3 ms·

If you must spend 80k to make 120k you are in a bad business. EDIT: Really Bad.

by rokhayakebe 18y ago

utnick 18y ago
really? a 50% ROI seems pretty good compared to traditional businesses
- ejs 18y ago
  But everything else is not profit, its 120-80 = 40k left for all the other costs, including a wage...
- rokhayakebe 18y ago
  Lets note that 95% of small businesses make less than 250k. If a business spends $800 and makes $1200 that is great. The risk is small. If the same business spends 8k to make 12k that is great. The risk is bigger but relatively small. If the new hired gun, self-proclaimed-marketing-guru, decides to jack up ad spending to 80k to make 120k, someone is betting too high now. Asking if this model is scalable is bringing emotion into this scenario which will guarantee you failure sooner or later. At one point you will reach the amount at which spending more on ads will not increase your revenue. I guess that is when justifying "branding" comes.
- apsurd 18y ago
  the article is analyzing "cost of acquisition" relative to revenue. As noted in other replies, this is not including total operating expenses. So for the business, the actual net profit margin is going to be lower than this.
tjr 18y ago
Would this method scale? As in, if I spent $8 in advertising, could I make $12?
- andrew_null 18y ago
  in paid user acquisition, unfortunately, the common case is that you run out of ads to buy. So then you have to start buying crappier ads that perform worse, just to get to the next level of revenue. One of the biggest examples of this is eHarmony, which is rumored to have $100M+ revenue, but terrible margins because they have to plow so much of that money back into advertising.
bmelton 18y ago
I dunno. If it scales, I'd consider myself lucky to find something with a similar return.
andrew_null 18y ago
I'm the original author for the blog - the numbers are fake, and were chosen to make the graph interesting :-) Your mileage will vary! Note also that you pay upfront for acquisition but your revenue base builds up over time - the more momentum you get, the better off you are. It is however true that a lot of businesses that rely on paid acquisition end up with low margins - just look into the leadgen industry as a good example of this. This is particularly true in the Google Adwords world where auctions systematically drive up prices. That said, if you can pay $80k and get $120k out, and that scales up to LOTS of revenue, then making $1.2B in revenue per year on $800M in cost may not be that bad. Certainly better than a lot of businesses.
run4yourlives 18y ago
Sounds like a profitable business to me.

If you must spend 80k to make 120k you are in a bad business. EDIT: Really Bad.

utnick 18y ago

really? a 50% ROI seems pretty good compared to traditional businesses

ejs 18y ago
But everything else is not profit, its 120-80 = 40k left for all the other costs, including a wage...
rokhayakebe 18y ago
Lets note that 95% of small businesses make less than 250k. If a business spends $800 and makes $1200 that is great. The risk is small. If the same business spends 8k to make 12k that is great. The risk is bigger but relatively small. If the new hired gun, self-proclaimed-marketing-guru, decides to jack up ad spending to 80k to make 120k, someone is betting too high now. Asking if this model is scalable is bringing emotion into this scenario which will guarantee you failure sooner or later. At one point you will reach the amount at which spending more on ads will not increase your revenue. I guess that is when justifying "branding" comes.
apsurd 18y ago
the article is analyzing "cost of acquisition" relative to revenue. As noted in other replies, this is not including total operating expenses. So for the business, the actual net profit margin is going to be lower than this.

tjr 18y ago

Would this method scale? As in, if I spent $8 in advertising, could I make $12?

andrew_null 18y ago
in paid user acquisition, unfortunately, the common case is that you run out of ads to buy. So then you have to start buying crappier ads that perform worse, just to get to the next level of revenue. One of the biggest examples of this is eHarmony, which is rumored to have $100M+ revenue, but terrible margins because they have to plow so much of that money back into advertising.

bmelton 18y ago

I dunno. If it scales, I'd consider myself lucky to find something with a similar return.

andrew_null 18y ago

I'm the original author for the blog - the numbers are fake, and were chosen to make the graph interesting :-) Your mileage will vary! Note also that you pay upfront for acquisition but your revenue base builds up over time - the more momentum you get, the better off you are. It is however true that a lot of businesses that rely on paid acquisition end up with low margins - just look into the leadgen industry as a good example of this. This is particularly true in the Google Adwords world where auctions systematically drive up prices. That said, if you can pay $80k and get $120k out, and that scales up to LOTS of revenue, then making $1.2B in revenue per year on $800M in cost may not be that bad. Certainly better than a lot of businesses.

run4yourlives 18y ago

Sounds like a profitable business to me.