Principle number four on how to make terrible ads and what to avoid, and I think this might be the most important one because of how common it is, which is avoid the unit of economics of the advertising channels. Get so caught up in the creative and the storytelling without actually realising does this actually make sense from a mathematical perspective. you'd be amazed at how many people i've seen make this mistake to make terrible ads never open a spreadsheet don't factor in okay how much is this going to cost per click what's the cpa what's the average order value what's the lifetime value is that actually sustainable who am i competing against in these ad auctions because that's essentially what's happening you're bidding against oh okay maybe there's a customer that can pay 10 times the price of me that i'm competing against.
Just avoid all that and just focus on all the creative stuff. That is one of the biggest mistakes that you can make. So flip that around. So don't avoid the unit of economics. Don't avoid the mathematics. Obsess over them. You should know it inside out before you start running advertising campaigns. Does my business make sense? Does the advertising side of my business makes sense? Does the LTV justifies the customer acquisition costs? So let's say you could come up or leave this module today, or leave this whole program today, and you drop your advertising costs by 10%, which is significant if you're spending millions of dollars a year. Or if you focus on how to increase the lifetime value of the customer, or increase the average order value of the customer, that goes so much further.
Because it's not just for your paid ads acquisition, it's for your whole business acquisition and ultimately the advertising game when you really drill it down to first principles it's money in money out so everybody focuses on money in and creative things they can do to reduce the amount of money in without thinking about the money out and how much they can extract and build upon that just by changing the fundamentals of the business let's use a model that blew my mind that I stole from Alex Hormozi which is this idea of let's say you have two business identical businesses identical advertising campaigns in a parallel universe but there's one subtle difference one has let's say a gross margin of 90 which is incredible and the other has a gross margin of 95 which is obviously insane and even further incredible and you may look at that and go hold on it's five percent difference what does it matter really in the grand schemes of advertising and you'd be seriously wrong so let's say for example for the product cost $100, for the 90% margin business, they take $90, which means there's a $10 gap there.
For the 95%, they take $95 with a $5 gap there. That means the 95% margin business has, let's say, for example, they're acquiring customers at $5 and they're acquiring customers at ten dollars they can double the amount that they're spending on advertising so they can double the other business just by playing with the margins at a five percent side of things like that's how just a subtle tweak to the margins can have such a significant impact in the acquisition costs so you always want to be thinking about not only can i be reducing the prices of my advertising from ad creatives, clever copy, clever things that I can do, you want to be thinking about the actual maths of this whole thing as well.
The actual maths in the back end. Because if you can fix that, it gives you so much more juice to squeeze out of your front end with all the different advertising campaigns that you've got going on. So on this topic, what I would recommend all advertisers doing is thinking about advertising from the following. You have the art, which is the creative side of things you have the science which is the data side of things and the ab tests but you have the maths which is the cold hard money in money outside of things and a good way to view it is like a factory and map out each key event so for example if you're focusing on digital but you could apply this for any other different form of advertising as well okay how much is the cpm how much does it cost me to reach a thousand people okay how much does it cost for somebody to click How much does it cost for somebody to hit the landing page?
What percentage of them convert? What's the average order value? And then what's the lifetime value? And having that all mapped out means that you can then play around with the ad creatives so much more and seeing the impact it has in the full funnel or the full bottleneck analysis that you've mapped out there. And you can say, oh, when we run these ad creatives, it has this impact here. Or, you know what, now we've fixed this issue with the LTV. we can pour we can triple our ad spend and even make our ad creators worse and it actually performs better so make sure you focus on the unit of economics you focus on the maths don't just get too obsessed with the creatives that you forget the fundamental physics of the system