So let's say you could convert $1 into $1.15 in revenue. You can't invest that money back into advertising because you forgot about costs and margin. Your product would need to have 100% margins for this to be true.
Now direct to consumer companies get no where close to that mythical margin and probably are well below 50% which means that you would need to finance a tremendous amount of inventory as a cost to get to revenue of $1MM.
So more like you need $25k ad budget and oh yeah we forgot to mention another $400k invested in inventory.
But saying you need $425k to get $1MM in revenue isn't as catchy as saying all you need is $25k.
I would hazard a guess that many of these kinds of companies aren't holding inventory, though. Dollars to donuts says that they're taking that money from the customer, ploughing it back into ads, then using cashflow from future customers to actually order the goods from a dropshipper week or so later.
Some would call it a ponzi scheme, others would call it a kickstarter.
Everyone seems to be reading this in the most literal way possible and complaining that the numbers aren't real, or that advertising doesn't work that way, or somehow thinking this is some sort of recommendation for an advertising based business strategy. It's not.
The point is simple: For the same unit costs, if you get your payment cycle time down, you will make more money.
It's a mathematical example showing what happens in extreme cases, so that it's easier to spot the trend. Nothing to do with advertising specifically.
You're an engineer and you've built your own product (no dev costs except your own time). Its serverless and hosting costs are minimal, < $1 per million requests (source: https://aws.amazon.com/lambda/pricing/).
Assuming you convert $1 in ad spend to $1.15 in revenue, would this be possible?
This is interesting, but I'm suspicious of the rosiness of the 1.15x return math when it implies that if this business starts on day one with a $1 ad buy they'll have $84bil in revenue after about six months.
and usually the 1.15 return occurs over a period of years. For most subscription services, you usually don’t earn everything back until a customer has remained one for over a year.
And for those 1-time products, ads dont immediately convert most of the time. You need to keep seeing them over and over before you make a decision to buy it.
So this is like the Carnot Cycle for investing then? The "theoretical optimal maximum" for a cycle, that efficiency will be measured against but can never be reached?
> Now, in practice, the scenario I’ve outlined is near impossible.
shocking. sensationalized title with nothing to back it up. its a shame too, because understanding cash flow is very important in business and its a worthy topic for startup founders.
This author, while I've never seen of or met her before, seems to be otherwise reputable but this is a garbage content on a level of which I usually see relegated to indiehackers.
Going from $0 to $1MM in one month for a brand new product from a brand new startup isn't near impossible, its FUCKING impossible.
Lets break this down a little bit more:
25k a day in adspend: okay great. Except that most ad platforms don't let you just immediately ramp to 25k per day. So unless you have a) a team of people who have been researching and building ads and keywords for some time before, b) an outsourced digital ad agency to ramp for you, or c) you're Google or Facebook, spending 25k a day isn't going to happen.
Immediate ROI: Sure, you spend $25k on ads, those ads net you a bunch of money on sales, then you can immediately transfer that revenue right back to ads right? wrong. Its going to take days or even up to a week to move that money back into ads. From your credit card process, to your bank, to your ad platform. So unless you have closer to $125k-$175k in cash or credit set aside for a weeks worth of ads, you can't turn cash that fast. Even if you ignore the fact that your card processor is going to freak the fuck out at the rapid increase in processing and is going to keep a substantial part of your revenue as a rolling reserve.
You have a company, product, and team that can deal with $1m in sales: The author just neglects this, which means shes either minimizing the work that goes to getting a company to this point or.... or i dont know what shes trying to say. You aren't going to be able to build a company that can deal with $1m in revenue in 30 days and live to tell about it. You probably spent months or even years building a team, that built your product, that cost you hundreds of thousands of dollars.
No, the tried and true, Product Owner (not investor) endorsed method for getting your first customers is to not use ads, but to do it with good old fashioned word of mouth and sales.
This type of content is awful because it works to perpetuate the flawed notion of instant startup success. All you have to do is spend a bunch of money and you too can be a unicorn. Its completely contrary to how it actually works and its frustrating seeing founders become demoralized because their startups don't work like this.
The truth is, it takes time and effort to build your company. Your fist $10k in revenue is just as hard and just as important as your first $1m in revenue. Its going to take time, maybe years, before you can get it done. Its definitely not going to happen in one month.
So let's say you could convert $1 into $1.15 in revenue. You can't invest that money back into advertising because you forgot about costs and margin. Your product would need to have 100% margins for this to be true.
Now direct to consumer companies get no where close to that mythical margin and probably are well below 50% which means that you would need to finance a tremendous amount of inventory as a cost to get to revenue of $1MM.
So more like you need $25k ad budget and oh yeah we forgot to mention another $400k invested in inventory.
But saying you need $425k to get $1MM in revenue isn't as catchy as saying all you need is $25k.