“PSM” = 💰🚀
The Golden Ratio of Growth
*Profitable Scaling Margin
LTV / (CPA + COGs) = PSM
^this is the most important equation to growth & acquisition
This calculates the projected operating capital
This operating capital, when above cost, is the amount of money you could invest at a complete loss and still breakeven
I use this equation as a replacement for MER/ROAS
This is the highest integrity way to figure out how much more you can spend
Let’s start by defining each variable
LTV:
equals the lifetime value of an average customer
CPA:
equals the cost to acquire a transaction
COGS:
equals your cost of the product landed to the customer
These are necessary known figures for any brand or advertiser to scale
Let’s establish 1 other truth
Every transaction is an opportunity
Either to start a new customer journey to an LTV
Or
to continue a customer on the LTV path
Revenue growth equals
A greater number of journeys
Or
A higher output of this equation
Let’s dive into execution
LTV is an output of both AOV and frequency of purchases
CPA provides two opportunities in this equation
A lower CPA translates into a higher profitable scaling margin
A stable CPA allows for the highest confidence testing for LTV
Get more customers for cheaper
Or
Get more money from a large population of similar customers
💰🚀💯❤️
The larger the LTV
The larger the CPA can be
AOV & LTV are not directly causational
*this is where ROAS & MER breakdown
Profit per transaction is far less important than profit margin per customer
MER cannot measure this
COGS is the criminally overlooked aspect of this equation
Here's a Use Case:
If you have five campaigns live, to support five different products
Each product will have a different PSM
Four of those products are a bottom line liability to overall growth
The more complicated your business
The harder it is to make money
Keep it simple
How much does it cost to put the product or service into the customers' hands?
A $100 LTV with an $80 COGS
Needs a 5X MER on a $20 CPA just to breakeven
PSM is infinitely more important than MER/ROAS
Because it's real 💰
If your LTV, CPA or COGS is highly volatile
The easiest way to scale a brand or account is to
Stabilize two of these three variables
Focus all available efforts to improve the 3rd
Stabilize costs and LTV
Lower CPA
Stabilize CPA and COGS
Improve LTV
Let’s finish by adding some complexity to the equation
This is gonna be fun
It becomes extremely difficult to plan against a projectable PSM
If you can’t plan 30 days, three months, one year into the future
At best,
You are going to be reactionary
Being reactive is a far weaker position
Than being proactive
🔥🧐
If 20% of your sales are repeat purchases
Multiply CPA by 1.2
If volume of production will reduce COGS by 20%
Multiply COGS by 0.8 for planning projections
If subscription will raise LTV by 2% a month
Multiply LTV by 1.02 per month for planning projections
Throw away MER today!
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