From Overlooked to Oversold: How the Magic Money Formula is Vital to Your Business Survival

Understanding these metrics literally changed the way I operate my business, and are Vital to the livelihood of your business. I call it the Magic Money Formula. 

It’s the way private equity firms value a business investment worth billions of dollars. It’s the way Sharks on Shark Tank understand if a company is a good, or bad, investment. And it’s the way you should understand your business too. 

While I call it the Magic Money Formula, others call it Unit Economics. 

I know it sounds like some fancy term you would hear on CNBC with Jim Cramer about stock prices, earnings, and all the other Wall St. terms used about big, fancy businesses. 

Unit Economics applies to big businesses too, but these principles are even more important to small businesses where one or two bad months will put you out of business forever. 

Let’s uncover the secret.

Unit Economics is a fancy term to describe the amount of money each customer spends at your business, how much it costs to get that customer, how much it costs to fulfill what the customer bought, and how much is left over at the end. Get those right and you’ll never stress about money, ever again!  

Get these numbers wrong and you’ll feel like growing your business is like running blindfolded through a minefield at night while being chased by Will Smith after you told him his wife looked nice tonight. Not fun. 

If you’ve ever watched Shark Tank, you’ve heard the Sharks talk about Unit Economics. It sounds more like a conversation about their business than a math equation. But if you play close attention there’s a very specific set of questions they always ask:

“How much does it sell for?”

“How much does it cost to make it?”

“What is your customer acquisition cost?”

Then the sharks put their head down to do some math. 

Follow up questions always involve trying to understand if the product can be made for less money and if they can scale customer acquisition at the same, or lower, cost than the entrepreneur described. 

The simple math equation they use to invest millions of dollars isn’t rocket science. It’s how they make their money, and it’s how you should think about your business if your goal is to make real money. 

The Pillars of Unit Economics

Customer Acquisition Cost (CAC): It’s how much it costs you to get that paying customer to fork over their cash for whatever you sell. Here’s the formula:

CAC = Marketing Expenses /  New Customers Acquired

Let’s say you spend $1,000 on some facebook ads that bring in 100 new customers to your business. Your CAC would be:

CAC = $1,000 / 100 = $10. 

Each new customer costs you $10 to acquire. Knowing this number is vital for understanding how efficient your business is at acquiring new customers. The lower the number, the better, as you’ll ultimately have more money left over for profit. 

Average Order Value (AOV): When someone buys, how much on average do they spend? The more the better.

It’s the reason you hear the person at the counter at McDonalds ask “Would you like fries with that?” A little bump with every customer moves the needle with the entire Unit Economics equation in your favor. 

Cost of Fulfillment/Cost of Goods Sold (COGS): The amount of money it costs to fulfill whatever you sold. If you own a burger joint, it’s the bun and all the stuff in between. A massive lever the Sharks use to drive profit is decreasing the cost to produce a product. Lower product costs = higher margins = more profit. 

Customer Lifetime Value (CLV): The golden goose of your business. It’s all about how well you take care of your customers and keep them coming back for more. This number is the average amount of money each person spends with your business over all time. The higher your CLV, the bigger your smile, the better you sleep, and the more vacations you take. 

Subscription based businesses have a massive advantage here. They went crazy around 2015 as e-commerce grew in popularity all because of CLV. Subscription based businesses can be massively profitable. 

Putting it all Together

I need things to be simple so I can understand them. It may sound like an oversimplification, but the goal is to spend less on acquiring and fulfilling a customer than they spend with you.

If your CAC + COGS (or Fulfillment Costs) is less than your CLV, you make money. Period. 

If your CAC + COGS (or Fulfillment Costs) is less than your AOV, you make money on the first purchase, and the margin on your CLV is all gravy. You make even more money. Your business grows faster. 

If you know how to scale your business, while maintaining profitable unit economics, your business becomes an ATM machine. You KNOW you can put $1 in and get $3 out. Every. Day. 

No more guessing. No more hoping you get more customers. 

Here’s a couple more tips that work with every business.

1. It’s easier, and cheaper, to keep a customer than to get a new one. Treat your customers like BFF’s and they’ll spend way more with your business. 

2. Don’t try to be the cheapest option. Selling for less than your competition is a race to the bottom. It gives you less money to provide a great experience for your customer, decreases your CLV, and kills retention. Figure out how to charge more for your product than you competition and make it feel like they’re still getting a deal. 

3. Upsell like crazy. There’s a reason most successful businesses do it. It works. The warranties (like applecare), service plans, add ons, accessories, etc… They all compliment the purchase and drive AOV, CLV, and Profit through the roof. 

4. Keep track of these numbers weekly, and pay attention to how they change over time. Use a spreadsheet to log them, and use a simple calculator to help calculate them. There’s a free Unit Economics Calculator on my website HERE. 

The Danger of Misunderstanding Unit Economics

Misreading these metrics is like thinking you can cook a five-star meal because you binge watched Beat Bobby Flay on Netflix. It’s not just about throwing ingredients together; it’s understanding how each one affects the other. 

For example, misjudging your CAC could lead you to spend your entire marketing budget on ads that bring in a bunch of window shoppers and no buyers. On the other hand you may pull your marketing budget from a campaign that’s making you money and leave a significant amount of profit on the table for your competition. 

Mastering Unit Economics isn’t just for Wall St. wizards. Every small business owner deserves to have a chance at turning their business from a hidden gem into a viral TikTok sensation. Get these numbers right and you’re well on your way to writing your own success story, more sound sleep, more family time, more vacations, and living the life you dreamed of when you first started this venture. 

PS- If you liked this post and you're committed to getting more customers, I've put some time aside on my calendar to help you understand the unit economics for YOUR business and how to make you more money.

Fill out the form below to get in touch.