Why Thinking More Customers Is Costing You Money

Howzit friends,

There’s one sentence I have heard in almost every first conversation I’ve ever had with a business owner, and it really doesn’t matter whether they’re turning over two hundred grand a year or twenty million. It comes out roughly the same way every single time.

“Kenneth, I just need more customers.”

That seems obvious and totally logical, doesn't it? Business feels a bit slow, the bank account is looking thinner than you’d like, which means you’re probably not sleeping as well as you should (that means more grumpiness for sure) so surely the answer has to be more people coming through the door. More leads, more traffic, a bigger ad budget.

Hustle, hustle, hustle… (btw, the hustle culture is not my vibe to be honest) 

Here’s the problem, though…getting a brand new customer is the single most expensive thing you will ever do in your business. Not one of the expensive things, the most expensive thing. And most businesses have built their entire growth plan on top of it, with absolutely nothing behind it to not only bring that customer in once they’ve arrived, but to keep them and move them up your product offerings.

Focusing only on acquisition- that’s the fool’s game. And just so we’re clear, I’m not having a go at advertising here, because I love advertising and I’ve made a very good living from it. What I’m having a go at is advertising into a business that has no back end, i.e., thinking that acquisition is the one and only thing.

I know the acquisition trap very well (in fact, I courted it for too long), because I was trapped in it myself for about fourteen years, and it cost me a lot of money, a lot of worry and copious amounts of stress and sleepless nights.

I want to help you and show you a better and different way to go about your marketing.  It’s going to change what you spend your money and your energy in the future.

Revenue is only ever three numbers

Let’s strip business right back to the bone. Whatever you sell, wherever you sell it, your revenue is only ever three numbers multiplied together.

Revenue = Customers × Value per order × Frequency of purchase.

Or, as I scribble it on the whiteboard, R = C × V × F.

C is how many customers you have.
V is how much each one spends when they buy, which is your average order value.
F is how many times a year they come back and buy from you again.

That’s honestly it, and it’s beautifully simple. In fact, you could explain this to a ten-year-old over breakfast (as long as they don't have a screen in front of their face…LOL). How many people buy from you, how much do they spend, and how often do they come back?

Let’s put some real numbers on that example, to make it a little more concrete. Say you’ve got a business turning over $500,000 a year:

Customers - 1,000

Average order value - $250

Purchases per customer per year - 2

Annual revenue - $500,000

1,000 × $250 × 2 = $500,000. Nice and simple.

Now the owner comes along and says, “Right, Kenneth, I want to get to $750,000 this year. Another quarter of a million on the top line, please.”

You’ve got three doors you can walk through to get there.

Door one: more customers

You go from 1,000 customers to 1,500, and this is the door that almost everybody reaches for.  It’s the most obvious, right?

But have a proper look at what that actually asks of you. In order to hit that target, you need 50% more traffic and 50% more leads. That means you’ll need a materially bigger ad budget, more sales conversations, more proposals, and enough capacity to deliver all that extra work once it lands. And every single one of those extra customers has to be bought and paid for.

More spend, more risk, and a lot more moving parts.

Door two: a bigger order value

Here, you leave your customer count exactly where it is, and instead you raise the average order value from $250 to $375.

There are many ways you can do that, such as raising prices, providing order bundles, order bumps, upsells, complementary products, etc. With this approach, you don't need new traffic, and you don't risk extra ad spend.

Door three: more frequency

Same 1,000 customers and the same $250 order, but instead of buying from you twice a year, they buy three times.  You just get them coming back more often

You do that with reminders, emails, SMS, a phone call, reorder prompts, subscriptions, auto-ship, events and seasonal offers. And again, there’s no new traffic and no extra ad budget needed.

Three doors, exactly the same destination, and two of them cost you nothing at all in ad spend.

Now in the real world you’re probably going to open all three doors a little bit rather than one of them all the way, and the right mix depends entirely on what kind of business you’re in. A supplement company and a custom home builder are never going to have the same answer, so the right door depends on your business, not on habit.

But look at what actually happens out there in the real world. Almost everybody reaches for door one. The most expensive door and the one that appears to be the most obvious.  Just go buy more customers.

And I want to be really clear here, because people do sometimes misread me on this one. I am not anti-acquisition, and you always have to be feeding the conveyor belt. A business that stops bringing new people in eventually dies. What I am against, though, is the focus on acquisition being the only thing you do, because that’s exactly where the whole thing gets fragile.

The number nobody wants to talk about: your margin

Before you go judging a single marketing number, you have to know one thing about your business: what do you actually get to keep (which I’m sure you’ll agree is the important part)?

Your profit is your revenue multiplied by your margin.

And if you’re not familiar with gross margin, it’s simply what’s left out of every sale after you’ve paid the direct costs of delivering the thing you sell. For a physical product that’s the product itself, the packaging, the shipping and the payment fees. For a service business it’s mostly the people doing the work. It’s the money that is genuinely yours before the rent, the software, the tax and everything else comes along and takes its slice.

The margin is wildly different depending on what you sell:

Bear in mind these are just averages or guidelines, so your business may be different.  The most important piece, is that you know your number and if you don’t know what it is, that’s the very first thing to go and find out.

Ok, so here’s a nugget for you to consider…

Your margin sets the absolute maximum you can ever pay to acquire a customer.

On a $100 sale at a 20% margin, your gross profit is $20. So the most you can possibly spend to win that sale and still break even is $20. Spend $25, and you start losing money and there is a crazy twist to this too, which we’ll get to in a second.  More about this in a second, but even though you are losing money, your ad buyer may be telling you that they are making money.  Hmmmm!

This is a common problem and so not to worry; you are not alone.  The marketing person is celebrating and saying “what’s the problem, I spent $100 and brought in $300 of sales; that’s a three-times return on ad spend.”

Meanwhile, the finance person is saying, “This is not good, we’re bleeding money, cut it.” And you, the confused owner, are sitting in the middle, wondering who on earth to believe.

Oh, and while we’re here, return on ad spend (or ROAS, as you’ll hear it called) simply means the revenue you got back for every dollar you put in. Spend $100 and get $300 back, that’s 3x ROAS.

They’re both right, by the way, but they’re both looking at half the picture. The marketing number is revenue, and the finance number is what’s left over. Your job, or your CMO’s job, is to get those two numbers talking to each other properly, so you get to see the full picture.

Once you know your margin, you can work out what your ads actually have to return just to stand still:

Have another sniff at that top row, because it’s a brutal one. A 20% margin business needs a five-times return on cold traffic just to break even. Five times, to an audience who has never heard of you, on a first purchase. That is pretty darn difficult to do, and most people never get anywhere near it.

So how does anybody make money at all? Well, that’s where the back end comes in, and that’s really what this whole article is about.

The front end and the back end

Every business has two halves, and they do completely different jobs.

The front-end is acquisition. It’s how you get somebody through the door, which is the work of your ads and content, your offer and your first sale to a customer/client. Its only real job is to buy you a customer at a price the market will accept. That’s it, that’s the whole job.

The back-end is everything that happens after that first purchase. The second sale, the upgrade, the renewal, the service plan and the next thing they need from you, i.e., the ascension in the buyer's journey.

So the front end buys you the customer, and the back-end is where all the cream is, i.e., profit.  So many businesses are stuck in the acquisition cycle as they have no back end, and so every single month they start from zero.  It’s relentless and exhausting.

So let’s take a look at some well known businesses that really highlight the power of a strong front-end and back-end model to their business.

Have a look at a car dealership

We all drive past a dealership lot and think those people must be absolutely printing money. Cars are $60,000, $70,000, and a hundred grand for a truck now. When on earth did trucks become $100,000?

But here’s the thing, the car itself is the thinnest part of the whole deal. The dealer might make one to two and a half grand on a new car. Where the money actually comes from is everything they stack around it: the finance and insurance spread, the extended warranty, the paint protection coating, the trade-in they buy off you for $10,000 and quietly turn around at $15,000, and then five to ten years of servicing.

Here’s what that looks like in the published financials of AutoNation, one of the biggest dealer groups in the US:

Selling cars, which is the entire thing you and I think their business actually is, produces under a quarter of their gross profit. More than 77% of it comes from finance, insurance, parts and service, and every bit of that is back-end.

That’s also why the salesperson isn’t nearly as excited as you’d expect when you tell them you’re paying cash. Years ago, that got you a lovely discount when you offered them cash. Try it today and watch their face. They’re not interested in your briefcase full of cash, because cash cuts them right out of the financing spread, and the financing spread is where they were planning to make their money.

Have a look at Chewy

Chewy sells pet food, cat litter and squeaky toys (and a number of other items). Their entire business model is to win the pet owner on the first order, make replenishment ridiculously convenient, and then gradually capture more and more of whatever that new customer spends on their beloved pet.

Eighty-three percent of a twelve-and-a-half-billion-dollar business comes from repeat, scheduled orders. The first sale is barely even the point for them. The first sale is just the entry fee to their greater business model.

And notice what they’re up against, because this is a genuine constraint and I think it’s the most interesting part. The dog does not eat more just because Chewy would quite like him to. Once you’re on auto-ship for food and litter, your frequency is pretty much set in stone.

So how do they keep growing? They widen what they sell you, with treats, toys, accessories, supplements, medications, pharmacy and veterinary services.

That’s the thinking I want you to borrow. If you’re looking at your business and thinking that you cannot make anything more from what you offer, look at broadening your offers with complimentary products and services.  

And now, the bit where I got it wrong

So I ran a marketing agency for about fifteen years. We built custom funnels for people, all done-for-you. I started out charging around $1,200 or $1,500 a project, and by the end of it we were doing $15,000 and $20,000 builds.

And for years I looked at my front-end and felt rather pleased with myself. I was getting roughly a four-times return on ad spend, so four dollars back for every dollar in. Any marketer alive would take that and go home happy.  My business kept growing and expanding every single year and it was exciting.  

But I was permanently stuck in acquisition mode, because I had no real back end at all. I’d build your funnel, hand it over with a bow on it, and then I’d be right back at the start hunting for the next client. The obvious next step was to manage people’s ads for them, but honestly, only a small few clients have a business model where that’s genuinely profitable for them to pay an agency to run ads for them.

So it never became the back-end I actually needed.

So the business ran on feast and famine, even though I had a 4x ROAS (remember the profitable and rosy marketing data points?). I’d have a month at $100,000 or $150,000 and feel like we were on a really great roll and fulfilling the huge demand for our services. Then the next month would come in at $50,000. And when you’ve built a beast with $80,000 or $90,000 a month of expenses, a $50,000 month isn’t a slow month; it’s a bleed. You can have $300,000 or $400,000 sitting in the bank and burn straight through it in three or four months, and I’ve watched that happen from the inside.

There was a second thing going on too that I genuinely couldn’t see, because I was only ever looking at my marketing numbers. My delivery was inefficient. My staff were taking far too long to complete projects, because I hadn’t built the systems and processes to make the work repeatable. So my cost to deliver kept creeping up and up, while I sat there admiring my four-times return on ad spend and wondering why I was short of cash every single month.

Nothing was wrong with my marketing. The marketing was the only part that was working, which is the cruel irony of the whole thing. What was wrong was that I’d built a business that had to win a brand-new customer to earn a dollar, then spent more than I realized to serve them.

When I finally started looking at the whole business instead of just the front of it, and fixed the delivery, fixed the retention and priced properly, my margin settled at about 54% and the money started staying in the account instead of just passing through it and waving on the way out.

That’s the shift I want for you, and the answer is not always more leads and customers. It’s a back-end.

So what actually goes in a back end?

Most people muddle this into one big blob called “more sales,” but it really isn’t one thing. It’s three things, and they happen at three different moments.

1. The immediate maximizer

This one happens right at the point of purchase, when your customer is at their absolute hottest. They’ve already decided to trust you, and their card is literally in their hand. That is the easiest yes you are ever going to get from them, so please don’t waste it.

There are three ways to use that moment.

The order bump is a tick-box at checkout. For example, you sell a book: “Add the audiobook version, normally $15, yours today for $10.” One click, and they don’t have to agonize over a new decision.

The upsell comes straight after they’ve paid. “Would you like the mini-course for $97, or the templates that go with the book?” It’s a different thing and a bigger thing.

The cross-sell is something that naturally goes with what they’ve just bought. Buy a pair of shoes, get a pair of socks. Buy a cheeseburger, get some fries. And you’re going to be thirsty after all that, so have a drink. And after all that fat and sodium you’ll be wanting something sweet, so how about a dessert?

That, in case you hadn’t noticed, is how we ended up with the value meal. It’s the most successful cross-sell in human history and nobody even notices it happening to them.

2. Ascension

This one happens later, and it’s a bigger offer altogether. They bought the $200 thing six weeks ago, and now they buy the $2,000 thing. It isn’t the same purchase again, it’s the next level up.  In your business you may have a $50 entry points that goes to $200, which goes to $5,000 then up to $20,000.  Your customer is ascending up the offer curve.

Consulting, for example, is a great example of this. Assessment, then strategy, then implementation, then an ongoing retainer. Each step is a real piece of work that stands up on its own, and each one earns you the right to the next one.

3. Retention

This is the same customer buying the same thing again, and again, and again. It’s Chewy’s auto-ship model. It’s your dentist booking your next appointment while you’re still sitting in the chair with the bib on and those fancy little glasses (you know the ones I’m talking about). Notice that they never say “give us a call if you need us.” They book it while they’ve got you.

Those three together — maximizer, ascension, and retention — are what create your lifetime value. And your Lifetime Value (LTV) is determined by exactly the same two things we started with, which are how much they spend and how often they come back.

Here’s the kicker with ascension and retention.  You already paid to acquire the customer, so whatever you sell them here is profit (before you deduct your expenses), as the acquisition cost is zero at those stages. 

Right, let’s run a real one

Now let me show you how this plays out with actual numbers; it's more useful to look at a concrete example.

Say you’ve been brought in to help a perfume company. One bottle, $100, sold direct to consumer through paid social. They’ve been running ads for eight months, and the owner tells you sales are steady but the business doesn’t feel like it’s making any money.

Here’s what’s actually going on:

The ad platform is reporting a three-times return, so the media buyer is thrilled and probably sending screenshots to the group chat (hands up - that has been me…lol). Meanwhile, the business is losing forty dollars every time that cycle runs, which is roughly thirteen dollars on every single bottle sold.

At a 20% margin, remember, break-even is 5x. She’s sitting at 3x. So the finance person says kill it, and honestly, if nothing else changes, the finance person is dead right.

But before you kill anything, have a look at the rest of the business, because there’s one line in this company’s numbers that tells you absolutely everything.

Can you guess what it is?

Nobody has ever ordered twice.

Not one customer. Ever. And the moment you spot that, the question changes completely. It stops being “are these ads working” and becomes “why on earth is nobody coming back?”

So you go and check the obvious things first, because you have to. Are there complaints? Refunds? Bad reviews? Is the product actually any good? Because if the product is the problem then no amount of clever marketing is going to fix it, and all you’ll be doing is spending money to amplify something people don’t like.

In this case the product’s lovely and the reviews are good. People simply aren’t being given any reason, or any reminder, to buy it again. Nobody ever asked them to.

And think about what’s quietly happening in the background too. Somebody buys this perfume, loves it, and three months later wants another one. They can’t remember where they got it from, so they type the brand name into Google…and Amazon outranks the brand’s own website, because Amazon outranks everybody. So the reorder goes to Amazon, Amazon takes its cut, and this poor business has effectively paid to acquire a customer for somebody else’s checkout.

What I’d do first, this week

Nothing that needs a new product, nothing that needs a photoshoot, and nothing that takes three months.

I’d email the existing customers. Every single person who has ever bought. A bottle lasts about three months, so anyone past that mark is due. Three emails, and maybe a code for 10% off to get some revenue moving. Every one of those sales carries the full 20% margin with no ad cost attached to it whatsoever, so the margin on a repeat order is pure.

I’d capture what we need at checkout from now on. What they bought, when they bought it, and their birthday. Yes, their birthday. Perfume gets bought for occasions, so that’s birthdays, Valentine’s, Christmas and anniversaries. If you know the date, you get to be the helpful reminder instead of just another ad in the feed.

I’d put a two-bottle option on the page. “Get your second bottle today, $180 for 2 bottles instead of $200.” If two of your three daily buyers take it, revenue goes from $300 to $460 on exactly the same $100 of ads. You’re still under the $500 you need to break even, but you’ve cut the loss by more than half, in a week, with no new traffic at all.

And what comes after that

Then you start building the things that take a bit longer, so that’s bundles, travel sizes, his and hers, a gift set and a subscription. Those all need design, packaging, production runs, photography and new pages, so that’s months of work rather than days.

This is how I want you to think about every single one of these: what can I do this week, and what needs a whole quarter? Always, always do the week first.

And here’s the line I’d underline twice if this were a whiteboard:

A 3x return on the first sale is only a loss if the customer never comes back.

If they never come back, the finance person was right and you should turn the ads off today. If they do come back, that very same 3x is the front end of a perfectly good business.

“But Kenneth, my customers genuinely only buy once”

That’s a fair challenge, and you’re right that some businesses really do look like that from the outside. So let me take the hardest one I know.

A family plumbing and heating company. Three vans, advertising on Google search, and the phone rings when something goes wrong. Here are their numbers:

Technically the ads work, because he’s above break-even. But $37 a job, and he’s the one doing all the work. He’d honestly make more at Starbucks, and he’d get a free coffee out of it.

Door three, which is frequency, looks completely shut here. You can’t make somebody’s boiler break more often, and I’d really rather you didn’t try.

Except the frequency isn’t truly once every four years. People need a plumber far more often than that. What actually happens is they can’t remember who they used last time. The guy handed over a business card that went in a kitchen drawer, or a fridge magnet so ugly it went straight in the bin. So the next emergency goes to whoever is top of Google that day, and our man pays $120 all over again to win back a customer he already had.

So what can he sell that turns a one-off call into an actual relationship?

A maintenance plan. $180 a year, two scheduled visits, priority booking when something does go wrong, and a discount on repairs.

Look at what that one move does for him. His frequency goes from one job every four years to two touchpoints a year, and when something does break, they call the company they’re already paying. It builds his order value too, because on a scheduled visit you find the small thing before it becomes the big thing, which is genuinely better for the customer as well. Nobody wants to be replacing a heating system in January.

And best of all, it costs him nothing to launch. He already has a list of every customer he has ever served, so he can phone them or email them this week.

If 30 of those 100 past customers take it, that’s $5,400 of high-margin revenue from a database he has already paid for once. He doesn’t spend another cent on ads to get it.

That’s the pattern in almost every “my customers only buy once” business. Pest control did it. HVAC did it. And there’s an enormous unexploited version of this sitting in real estate, where an agent sells you a house and then vanishes for twelve years, instead of staying in your life through renovations, maintenance, contractors and referrals.

Now here’s the uncomfortable bit

This is the conclusion that falls out of everything above, and it explains a lot of things you’ve probably found frustrating over the years.

The business that can afford to pay the most to acquire a customer and still stay profitable is the business that wins.

Not the best marketer, and not the smartest ad. The one who can afford to pay the most.

A business with a strong back end can afford to break even, or even lose money, on that first sale, because it knows the profit is arriving later. Which means it can outbid everybody in the auction, on every platform, all day long.

A business with no back end has to make its profit on sale number one. Which caps what it can spend to win a customer, which in turn caps how fast it can grow and how big it can ever get.

That’s why two competitors in the same market, selling much the same thing, can run wildly different ad budgets. It usually has very little to do with who writes the better ads.

So if you’ve ever looked at a competitor’s advertising and thought “how in the world can they afford that?” — now you know. They’re probably not better at ads than you are. They’re just playing a much longer game with the same customer.

One serious word of caution

I have to be straight with you here, because “lose money on the front end” is a dangerous sentence to read and go and act on without the rest of it.

You can only afford to lose money on that first sale if two things are true.

The first is that you actually know your numbers. Not a feeling, and not “I think they come back.” You need to know what people genuinely repurchase and how often, before you deliberately start buying customers at a loss.

The second is that you can survive the gap. If it takes three months for a customer to become profitable, then you’re funding three months of losses out of your own pocket before the first dollar of profit shows up. And once you fold your margin into that, it’s often more like four or five months.

So you and the business owner have to decide, deliberately and out loud, where you’re breaking even. Is it on the first order, or over a lifetime? And if it’s over a lifetime, how long a lifetime are you actually willing to fund? Three months? Six? A year?

If you’re selling a genuine one-off purchase, or you’ve got no cash cushion behind you, then break even on the first sale and don’t feel bad about it. There’s no shame in it at all, and the graveyard is full of businesses who thought they’d figure the back end out later while burning money on the front end today.

The back end buys you the right to be aggressive. It doesn’t hand it to you for free.

Where to start this week

You don’t need a project plan for this, mkay. You need about an hour and an honest look at what you’ve already got.

Work out your three numbers. How many customers did you serve last year, what was the average order, and how many times did the average customer buy from you? If you don’t know, that’s not a failure, it’s simply your first job. Most owners I meet can’t tell me, and the ones who think they can are often out by a mile.

Find your gross margin. What do you keep out of every hundred dollars after the direct costs of delivering it? Your bookkeeper or your accountant can give you this in about ten minutes, so go and ask them today.

Work out your true break-even. Divide 1 by your margin, so a 25% margin means you need a 4x return. Then go and look at what target your ads are actually set to. I’d bet good money there’s a gap sitting there, and that nobody has ever mentioned it to you.

Find out how many customers have bought from you twice. This single number tells you more about your business than almost anything else on your dashboard. And if it’s close to zero, you don’t have a marketing problem, you have a back end problem. Which is honestly the best news you’ll get all month, because that is the cheapest revenue available to you anywhere.

Then pick one back end move and do it this week. One order bump at checkout. One reorder email to past customers. One maintenance plan offered to a list you already own. Not a strategy document, and not a committee. One move.

And then go and look at the world through these eyes, because it’s genuinely good fun once you start. Watch what Amazon does to you at checkout. Watch what your dentist does before you’re even out of the chair. Watch what the dealership does the second you say yes to the car. Every one of them is running C, V and F on you, and most of them are very, very good at it.

You’re allowed to borrow from any of them, by the way. And it doesn’t have to come from your own industry either, because some of the best moves I’ve ever made for clients came from watching a completely different kind of business solve the very same problem.

To wrap it all up

More customers is not the answer. It’s an answer, and it happens to be the most expensive one on the menu.

The money you’re looking for is almost certainly already sitting inside your business right now, in the customers you’ve already paid good money for and then never spoke to again.

So go and find out how many of them bought twice. Start there.

Chat soon and here’s to your growth,
Kenneth