh, let’s just go with \$2,000 per client cause people come on average for an entire year and they spend, they come twice a month, they spend a certain amount of months that you’ve done the math and you find out, Hey, our lifetime value of a client, it’s about \$2,000. Um, but on the first sale, that chiropractor only makes \$150 for the very first visit. How much should that client, that chiropractor be willing to spend to get one client? Do they need to make a profit on the first sale? Or can we have them make a profit on the lifetime value in, it’d be willing to spend up to \$150 to get a client. Could we be willing to spend more? Okay. Now think through the logic on that. If a, if a chiropractor is willing to spend \$150 to get a client for their office, a brand new patient and all the other chiropractors are only willing to spend \$50 to get a client, a new patient for their office.

Okay, and they’re your advertising. You’ve got your video campaigns up, your competition has a video campaigns up. You’re doing doing the same thing. Even let’s say, how do we win? I don’t, we beat the competition. Well, if you’re willing to spend three times as much because you’re willing to make your profit on the lifetime value, delivering great value to your patients and then having them come repeatedly, who do you think wins that battle? The person spending \$150 a person has been at 50 I thought he is always the person spending 150 as long as they have good messaging, you know, they, they know what they’re doing with their campaign. That can all be taught. That’s a skill, right? Marketing and psychology and a video production and really running campaigns and setting them up and everything. That’s a scale. It can be built if you don’t know how to do it.

It’s daunting at first, but what isn’t right? Um, playing soccer for the first time, it’s also daunting, right? Playing a new sport, uh, it’s, it’s all daunting. It’s scary until you get in and then it becomes muscle memory after time practice and doing it, learning from people who are really good. Um, so you have to think through that. You have to know that these numbers, what you’re willing to spend to get a client. It’s a subjective question. And the way that I help my clients, the next level creators work with their clients. So that way they can determine that number is entirely based on what that business, where that business owner is. So that way we can create the right plan for them to grow their company, um, in a way that doesn’t crush their cashflow, right. In a way that’s gonna really help them grow rapidly.

Um, grow with predictability and not make it so that way. Hey, they’re investing everything they have into this one campaign, right? They’re investing everything they have. And to you, the way we do it is we have our clients really be there as trusted advisors, trusted partners to help them through the video production, the messaging, the script writing, the concept, the audience, everything for this campaign from start to finish and the math behind how to make it work and tracking of that math so that way we can predictably and consistently produced them sales. Okay? So that’s really important. That is sort of the bread and butter behind these campaigns. It’s if you see people online advertising all the time, right? You’re seeing them on youtube, you’ve seen them on Instagram, Facebook, Google, um, if they’ve been there for years like we have, right? Um, and they’re still producing.