11. Lifetime Gross Profit LTGP | $100M Lost Chapters Audiobook

0:00Lifetime gross profit, LTGP, the arms race of business. LTGP, the amount of gross profit a customer collects over the lifespan of a customer. In other words, how much total money you make from a customer minus everything it costs you to deliver it. Now, that's easy to understand, but can be hard to figure out if you don't have a CRM or a customer relationship management tool that tracks some of these metrics for you. That's okay, though. I'm going to give you some back and napkin ways to calculate it. LTGP, step one, gross profit. The first thing you have to figure out is gross profit. Gross profit is what's left over from a purchase after you deliver the goods or service.

0:33Note, this isn't net profit, which is what's left over at the end of the month after you paid all expenses. This is just what's left over on the core thing you sell. You then run your business on the gross profit to pay the rest of your bills and hopefully have some left over for your pocket at the end of the month. Author note, many entrepreneurs mix up gross profit and net profit. Gross profit is money left over after only subtracting the cost of making and delivering your product or service. Net profit is money left over after subtracting all costs. Product example. I sell a widget for$100.

1:04It costs me$20 to manufacture and shift the widget to the end consumer. My gross profit is$100 minus$20 equals$80. Also, gross margin is your gross profit expressed as a percentage of the total price you charge. Gross margin and gross profit get used a lot in similar situations. Don't let it confuse you. It's the same concept. Gross profit is expressed in an absolute dollar amount, while gross margin is the same concept expressed as a percentage. In this example, my gross profit is 80 bucks, but my gross margin is 80%, aka$80 divided by$100 equals 80%. That was a good warmup. Let's do one for services.

1:39So for example number one, I deliver services monthly. I have one account representative per 10 clients. My clients pay$3 ,000 per month each. My rep costs me$6 ,000 per month. Let's figure out the gross profit. Clients per rep equals 10. Revenue per client equals 3 ,000. Cost per rep equals 6 ,000. So I make 10 clients per rep times$3 ,000 per month equals$30 ,000 per month per representative. Assuming I have no other cost for delivering my service, my gross profit is$30 ,000 of revenue minus$6 ,000 of cost, which equals$24 ,000. My gross margin is$24 ,000 divided by$30 ,000, which is 80%. So my gross profit on a single customer is$3 ,000 times 80 % equals$2 ,400.

2:22Cool, right? lgp step one action figure out your gross profit and gross margin for each thing you sell and your business overall hint you may be surprised that some products you spend a lot of time on don't make you as much profit as you thought lifetime gross profit step two figure out the average number of transactions a customer makes over the lifespan if your crm tells you this awesome but oftentimes they don't and even if they do they're often wrong because data tracking is a mess especially if you're starting out so it's good to understand how to do this math so i'm going to give you a few back and napkin methods you can use depending on your circumstances.

2:55Disclaimer, figuring out how many transactions a customer makes on average is always an estimate because every day customers buy more stuff and the business gets older. As such, lifetime transactions always increase as a business gets older because customers buy more. So these are the ways I estimate it. Number one, export your lifetime customer data. Sort by number of transactions, average out that column, ta-da. Example, average number of transactions equals four. Number two, if you have a recurring revenue business, you figure it out differently. This forces us to introduce a new concept, churn.

3:26Churn is the percentage of customers that leave between time periods. So if on the first of last month, we had 100 customers, and this month of those 100 customers, we lost five, our churn is 5%. Last period equals 100, this period is 95, the difference is 100 minus 95, which equals 5. And churn is the people who left divided by the original amount, which is 5 divided by 100, which equals 5%. Note, people get this twisted. Don't be one. If you sign up new clients during this time, it does not affect churn. The same number of original people left. You could sign up zero or a thousand new clients during the same month.

3:56You still lost five of the original hundred and your churn is still 5%. LTGP, step two action. Figure out the number of transactions or churn. Now that we have this figured out, all we have to do is put steps one and two together to get our lifetime gross profit. LTGP, step three. If you have physical products business, multiply average gross profit by number of transactions. Or if you have a recurring revenue business, divide gross profit by churn percentage. Physical products LTGP example. Gross profit times average transactions per customer equals LTGP. $80 times 4 equals$360 of LTGP. That's it.

4:33Services example. Gross profit divided by churn equals LTGP. So$2 ,400 divided by 5 % churn equals$48 ,000. Bingo. See? Math, no fun. Money math, so fun. That being said, I want to make an important note. LTGP is the arm's race of business. In an auction of attention, the person who can spend the most to acquire a customer wins. That's Dan Kennedy. Or as I prefer to say it, the business that makes its customer the most valuable wins. After all, you can only get CAC to zero, but LTEGP can go infinitely high. And in my experience, it's easier to make advertising more efficient than it is to make people stay longer.

5:04CAC is about getting customers. LTEGP is about keeping customers. This leads us to the final part of our acquisition trio, payback period, PPD.