You Don’t Need a Marketing Budget

What if you could grow your business without a marketing budget? In this video, I share the one powerful ratio every entrepreneur needs to master to scale smart and fast.

You’ll learn how to calculate this key metric, avoid costly mistakes, and apply a proven formula that drives efficient, sustainable growth. If you're tired of throwing money at marketing without results, this is your roadmap to scaling without the waste.

TRANSCRIPT:

Blow up your marketing budget, you don't need one if you can get this one ratio right. In today's video, I'm gonna show you what that ratio is and how you can apply it to your business to unlock unlimited growth and profitability. My name is Steve Coughran, I'm the founder of Coltivar.

I've spent the last 15 years of my life turning around and growing companies, creating over a billion dollars in value in the process. And today, I'm not gonna just show you what that ratio is, I'm also gonna give you the exact formula that I use in order to scale organizations. So let's go ahead and jump in.

Really what I'm referring to is sales and marketing efficiency as measured by LTD to CAC. LTD is just an abbreviation for lifetime value of a customer and CAC represents customer acquisition cost, right? So in other words, I'm saying what's the value of a customer over their life of doing business with the company compared to the cost to acquire that customer, that's the ratio. But I don't necessarily like LTV as much because its definition can vary.

So to get even more granular, I like to use LTGP, which stands for the lifetime gross profit of a customer compared to the customer acquisition cost. Now, a good ratio to start with is three to one. The reason why I wanna have a three to one ratio is because over time, as you scale a business, this number naturally compresses.

So if you're at three to one over time, when you hire more business development reps, more sales reps, as you're paying commissions or affiliate fees, whatever it may be, this number is naturally going to compress. So you wanna have a big enough spread to account for that over time. So some of the best companies, some of the best in class companies that we work with have a LTGP to CAC ratio of 25 to one or greater, right? So there's a lot of room for improvement even if you're operating at a three to one ratio here.

Okay, let's get into the details here so you know how to find this in your company and how you can compute it and implement it immediately to drive greater value. So if you look at an income statement, there are three sections, all right? We're gonna get into each of these here, starting with the top, with revenue. Revenue represents the top line.

It's the amount of income a company earns from selling its products and services to customers. But a company doesn't get to just keep all of its revenue. Instead, there are costs that are incurred, starting with cost of goods sold, also known as COGS.

This section represents all the costs associated with fulfilling the product or service. In other words, delivering the product or service into the hands of customers and may include items such as material costs, equipment maintenance costs, not the cost of the equipment itself, that's recorded on the balance sheet, but the equipment cost or rental cost of equipment, if that's applicable, direct labor, subcontractors, and all other direct and indirect costs, like I said, related to fulfilling this revenue. That hits cost of goods sold.

And then down below, we have OPEX, which is just short for operating expense, also known as overhead, fixed costs, selling general and administrative costs, SG&A, or just G&A. All of those things represent the operating expenses of the business. All right, so in between revenue and cost of goods sold, we have gross profit.

This represents the amount of profit that the company earns after pricing its products and services, fulfilling those products and services, and before accounting for operating expense. But if we take gross profit and we subtract out operating expense, we arrive at operating profit. Now, if we wanna go down below this, if we have other income or expense, and we subtract that from operating profit, we arrive at net income.

So this is how an income statement is broken out. So if you wanna figure out your LTGP, all you're going to do is look at your gross profit generated over a period of time divided by the number of customers that you had over the same period of time. Now, if you wanna be conservative, right, and you don't understand what is the lifetime of your customer yet, then just take the gross profit for one year.

That's the most conservative way to calculate this number. If you know the lifetime of a customer, let's just say it's two years or three years, then you can calculate it accordingly, right? You just take your gross profit over that same period of time divided by the number of customers, right? That will give you your LTGP per customer. Now, to figure out your customer acquisition cost, that's gonna be a little bit different.

You're gonna look down here in operating expense because that's where your customer acquisition costs typically fall. And you're gonna include things such as business development cost, maybe you have sales salaries, you have advertising and marketing, maybe you pay some commissions, maybe you have affiliate fees, maybe you have bonuses that you pay out. In all costs associated with acquiring new customers, you're gonna take all of this and you're gonna divide it by the number of new customers that you brought on during a given period of time, right? So that's how you get the ratio of LTGP to CAC.

So you can compute this in your company right now today to understand what this looks like, okay? So let me erase this and let's go further and let's talk about how to improve this if it's lagging behind that benchmark I gave you. And then at the end, I'm gonna give you a formula to follow to scale your business into the stratosphere. All right, so we have LTGP to CAC and let's just say for your business, it's one-to-one.

That would be a sad face because that would mean that you spend $1, right? To acquire a customer and you only bring in $1, you just break even. For some businesses, the ratio may be $1 in gross profit over the lifetime, but they spend $2 to get that customer. That is a negative ratio.

That is a super, super sad face with a little teardrop coming down, right? So that's really bad. So if your business is underperforming with this ratio, whether you're measuring it or not, that's where the marketing budget comes in. So I was just talking to one of my clients recently and their team was like, okay, we're anxious for this upcoming year, Steve, we need to figure out what our marketing budget's gonna be.

So look at our numbers, look at our projections and help us to come up with it. And I was like, you don't even need a marketing budget if you get this ratio right, because why would you constrain the business? Let's just say your ratio is five to one, meaning that you spend $1 and you get $5 in gross profit. Why would you ever tap that? Why would you have a marketing budget? You just wanna pour the gasoline on your business and see it accelerate.

But the problem is, is that companies underperform with their sales and marketing efficiency, so therefore they see sales and marketing as just an expense, as a line item on the P&L. But when you get this ratio right, you don't need a marketing budget, you could just spend all the way up to your capacity, or until you hit a constraint with growth and your processes or systems start falling apart and you're like, okay, we can't spend any more right now because we're bringing on too much business and the wheels are coming off. That's why I said at the beginning, you don't need a marketing budget if you could get this ratio right.

All right, so let's just say your ratio is two to one and you have a sad face because Steve said it should be at least three to one, but you really wanna be 10 to one or 20 to one, just like the superstars in your industry. How do you fix that? All right, there's a few levers that you could pull. Number one is price.

And this is the best lever you could pull. But just remember, if your price exceeds perceived value, customers don't buy. You have to increase your perceived value and then customers start to buy.

The worst thing you could do, and this is what a lot of companies do, instead of focusing on increasing the perceived value that they deliver to customers, they just drop their price through discounts or whatever. But by doing that, you're impacting the bottom line. So if this is the greatest lever on profitability, it also works the opposite way.

If you drop your price, guess what? It's gonna have the biggest negative impact on your profitability as well. So getting the price right is super critical and this could be a lever you pull. Also, you can lower your cost of delivery.

This may involve renegotiating with your suppliers or better yet, making your labor force more efficient through technology or through training or through better equipment. So just lowering your cost of delivery is super valuable. And then you can always increase this by doing upsell, cross-sell or downselling.

So any of these strategies right here can get your customers to buy more of your product or your service. So these are just some high-level strategies you could pursue to increase your lifetime gross profit. From a customer acquisition standpoint, this is where fixing the leaky bucket in your funnel can help to lower your customer acquisition costs and make the side of the equation more efficient.

Because think about it, here's your funnel in your business and let's just say you bring in 1,000 leads. But then after you bring in those 1,000 leads to your page, half of them drop off. Then you only have 500.

And out of those 500, let's just say only 10% sign up for a demo. And then from there, your conversion is only 10% once again, and you sign up five. So you have a lot of attrition and drop-off across the steps of your funnel.

So what I would recommend is looking at your funnel and seeing where your customers are dropping off because let's just say you can fix this drop-off rate. Instead of 50% right here, you take it to 70%. Now, just by doing that, this changes to 700.

Instead of 500, this changes to 70 and then this changes to seven. Okay, great. But then as you work down the line, see the 70 right here? What if you can change that to a 30% conversion? Now the number goes to 21.

So you can see how focusing on your funnel and optimizing it every step of the way can have a major impact on your customer acquisition costs. All right, so enough with that. Let's get into the bonus here that I promised you at the very beginning, which is the formula you can use to unlock unlimited growth.

When it comes to investing in sales and marketing, you can either do that with company money, right? So the company can take its money and pour it into the sales and marketing machine, or you can use your customer's money to put it into the machine. Which one would you prefer? Okay, if you're like most people, you're like, let me use my customer's money to grow my business, right? So here's how you can actually do this. If you look at the amount of cash you get from a customer within the first 30 days, right, so cash from your customer, here's your customer right here, terrible picture, but they're gonna give you cash down, right, for your product or service.

Now, if you think about most lines of credit or credit cards, et cetera, you typically have 30 days to float before that bill is due. That's why I look at the 30 days of cash that's coming in initially from this customer. Now then, if you could take that cash and reinvest it into sales and marketing to bring on more customers, this is how you scale your business.

So the formula is this. If this is greater than two times your customer acquisition cost plus all your costs of goods sold required to fulfill the product or service to the customer, then if this is the formula that you're following and if it's greater over here on the left-hand side, cash is greater than 2X your CAC plus COGS, then you could grow unlimitedly because your client is financing the acquisition of future customers, right? So in other words, let's just say you offer a product or service to the market and you collect $5,000 upfront as an onboarding fee. Then you look over here at this side of the equation and let's just say your customer acquisition cost is $500 and your costs of goods sold, all the labor or payroll costs you have to incur to fulfill this product or service, all the material costs, all the other costs that we talked about earlier, let's just say that these costs of goods sold equate to say $1,000, right? So then you have $1,500 here and your customer acquisition cost plus your COGS times two, well, that equals $3,000, right? So this number right here, the cash that you're collecting from customers is $5,000, which is greater than the $3,000, which means essentially you would have a $2,000 surplus.

I'm just taking the $5,000 minus 3,000. I know a lot of math, your head's like, ah, it's gonna blow up. But if you just take this $2,000, then you could plow it back into the machine, back into your sales and marketing and then you're just gonna create this flywheel in your business and this is how you drive your company and unlock growth and high levels of profitability and cashflow.

By following this formula, this is the exact formula that we use at Coltivar to help scale organizations. If you need help with any of this in your organization or you just wanna talk about your company's strategy, you could always reach out and connect with us at coltivar.com. Be sure to share this video. If you got value out of it, that would mean the world to me and until next time, take care of yourself.

Cheers.