Capital allocation and leverage. · Dropshipping Skool

Abraham Rolls

17d ago in General discussion

Capital allocation and leverage.

If you want to grow your business to $100m there is one thing you need to understand…

Capital allocation and leverage.

The vast majority of businesses start as the following:

- one or two founders

- sitting in their garage

- ready to do whatever it takes

Because you have no budget and no savings, you can’t hire anyone meaning you have to do everything yourself.

It could be cold calling, facebook marketing, organic social etc.

Eventually as the business grows, you have to do everything to the half of your ability because you are so time constrained.

Logically, you decide they need to hire…

You have a few options here. You can:

a) hire a cheap contractor

b) hire an expensive agency or full-time role

c) keep doing something half assed as its technically not broken

This is a huge inflection point and depending on whether they understand the concept of leverage and ROIC is whether they will grow or fail.

Leverage is often used to refer to debt. In this situation I am referring to the businesses power to influence a person or situation to achieve a particular outcome.

There are a ton of things that impact the leverage a business has for its marketing efforts.

Let’s use obvious extremes to illustrate the point of leverage.

Ronaldo apparently charges $3,200,000 per Instagram post. If I were to create a new fitness tracker that cost $90 to get to a customer and sold for $200 (meaning $110 profit) I would need his post to sell 29,000+ watches from that post to break even.

Chances of that happening on a fresh brand = 0

A brand like Whoop or Nike though can afford this because of the leverage they have.

A brands marketing leverage is affected by:

- its brand awareness/affinity

- its unit economics

- its repeat purchase rate

- its marketing funnel

Even if Ronaldo doesn’t convert enough to break even on the post directly for these brands, they have so many other supporting factors that allow the campaign to eventually convert profitably.

So what does this have to do with your small to medium sized business.

The main point is that you need to understand the underlying ROI that each marketing effort is giving you so you can decide whether its worth it.

A common mistake here is organic social.

The founder is doing 1 reel a day, getting a decent amount of views then stops for a month because they need to focus on ads.

If you understood the value creation of that channel you’d hire a creator to take it off your hands.

You need to find a way to measure the effectiveness of that channel then 10x it through employees.

Let’s take another example…

Website CRO.

Initially when you are doing a few sales here and there, small website changes just don’t provide enough results to warrant the time.

But when you have 10,000+ website visits a month, suddenly you have the leverage to invest into a CRO agency or hire a funnel manager.

This relationship between investing more into each channel is constantly fluctuating.

If your product and brand is becoming better and better, chances are you should be investing more and more into the quality of your teams and content.

It will allow you to bring in thought leaders that wouldn’t have been profitable in your earlier stage of business.

This is often why you can’t just keep hiring $15hr freelancers if you want to push past $10m to $100m in revenue.

Below are some examples of how an ecom brand might transition over time in each category with more leverage:

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