[Voiceover]: Foreign.
Nathan Bush: I think it's fair to say that we are all in a race to acquire new customers at the moment. But how do you know what a new customer is actually worth? We're not just interested in what they spent on that first purchase. We want to know over time. How do you know whether the customers you are bringing in are going to stick with you or whether they're gone the moment that an offer ends? That question is the one that you ask during a sale. Because a customer who came in at 30% off is not the same customer as the one who paid full price, even though the two of them can look identical. In your reporting, most of us can tell you how many new customers we brought in in the last month. Far fewer of us can say what that group went on to do, whether they came, how long they took, and whether they are worth what we paid to acquire them. That's what we are diving into today. Rob Ward co founded Quadlock. He bootstrapped it from a novelty bottle opener into a business doing more than $200 million in revenue and 50 million in profit. And then he sold it to Swedish outdoor group Fuel at the end of 24 for $500 million. Fair to say he knows what he's doing. He's since written everything that he's learned into a free DTC playbook. And he has a framework for exactly this. How to measure the value of your new customers. He calls it the three Gates Framework for New Customer Acquisition. There are three checkpoints you run a new customer through. One, are they profitable on that first purchase? Two, how long until you get your money back? And three, what are they worth across the whole relationship? Let's hear about it from Rob. And you've got three Gates framework around the floor. The payback and the value. Can I put you on the spot and ask you to tell us how you think about that?
Rob Ward: No worries. I will quickly run through the gates and I'll say why I think they're important. And when you're building something like this, you've got to put some metrics down that are either effectively green, amber or red.
Nathan Bush: Yeah.
Rob Ward: But it's less about trying to pass each one with the green. It's more about understanding where the levers are that'll change your situation potentially. Or even just understanding where you are in the first place. That's probably the first place. But you hear people talk about things like unit economics, contribution margin, that kind of thing. And this is all important. But I've often found, especially in today's day and Age that, that just is like a scorecard. It doesn't actually tell you where to go and fix and it doesn't give you enough levers to fix or potentially just not even fix. Just make better impact change like where the business is. So I thought if you do something that actually elevates the levers and shows how to impact this for the whole business, then that could be something that's very, very usable. And the way I like to think about it is the three gates. The first gate simply is, are you profitable or how far behind are you on first purchase? And this, the important thing here is you're not using cac, you're using ncac. And it's just looking at new customers and it's looking at the aov. So understanding that you know your new customer, not your blended aov, the new customer aov. So it's just going after that new customer. You also have to be thinking at this point in time that you may be using some money to retarget and doing some things to retarget existing customers, but you're almost parking that and going, let's just work it out on that first purchase, right? Then you go to the second gate. And the second gate, obviously, if you were profitable within the first purchase at a contribution margin level, that's the other thing, contribution margin. If you're profitable at contribution margin on the first purchase, then automatically second grade's green. But not every, not every brand, not every category is. So it's like that is the payback. Like how long does it take for the cash to come back? Yeah, like how long can you get them back? Can you get that customer back? Can you make that customer profitable?
Nathan Bush: And then so just, just to clarify there, if you get to that first gate, the floor, if a customer is not profitable on the first one, on the first sale, but you think they've got high propensity to turn into second, third, do you continue through to the second gate?
Rob Ward: Well, this is the thing, you should be observing this. So this is where if you do go through it actually will ask, is this observed? And so if you can observe that you're negative at the start, but you get them back within say three months. And then you end up positive. We'd say that's great, that's great. If it's maybe seven or eight months, you get like an amber. And this all comes back to now. If it's 12 months plus, you might be red. Right? Payback period. Now this all comes down to when you're building something like this, you have to put something in. But the thing, like some metric. But the thing here is it depends on your business model because you may be a funded startup that knows you've got good contribution margin but you're building a new market or you, you're spending ahead of where you are. If your customer economics aren't good, chances are they're not going to fix themselves. I don't think it's happened. There may be instances where you could move forward, but you're moving forward with risk.
Nathan Bush: Yep.
Rob Ward: I think is the thing. And it's trying to just bring that to the forefront because I had way too many conversations with people where the problem that they have today is something that had been baked into the business for a long time.
Nathan Bush: Yeah, yeah, yeah. Okay. So it's acknowledging the risk. It doesn't mean that it's a necessarily stop but you know what you're dealing with.
Rob Ward: But also it starts pointing you going okay, cause if you're just looking at say your contribution margin on a unit economics, you might be looking at it and going okay, and this is contribution margin after the cac, after the ncac. Right. Okay. But if you just, if you're just looking at it simple contribution margin, maybe not with the cac, you're looking at that going, I've either got to sell it for more or buy it for less. And maybe some the variable costs in between, both of those can be very hard to move. And you move, one quality might go down, you move the other volume, you move the price up, volume might go down. But if you bring it into like the customer view, then it's like okay, actually no, we, we, we can go negative because we know we get them back in a month's time and then we're positive and the cash conversion cycle works for our business. We understand that. And then you're like actually what if we just, instead of making this brand new product for this brand new category, what if we just make a cross sell product or an upsell product rather that just increases the aov. Now we got a lever that we can pull that's going to maybe make the first purchase or the next one, like get the value back sooner. But if you're looking at contribution margin just in the P and L, you don't see these opportunities the same way as you do with customer unit economics, like unit economics versus like the customer economics. Right. So then we get to the third gate and that's all about the lifetime value of the customer. And this is where I'm saying it's not as simple as everything has to be green.
Nathan Bush: Because if you put quad lock through
Rob Ward: this model over the years, it would have failed in different parts at different times. For example, when we first launched, we were profitable. Day one, first sale, obviously important because we're bootstrapped and we had no money. And so like that's why we're still here. But then our lifetime value just wasn't there. We didn't have anything else to sell. We make everything we had to design and make everything we had to sell. So when you're looking at a model like that, you're like, oh, okay, so. And on the third gate, actually I should mention that there's, if you, if people have a look, there's, you can, have you observed that people come back for 12 months, you know, 24 months. Like you can put in how long that customer life cycle is and the retention rate as well. And then you can actually see effectively a break even line and at what point you break even and also like go forward three years, how much return have you made on that initial investment? And it's sort of in some regards, oversimplifying. But the, the thing here is I was always of the. I didn't think you should always be paying to repurchase to reacquire the same customer all the time. And I think plenty of good businesses have gone bad doing that exact thing. So that's probably where it lands. But really it goes. You got three gates, you've got your payback periods and then underneath it, probably the most important part is, okay, so each part of this gate, like, where are the levers? Where are the levers that in the business you can go, and we've got that all there and you can go, okay, my problem is that our customer lifetime value sucks. Like, what do we do here? I'm like, we got to innovate, we got to bring in some more things, we got to give them a reason to come back. Not always is your scaling problem just your contribution margin and just your cac. You hear people just. I think that oversimplify it.
Nathan Bush: What I love about what Rob explained there is that not every one of those three gates needs to be green. It's not that a new customer is either good or bad. The gates give you signs about the value that a customer is going to give you over time and allows you to make decisions for your business based on what's happening and pull different levers at different times. So let's go back into the archive because how strictly you apply that first gate. Whether that customer is giving you a return immediately is something that some really smart people in E commerce actually disagree on. And I love a bit of disagreement. So Lesson one Split New from Returning before you calculate anything, this is exactly where you start. Gate one only works on new customer numbers, which means ncac, NCAC rather than a blended acquisition cost and new customer average order value rather than a blended one. Map it out and you'll see why. Say your blended average order value is $95 for all your customers, but your new customer average order value is $68 because returning customers often buy more, they trust you more. Say your blended CAC customer acquisition cost is $40, so that's what it costs for everyone who comes in via your advertising. But your NCAC, your new customer acquisition cost is $72 because a lot of that spend was retargeting people who had already bought. It's always going to be cheaper. At a 45% contribution margin, the blended maths says that you're $2.75 ahead on every customer. However, the new customer maths says you are $41 down on everyone you bring in because new customers typically spend less and cost more to bring in. So these are two very different types of customers sitting in there and they need to be measured differently. Separate them. A returning customer already knows you, so they are cheaper to reach and they spend more when they arrive. A new customer is neither. Average the two and you get a number that describes neither. Nobody. Carla Pen Khan is the co founder of ProfitPak and she is more bullish on the first gate than Rob is. She wants to see new customers profitable from the very start.
[Voiceover]: Really important to distinguish between new and returning customers. And that is because when you are advertising to customers, if you are not looking at what's new versus returning, it's very easy to put all your advertising budget into returning customers because they convert a lot cheaper because they know your brand. But then you're not building your customer base. So it's really important to know what are my new customers, what am I spending to acquire them, how profitable are they? And hopefully they're profitable from day one.
Nathan Bush: I'm not going to argue with Carla. She knows profit better than most people out there. But Rob says that you can go negative on that first order as long as you can observe them coming back. Carla says day one unless it is a subscription. Both of these positions are held by people who know profitable businesses inside and out. Neither is wrong. They are just different ways of managing a business. Again, remember these are gates. These are ways to make decisions and get clear on what your new customers are worth. Which brings us to lesson two. Payback has to be observed, not just hoped for in gate two. The payback in gate two. We need to see where that in gate two. Which brings us to lesson two. Payback has to be observed, not just hoped for at some time in the future. We need to see where that payback is coming from and how long it takes to arrive. Your payback period is just that, how long it takes to earn back what you spent acquiring the customer. Rob's bands are a good starting point back and into the profit. And that brings us to lesson 2. New customer payback has to be observed, not just hopeful that one day our new customers will turn profitable. We need to see where that payback is coming from and how long it takes to arrive. Your payback period is just that, how long it takes to earn back what you spent acquiring the customer. Rob's bands are a really good starting point. Back and into profit inside about three months is green, seven or eight months is amber, past 12 months is red. But those bands are worthless. If the return is something you are assuming rather than you can actually document and see happen. You need to set your own metrics around those bands and and where you actually draw the green, amber, red line. Have a think about how it actually runs. Take one month of new customers and hold that group together, called a cohort. Follow them for 12 months and plot what they've contributed against what you paid to acquire them in that month. Find where that month crosses zero, in which case what you paid is what you've got back. Remember, we're talking profit, not just revenue. That is your payback period. Anything you have not watched a real group of customers, you need to be able to track that cohort and see the move from a cost to a profitable cohort. Danny Cheah is the founding partner at Kelly and Partners. And he sees these businesses at the point where often the maths and the profit has already caught up with them.
Rob Ward: I've seen a guy, he came to us and he had like a 200 grand Facebook debt, like debt to Facebook for all these ads that he was running that weren't actually at all profitable. I'm like, you've got no choice but to liquidate here. Like, there's actually no path away from this.
Nathan Bush: So you can acquire customers at what looks like a perfectly good rate. But if they're not coming back, all you are doing is accumulating new customer acquisition costs and a New customer is always going to cost you more than one who returns on their own or returns on off the back of media that you own. If they don't come back soon enough, you're gonna run out of cash. Lesson 3 Find the customers worth having, then go looking for more of them. Gate 3 is lifetime value and in practice that means working out which of your customers are actually worth having and then going and finding more of them. Start by describing what a good one looks like in your business. They buy it full price rather than only when there's an offer on. They keep what they order instead of sending half of it back. They don't need a support ticket every time and they come back without you paying to bring them back through Meta or Google. Then find them in your own data. Take your customers from six or 12 months ago and split them by what they bought first, which channel they came through and what offer they came in on. Some of those first purchases reliably produce customers who return. Some produce people who buy once at 40% off and never come back. It could be the same number of new customers on your dashboard, but very different outcomes for your business. Once you know which group behaves the way that you want, you have your seed group. Instead of uploading every purchaser to Meta and asking for a lookalike, upload that group. You're buying more of the good ones instead of buying more of everyone. Not every new customer is a good one. Mark Bartzer has spent years as an outsourced chief marketing officer and he keeps coming back to this.
Rob Ward: It's like what you'll find particular about numbers is 8% of the customers have made one purchase and 8% of the customers have made 20 purchases. And it's trying to figure out who is which and how do you target them and how do you. That's where the smarts come in, the strategies come in. You know, how do you get the one undone to make a repurchase if you can? And how do you find more of those 10 purchase customers and then segmenting to figure out who those 10 purchase customers are.
Nathan Bush: Mark makes an interesting point in that conversation. He works with a business where 80% of customers are one time purchases and they made a conscious, informed decision to ignore lifetime value as a metric altogether for that category. It was fair enough because they didn't expect them to come back within 12 months. It's when you're hanging onto the hope that they will come back that things get a bit messy. You need to know what you're aiming for in terms of lifetime value and what a good customer looks like. So you are not going to get a clean green signal across each of these three gates. And Rob's point is that you are not meant to quad lock failed different new customer gates at different times and it still sold for half a billion dollars roll. What the gates give you is somewhere to look. Split new customers from returning customers. Before you calculate anything, watch a real cohort of customers come back rather than assuming they will. And when you find the ones who behave the way that you want them to, use them as the starting point for the next round of acquisition instead of going out and buying more of everyone. We cover acquisition cost, NCAC and customer lifetime value in module 4 of the E Commerce Foundations Course, which is a new Add to CART course which we're just about to release. Made for professionals who want a career in E commerce and it brings together the lessons from over 600 interviews with Australia's best E commerce leaders as well as my personal experience and knowledge in E commerce. We're really excited to bring it to you. Keep an eye out for the E Commerce Foundations Course and if you are pulling your new customer numbers apart for the first time and you might want some help, or you might be arguing internally around how long a payback period you can live with, these conversations are perfect for for the Add to Cart community. And those conversations are happening every day. You can join for free over on add to cart.com au that is the playbook for this week. Go find those new customers who are worth keeping and then get more of them. I'll see you next Friday. Look, you probably know this already, but customers aren't just googling products anymore. They're asking AI what to buy. And if AI can't understand your brand, it won't recommend it. That's why Studio Hawk, Australia's largest dedicated SEO and AI search agency, is offering Add to Cart listeners a free SEO and AI Search master plan. You'll get an in depth audit of how your brand appears across search and AI platforms, plus a custom roadmap to improve your visibility and to help you get started straight away. You can also download their free E Commerce AI Visibility Toolkit. It's packed with prompts, checklists, wireframes and a step by step digital PR framework. Head to studiohawk.com add to cart that's studiohawk.com add to cart to download your exclusive toolkit and request a personalized master plan. We'll put the link in the show notes as well.
