Podcast Summary
Understanding Business Equations for Informed Decisions: Analyzing sales velocity equations helps entrepreneurs identify growth, predict revenue, and evaluate potential.
Having high-quality data is crucial for entrepreneurs to make informed decisions and ensure business growth. Understanding the fundamental equations of business, specifically the equation of sales velocity, can help entrepreneurs identify bottlenecks, predict future revenue, and evaluate a company's potential for growth. The equation consists of three variables: number of new sales per month, lifetime gross profit per customer, and hypothetical max revenue. By analyzing these variables, entrepreneurs can determine if a business is growing, shrinking, or maintaining equilibrium. Having a solid grasp of these equations will enable better decision-making and ultimately lead to business success.
Calculating Lifetime Gross Profit Per Customer: Determining the lifetime gross profit per customer is essential for businesses to assess their capacity, optimize marketing efforts, and make informed decisions about growth.
Understanding the lifetime gross profit per customer is crucial for making informed business decisions. This can be calculated by multiplying the price, margin, and number of purchases for non-recurring businesses, or just price and margin for recurring businesses. Knowing this number allows businesses to determine their customer acquisition cost (CAC) to lifetime value (LTV) ratio, which is an important metric for growth. Many businesses may not have this information readily available, and calculating it can provide valuable insights into the business's capacity and potential. For instance, a marketing agency selling a $1,000 per month service with a $100 monthly cost, 120 new units per month, and a 13.13% churn rate, can determine their maximum capacity to serve 923 clients and generate $923,000 per month with 90% gross margins. This information can help businesses optimize their marketing efforts, set pricing strategies, and make informed decisions about their growth.
Understanding Business Equilibrium: When Sales Equal Churn: Business equilibrium occurs when sales match churn, signaling a plateau. Identify this state to find new growth opportunities.
The point of equilibrium in a business occurs when the number of new sales equals the number of customers leaving, resulting in no net growth. This is important to understand because it signifies that the business has reached a plateau and must find new channels for growth. For example, if a business is currently making 120 new sales per month but also losing 120 customers, it is at a state of equilibrium with no growth. To calculate this, you can multiply the monthly churn rate by the current number of customers to find the number of customers lost per month, and ensure that it matches the number of new sales. If you're a business owner looking to grow your business to larger scales, it's crucial to understand this concept and assess your business's current state. By identifying if your business is in equilibrium, you can take steps to find new growth opportunities before stagnation sets in.
Determining Sustainable Business Growth with CAC and LTV: Calculate CAC and LTV to determine long-term profitability. Aim for a 3:1 LTV:CAC ratio and maximize customers per marketing budget.
Understanding the Customer Acquisition Cost (CAC) and Lifetime Value (LTV) ratio is crucial for business growth. By calculating these metrics, businesses can determine how much they are spending to acquire a customer and the potential revenue they can generate from that customer over their lifetime. A healthy LTV:CAC ratio of 3:1 or higher is necessary for sustainable growth, as it indicates that a business is acquiring customers at a cost that will result in a profit in the long run. Additionally, businesses should aim to maximize the number of customers acquired with their marketing budget, as the cost to acquire a customer can often be recouped through the gross profit generated per customer. It's important to remember that a business is not a nonprofit, and the ultimate goal is to make a profit. Therefore, investing in customer acquisition with a clear understanding of the potential return is essential.
Improve customer acquisition cost and calculate lifetime value for long-term business success: To grow a business with a long customer acquisition timeline and high upfront costs, optimize customer acquisition cost and calculate lifetime value for sustainable growth and potential profitability before recurring payments.
When considering investing in a business with a long customer acquisition timeline and high upfront costs, it's essential to find ways to improve the customer acquisition cost (CAC) and calculate the lifetime value (LTV) of each customer. By doing so, you can optimize your cash flow and potentially make a profit even before the customer starts recurring payments. This approach, known as "money kung fu," can help you acquire customers sustainably and grow your business. Remember, knowing the fundamental equations of CAC and LTV is crucial to making informed investment decisions.
