Wake up call for DTC Ecom brands! Even though you are trending on social media. The hottest VC is funding you... You can brag about a 6x+ ROAS And the best influencer creatives... You will still fail without - Knowing your Life time customer value - Your unit economics (Gross Margin 1, Gross Margin 2 etc) - Your Cashflow budget So why is LTV important? Well how do you know what you can pay to aquire a customer if you don't know what they will generate over their lifetime and each year? Media buying is a game with dimishing returns and 1 winner (The house aka, Meta, Google): You may get a 10x ROAS if you spend $1000 a month, but a 7x if you spend 10k. This is simplified of course, but the more people you reach, the colder the audience gets. Eventually you will end up paying more to outbid others... You have to understand your LTV in order to understand what your CPA goals should be. And that is just the tip of the iceberg.. because you still need more data... Most brands don't do accounting well. Heck if i say GM1, GM2, most ecom brands have no clue what I am talking about... You need to understand your gross margins... GM1 is total revenue minus cost of goods. ie how much it cost for you to produce those products The formula for calculating is GM1 = (Total Revenue - COGS) / Total Revenue Why is it important? GM1 provides a fundamental measure of the profitability of a company's core operations without factoring in other indirect costs like operating expenses, marketing, or administrative costs. Yet.. we need to get deeper.. we need to understand GM2 Gross Margin 2 (GM2): Here is where it gets interesting. Adding in shipping costs, CC fees, Fulfillment fees(software, packaging etc.) The formula for calculating it = (Total Revenue - (COGS + Variable Operating Costs)) / Total Revenue So lets say you sell for $100 your GM1 is 60% (40% is eaten up by cost of goods sold) Your GM2 is 40% (packaging, shipping cost etc.) Now you are left with $40 before accounting for marketing and your operational expenses. Now if your CPA is $45, you may have a problem.. You are not breaking even... but what if your LTV is $190 after 4 months? Perhaps this is not so bad after all.. This is why the economics are so important. What is the cost of getting that additional $90 over 4 months So few brands have these numbers... Last but not least... Cashflow.. equipped with all these numbers and sales targets for each month, you can actually calculate your cashflow. Obviously you need to factor in when you have to pay wages, ads, inventory. Without this, you are working in the blind and may go in the negative some months... Heck you could go bankrupt because of it.. The less you know about your numbers, the less aggressive you can be in scaling up your ecom brand... If you us to help you in this area, reach out to me on daniel@purplefire.io