This is Local Legends — a deep dive into the craft of building enduring small businesses. 🏆

Welcome to Part II of The SMB Growth Playbook. If you missed Part I, you can find it here.

Now let’s dive right back in.

IN TODAY’S POST:

Introduction

Part I broke down how to start building a growth engine for your business — and how mastering growth puts you in command of your business's destiny. We covered the first 5 principles in the SMB Growth Playbook:

• Principle #1: Know the Exact Pain Point You’re Solving

• Principle #2: Create Your Buyer Personas

• Principle #3: Document Your Sales Process

• Principle #4: Be Where Buyer Personas Congregate to Drive Demand

• Principle #5: Fuel Your Business — Invest to Grow

Part II wraps the playbook with the final 5.

Principle #6: Know Your Unit Economics

Principle #5 was “Invest to Grow.”

Principle #6 is about ensuring it’s a good investment.

To turn your business into the 'vending machine' I described in Part I—where every dollar invested yields a predictable return—there are 4 metrics to master:

Metric #1: Customer Acquisition Cost (CAC)

Your CAC is the total cost to acquire a customer. Let’s say you have to spend $10 in advertising to acquire a $50 customer. Your CAC is $10, or 20% of revenue. This is called your Direct CAC.

Now let’s say you spend $10 to acquire a $50 customer…but you also have a customer walk in off the street and spend $50 without you having to spend anything on advertising. You sold $100 across two customers…having only spent $10. Your Blended CAC is $10, or 10%.

As your business evolves, your CAC will include more expenses than just advertising. Over time you’ll buy marketing technology, hire sales people, use agencies, do branding exercises, and more.

But it’s a simple formula at the end of the day:

Metric #2: Average Sale Price (ASP)

The average amount a new customer spends with you.

Metric #3: Contribution Margin

Contribution Margin is the profit earned after delivering the product/service (COGS) and your Sales & Marketing. It’s the profit that “contributes” to your overhead expenses.

Example: If you earn a $50 gross profit on a $100 sale…but it costs $50 to acquire a customer, your contribution margin is zero. $50 to make your product, $50 to sell your product…$0 left for overhead, like rent and payroll. Clearly, this is unsustainable.

Now let’s say your gross profit remains at 50%, or $50 after a $100 sale. But this time, your CAC drops from $50 to $30, making your contribution margin $20 per sale. (You have a viable business if you can sell enough units where your contribution margin is greater than your overhead.)

Metric #4: Customer Lifetime Value (LTV)

Lifetime Value (LTV) adds another dimension to your analysis. If a customer’s LTV is high—meaning they transact multiple times across their lifespan with you—it justifies a higher CAC because the cumulative profit from this customer offsets the initial acquisition cost.

To break this down, a table is helpful. Here’s two scenarios — one comparing a business where a customer typically buys only once in their lifetime, and another where the customer buys four times on average after you acquire them as a customer.

Notice how CAC as a % of Lifetime Revenue changes wildly.

In the first business, your P&L will reflect that you have to spend 30% of revenue on sales and marketing.

In the second business, the higher Lifetime Value dilutes your overall Sales & Marketing spend to just 7.5% of revenue.

You can have two businesses with two very different unit economics and the overall financial performance can look very different.

Tracking Your Unit Economics

So how do you track all of this? And how often?

The best approach is to implement a monthly marketing close-out, similar to your financial close.

Here’s how to go about it. Start with a spreadsheet to track what drives your unit economics.

I created a template you can download and use here if you want help getting started.

With this template, you’re able to plug in your monthly revenue, leads generated, and sales and marketing spend by channel.

The spreadsheet will automatically calculate your ASP, CAC, and LTV.

Over time, average these figures and set targets so you know if you’re having a good month versus a bad month…and importantly: why.

Use your monthly data to adjust how you invest your growth budget.

Over time I’ve learned this: By thoroughly understanding and continually optimizing your unit economics, you ensure that every investment in growth is not only justified…but returns maximum value to your business to help you drive growth.

Principle #7: Optimize Your Unit Economics

Now you know your unit economics. You’re tracking them monthly.

But let’s say you don’t like your current numbers. Perhaps your CAC is too high to be sustainable. Or you think you can grow your ASP or improve your LTV.

This is where optimization becomes critical. In fact, it’s the most important step in your journey.

Understanding the Optimization Process

Optimizing unit economics means not settling for the initial results. It involves a continuous cycle of measurement, testing, and refinement.

Wanamaker’s famous quip about the inefficiency of advertising spend highlights the importance of identifying which investments yield returns. Your goal is to make every dollar accountable. And in this modern era, you have no excuse for not being able to quantify your entire funnel.

Start with a Pilot Budget

Begin with setting aside a budget specifically for testing new growth strategies. If you’re getting started, my rule of thumb is to set aside 5% of one month’s revenue as a test budget.

This is now your budget to experiment with new growth channels.

To get an idea of where to start, revisit Principle #4. It comes down to where your customers congregate and where your competitors are advertising. Don’t get too innovative here — stick to the basics.

In a B2C environment this might look like:

• Creating content, writing ad copy

• Sending email newsletters

• Spending on Meta, Google Adwords, Google LSA, LinkedIn, TikTok, Angie, Nextdoor, or more physical advertising like billboards or door hangers.

In a B2B environment this might look like:

• Buying lead lists and cold calling and emailing

• Attending trade shows and sponsoring events

• Channel marketing through partnerships

• Good ol’ fashioned outbound prospecting

As you deploy your pilot budget, ensure you’re able to attribute revenue generated so you can begin tracking your unit economics and setting benchmarks as you optimize.

Areas for Optimization

After your pilot, you will find certain channels work better than others. This begins your constant pruning process. Kill what’s not working, invest more into what is, and continue new experiments.

There are two areas of optimization:

Channel optimization: Experimenting with different advertising channels, fine tuning landing pages, improving ad copy, elevating your sales process and sales team, and adjusting the keywords you bid on. The tactical stuff.

Example: You run 5 ads on LinkedIn and one performs better than the other 4. Keep the copy, photo, and landing page…and kill the other four. Try 4 new ads that emulate what worked in the first.

Optimizing your Unit Economics: This is where the most significant step changes can be found in your business. But while channel optimization can happen over a few days, optimizing your unit economics can span several years.

All good businesses are working to improve the four Unit Economics we broke down in Principle #6:

Reduce your CAC: Invest in more effective marketing strategies, improve ad copy, enhance your sales team's skills, accelerate your sales cycle, and optimize your website's landing pages. Over time, you’ll get better at acquiring customers, lowering your Direct CAC. You’ll also build organic growth—customers who come to you without needing advertising—lowering your Blended CAC.

Increase your ASP: Raise your average sale price by elevating your product or service, building a stronger market reputation, raising prices, implementing packages or bundling, launching add-on products or services, and improving your sales team and process.

Improve your Contribution Margin: As you increase your ASP and reduce your CAC, your Contribution Margin will naturally improve. Also, look for COGS efficiencies to maximize your margin for covering overhead.

Improve LTV: Increase your Net Promoter Score and make it easy for customers to return. You’ve already acquired a customer—get them to come back by offering perks and conveniences, expanding your product offering, and staying top of mind.

Optimization Compounded

This is where compounding comes into play. As you optimize your growth channels and unit economics, you create a substantially different business financially.

Here’s how this looked in one of our businesses, using generic numbers.

• Phase 1: When we acquired the company, COGS were 50%, they were spending $0 on sales and marketing, had $30 in Opex, and were making a 20% profit margin. Pretty good overall.

• Phase 2: We set aside a healthy pilot budget and tested several growth channels. Profit dipped, but we were on our way to finding successful growth channels.

• Phase 3: We started to see growth. Our margin maintained at 50%, but sales were up 25%. Sales/Marketing was stable at 10% of revenue, and profits were still lower than Phase 1…but we were on our way to building a predictable and repeatable growth engine.

Our team was getting better at positioning our product, we had made enhancements to the sales process, we were lowering our CAC, and had a few ideas on how to get customers to return more often. We were nearing the point we could raise our prices.

Here was our P&L in each phase:

Phase 3 represented the bottom of our growth investment J-Curve. We were starting to cut spend in ineffective areas and re-deploy it to the effect ones. Organic revenue was growing, and our ASP was on the rise. We implemented a price increase.

Phase 4 represents a very different business — one that is driving more profits on a dollar basis than Phase 1, and critically, has a sustainable and repeatable way of driving growth.

Optimization is not a one-time effort but a continuous process.

This worked because we understood our unit economics intimately and were committed to investing in customer acquisition confidently, knowing these customers were profitable.

We had a veritable 'vending machine' — a system so efficient that it allowed us to leverage our superior economics to outmaneuver and strong arm our competition.

We were outspending our local competitors because we knew it was profitable, thus expanding our market share. Competitors struggled to keep up. We had a fly wheel.

Principle #8: Set Growth Goals

The previous 7 Principles have de-mystified the box of “growth.” What many operators see as nebulous you should now see as formulaic.

With this foundation in place, let’s look at how you can take this power to let the rubber meet the road.

Let’s say you run a construction firm that has a goal to drive $2M in new revenue. You now know what you need to do to unlock that growth.

ABC Construction Firm’s Unit Economics

• Cost per Lead (CPL): $250

• Lead to Opportunity Rate: 15%

• Opportunity Close Rate: 20%

• Average Sales Price (ASP): $250,000

By running ads, engaging in content marketing, and hosting niche industry events, the construction company drives traffic to its website and phone number receiving inquiries for its services.

To drive $2,000,000 in net new business, we can work backward to understand several sub-goals that get us there:

• New Projects Needed: 8 (at an ASP of $250,000)

• Deals Needed: 40 (at a 20% opportunity close rate)

• Leads Needed: 266 (at a 15% lead to opportunity rate)

• Cost to Drive Leads: $66,500 (at a $250 CPL)

Visualized, in reverse order:

This is information is power and puts you in control of your growth.

Now, be wary: as you invest in growth, you will likely see slippage in your unit economics. You might, for example, find that the leads you drive on a new channel result in a $175k ASP versus your historic $250k ASP. The lead quality is lower. I recommend taking your goals and multiplying them by a risk percentage, knowing things always take longer than planned and cost more than we expect.

Principle #9: Diversify Your Channels

There are many ways to acquire customers. Don’t rely on just one.

In small business M&A, the risk of customer concentration is often discussed. The same risk applies to your growth engine. If you have one channel for finding customers—say TikTok—and that channel stops performing (or gets shut down by Congress), you lose a major portion of your sales and marketing engine.

More practically, it’s important to diversify because channels have natural caps.

For example, if you run a custom suit shop that makes several wedding suits during wedding season, there are so many wedding publications to advertise in. The smaller your Total Addressable Market, the sooner you’ll reach a cap.

Look at each channel as a “brick” of growth that you unlock and stack at the front of your funnel.

Your goal is to identify as many bricks as possible to diversify your growth strategy. A healthy sales and marketing funnel might look like this:

• Meta: 120 leads/month

• Instagram: 40 leads/month

• LinkedIn: 8 leads/month

• Yelp: 4 leads/month

• Print Ads: 25 leads/month

• Google AdWords: 180 leads/month

• Trade Shows: 80 leads/month (annualized)

To build a business with 7 profitable lead-acquiring bricks, you likely tested (and cut) several channels. This is the cost of knowing how to grow your business profitably. And this is the asset you build as you identify new bricks.

Principle #10: Explore New Lines of Business

Just like channels, you can reach natural caps in a line of business.

For example, let’s say you’re a foundry that casts spring ‘horse rockers’ for playgrounds across America.

There are only so many playgrounds that need a horse rocker. It’s important to know when you’ve reached the point of maximum yield in a line of business (or product/service) and when it’s time to expand into new areas.

If you see increasing CPLs and no new working channels to find new playgrounds to sell to, your time might be better spent launching a new product or service instead of optimizing.

When we acquired Workshop SLC, they were exceptional at high-end, $500+ per ticket art classes with out-of-state artists who had an impeccable following and reputation. We ramped up this program but started to see a diminishing return curve — there were only so many people willing to pay for this kind of art class.

So, we launched night classes. We offered intro to drawing, intro to oil painting, advanced watercolor, and even a digital photography class. The next year, we launched a ceramics program. Today, that ceramics program represents a large share of our annual revenue.

Optimizing growth around a single line of business can only get you so far — so pay attention to know when it’s time to explore new lines of business.

Conclusion

Your business is a living organism, constantly evolving.

Each principle in this playbook is a building block. Together, they form a solid growth strategy. Implement and refine these principles. You'll navigate the complexities of small business growth with confidence and clarity.

Your goal is to build a repeatable and sustainable growth engine in your business.

Remember, growth isn't a sprint — it's a marathon. Every metric, every optimization, every new channel explored, contributes to the bigger picture.

Building an enduring small business is challenging. But with these principles, you'll turn obstacles into stepping stones.

Stay committed. Stay agile. And you'll find lasting success.

Go get ‘em.

⏰ In Case You Missed It

Thanks to Mikk Markus aka @PrivatEquityGuy on Twitter, I had a fun conversation about Decada Group’s founding story and our long-term strategy on the HoldCo Builders Podcast.

It was one of the most enjoyable interviews I've done.

Watch/Listen here:

You can also listen on Spotify or Apple Podcasts.