WEBVTT

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It is the sweetest equation ever, I love it.

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Welcome to the game where we talk about how to get more customers,

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how to make more customers, how to keep them longer,

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in the many failures and lessons we have learned along the way.

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I hope you enjoy and subscribe.

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What's going everyone? I've got a super special podcast

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lesson video for you today. What I want to talk to you about is

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how to answer the hardest questions in business using

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one math equation that only has three variables. All right,

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and don't worry, it'll be worth it. This is the number one

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thing. This is the number one equation that I use in my entire life.

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All right, four businesses. It's the one that I use most frequently.

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And where this all started for me was, I remember when I had my gyms,

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which is a recurring revenue business, obviously.

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I just wanted to know how we were doing, but my data tracking wasn't great,

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and stuff was all over the place. I just didn't know

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how what we were doing and what we were on track for,

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and I just didn't know how it worked. And I was like, man, I wish I could just like

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see into the future. I wish I knew what this would end up like, right?

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And so I was playing around with math stuff, and this is actually at a time when I was trying

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to get better at math, because I'm not, I wasn't naturally good at math.

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And so I would just like try and like write out what,

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like how I would try and calculate this, and I really struggled with it.

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And one day I was driving, and it actually just hit me.

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I was like, what if I just divided it by this,

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and that would just tell me the number? And it turns out I was right.

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And so what I want to explain to you is the number one equation that I use the most

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in all of business, and I call it the Pi equation, all right?

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Now it has nothing to do with Pi PI, right?

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And it has everything to do with any kind of, just, I mean, really just all business.

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It is the sweetest equation ever. I love it. I use it all the time.

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All right, so what is the Pi equation? Why is it called Pi?

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I actually think I was dieting at the time. It's so I call it Pogs.

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It looks like a Pi when I drew it out.

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Pi like the Pi you eat.

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No actual real reason. I call it this.

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And for some reason it has stuck, all right?

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And so it is a simple equation. It is a division equation.

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All right, very simple. Draw a big line here, all right?

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And what it essentially is, I'll draw a smaller one here just so you can see it,

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is inflow divided by outflow, all right?

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So why is this useful?

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So for me, I like to have a very good idea of where my business is at.

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Where they're growing, where they're shrinking.

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What if we just did this for the rest of a year or forever, what we'd end up at?

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And that is exactly what this question answers.

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What's important about this is that the inflow is actually a rate thing.

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So basically you're dividing rates to get an outcome, all right?

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I'm not going to get like super into it because that's not what's important.

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What's important is understanding what it will give you,

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which is your hypothetical max, right?

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And it gives you three different hypothetical maxes,

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so that you can calculate stuff for your business, all right?

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So for example, let's say I have an inflow of five new customers per month, all right?

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I get five new customers a month.

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And let's say that my churn on my membership, my recurring, my service, whatever,

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right, is let's say it's 10%, all right?

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So that's 0.1, 10%, all right?

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So if I want to know what the maximum of customers I will be able to have given this inflow,

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I can project that.

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So right now, if I have let's say 30 clients,

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if I'm doing this and getting five new clients a month and losing 10%,

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it means that I will be growing because 10% of 30 would be three and I'm getting five, right?

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But at some point in the future, as I go on,

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there will be a point where 10% is equivalent to five and at that point, I'd reach equilibrium.

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And so that is when I would have reached my hypothetical max.

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And so why this is so important is that when I do this little equation, let's say it's

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five divided by 0.1, which is 50, right?

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Which means 50 is going to be my hypothetical max.

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So I know that if I'm signing up five people every month and I'm losing 10% of my clients every

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month, that I will reach a business that has 50 clients on average and I will not be able to

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increase that number ever, unless I either increase the amount of people I sign up,

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the rate at which I sign them up, or I decrease the rate at which people leave.

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And that's it.

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Pretty cool, right?

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Like this equation has like changed my life.

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So what it does is it allows me to make very quick calculations to understand where I'm

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at, whether we're doing well, whether we're shrinking, et cetera.

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So for example, if we had the same equation where I said I had 30 people right now,

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and I said I'm signing up two people a month, right?

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And I've got 10% churn.

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Then I know that the hypothetical max if that is 20, right?

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Is 20, which means that I'm going to be shrinking from 30 to 20 over the next

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half of many months unless I fix this.

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And so it gives me a very clear snapshot of whatever I'm currently doing

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and extrapolates into the future.

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Now, you probably already have some ideas of how you could use this in your business, right?

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This gives you a hypothetical max that projects out your current rate

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so you can understand where you're going.

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That's the point, all right?

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Now, I'm going to draw a little dotted line here.

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That is the first use of this equation.

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The second use is understanding lifetime value, all right?

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So let's say that we have a client,

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and the average revenue per client that we have per month,

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let's say is $500, all right?

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So let's say it's, let's use a different number.

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I'll say $1,000, all right?

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That's a little something, all right?

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So $1,000 per month is my average revenue per client.

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Now, let's say that I can keep a $1,000 per month client

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for five months.

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So my churn, right?

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The percentage that would leave every month would be 20%.

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All right?

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So 20%, which would be 0.2, right, is my rate of people leaving.

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20% of my customer.

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So if I have 10 customers to leave every month,

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it's 20%, all right?

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It's churn.

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Now, when I phrase the equation or whatever,

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when I frame it this way,

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I can now extrapolate how much this person is worth to me.

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So if I know that my average person pays me a thousand dollars

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a month, and I know that on average, 20% of my customers leave every month,

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then I know that my customers are on average worth $5,000,

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which is 1,000 divided by 0.2.

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Pretty sweet, right?

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So now I know that if all customers that come to me,

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if I change nothing or worth $5,000,

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then that gives me a number that I can go and mark it with.

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I know that I can spend at least $1,000, $2,000 to go acquire this customer, right?

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I'm using rough math.

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It'd be less than $2,000.

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You want to be a three to one.

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I'm not going to get into that right now.

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But that's the point here is that this would give me rough math

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to know how much I could spend to acquire a customer.

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That's super useful.

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Now, with these two things together,

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I can know where my business is going to stall.

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I can also see how I can manipulate these variables

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in order to know where my business is going to reach.

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Now, I can also see if I'm increasing,

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if I'm growing my business,

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or if my business is shrinking,

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simply by knowing what my inflow of customers in versus my outflow.

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Now, you can also do this on a bigger scale.

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I said it's three variations of the same concept, all right?

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Now, let's say I'm signing up $10,000 a month of new business, all right?

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So, this is the same concept as this.

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What I was talking about over here where you know I'm signing up five customers a month.

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But this is just basically combining the first two things into one overall number, all right?

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So, I'm signing up $10,000 a month of new business, all right?

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That's what I'm signing up in new business per month, all right?

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Now, if I know that I'm losing, again, 10% of my revenue per month,

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then I know it's 10%, boops, which is 0.1, right, or 0.1.

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Then I know that this business is going to cap out at $100,000 per month.

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Hey guys, real quick, if you're new to the podcast,

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I have a book on Amazon called $100 million offers that over 8,000 five star reviews

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and it has almost a perfect score.

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You can get it for 99 cents on Kindle.

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The reason I bring it up is that I put over a thousand hours into writing that book

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and it's my biggest gift for our community.

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So, it's my very shameless way of trying to get you to like me more

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and ultimately make more dollars to that later on in your business career.

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I can finish the part with you.

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So, that's my gift, go check it out, Amazon, and back to the show.

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Now, again, the reason that that's important and the reason that I use all three of these

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variations of this equation is because I can see if I'm shrinking or I'm getting bigger.

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If I know that we signed up $10,000 in a month and we're doing 10% turn

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and I know we're going to extrapolate out to $100,000 a month.

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But if we're currently at 200, I'm like, that's not good, we need to fix something.

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Or if we're at 50, I'd be like, that's awesome, we're going to double.

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But the thing is, is that you're going to double and then you're going to cap.

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And what's more is that as you do this, unless you have negative turn,

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which most people do not have in service-based businesses,

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what's going to happen is that your rate of growth is going to slow.

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All right, so it looks like this.

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All right, and so this is going to be your hypothetical max,

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right at the top here.

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All right, and so what happens is you quickly, like when you have zero clients,

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when you sign up 10 people, right, boom, you have a huge explosion in growth.

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Right, percentage wise, there's like a vertical line.

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Right, but the next month, when you have 10 and you lose 2, now you have 8,

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but then you gain another 10, but you only gain 8, right?

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But then now you lose 10% again, right?

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So you lose, or is our 20% again, but now you lose 3 because 10% is bigger of 18, right?

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So now you drop down to 15, but then you add another 10, right?

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But now you're at 25, but you notice how the rate goes from 10 to 8 to 7, right?

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The growth continues to slow down over time because churn eats out a bigger and bigger percentage,

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right? And so with this, you can know that this is going to be your hypothetical max,

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realistically, the most business has enough volatility that once you're at about 80, 90%

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of your max, which would be like right here, right? It's realistically where you'll

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usually end up calving up because your fluctuations in business are such that

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that's around where you're going to be.

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Now, I'm going to add in a bonus thing for you, which is called the golden ratio.

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And so the golden ratio is the way to beat this equation so that you actually never end your

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growth. Here's how it works. We're going to have two rates. So you have the rate of people leaving,

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right? Leaving percentage. You can put that as whatever you want. The fancy word is churn.

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Leaving percentage, x is percentage, cancel percentage, whatever.

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And then here you have your referral percentage.

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This is where things get magical. So if 10% of your customers were to refer a new customer every

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month and 5% of your customers leave every month, then you have 10% over 5%

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and it means that your business will double every growth period. Sorry, it will continue to

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unendingly grow because the more people who come in from referrals, a smaller percentage leave

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every month than this is called negative churn. This is where you have a business that grows

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faster than it turns on its own without paid advertising because your product is so good.

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That is where we all want to go. This is the promised land. This is the golden ratio,

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just what I call it. And when you can achieve this, you can grow forever.

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Now, realistically, you don't grow forever because you'll get big enough and you'll mess

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something up and then all of a sudden your referrals percentage will go down or your churn

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percentage will go up. One of those things happen. But when you can achieve this for a period of time,

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that is when you have crazy growth. Because not only are you getting customers from your normal

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acquisition channels, but you're actually the percentage of customers who refer, which is why it's

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important, is it stays fixed and it's greater than your person's churn. And so it just continues

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to grow and grow grow, which is awesome. So as a quick recap for you, the pie equation is the

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most used equation that I use in all of business, especially if you have a recurring revenue-based

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business. But even if you do not, it's still an awesome equation. And I use it in three specific

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ways. One is so that I can know whether I'm growing or shrinking. Number one, number two, I used

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to extrapolate out what my current acquisition versus my outflow rate, how much I'm going to

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level out at. This equation gives me that answer. To the same degree, it also gives me my hypothetical

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lifetime value per client. So I can know that how much I can spend to acquire a customer because I

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can know exactly what they're going to be worth to me, given their churn with a pay me on average

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per month. And again, I can put all those things together into one number where I say I'm starting

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up this much new business per month and this much business is leaving. And this is going to be my

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overall number. This top number is going to be the overall number that I'm going to be able to

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generate per month in my business. And so putting all these things together is I use this equation,

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I mean, five times a day. I use it all the time. I use it when I'm coaching people. I use it when

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I'm thinking about how we're doing. And this is the type of back and back in math that I feel like

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every entrepreneur needs to have in order to be able to understand where their business is and

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how it's doing. And let me show you one more way to use this because like I said, I use this

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equation literally every day all the time. And it's by combining two of those pieces. So if I had

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like I said earlier, let's say I had $5,000 was the lifetime value that I calculated,

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which was based off of $1,000 per month divided by 20% churn. That gives me my $5,000.

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Now, let's say that I know that I'm signing up 20 clients a month, I can know that simply by

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these two numbers, if I know what my inflow is, 20 clients a month, and I know that they're going to

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be worth $5,000 total, then I know that my business is going to level out at $100,000 per month.

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This is like the biggest thing ever. This is how the whole game works. This is the equation,

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this is how everything that I do extrapolates off of this thing. And so 20 per month,

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now here's where it gets tricky because you're like, well, that makes sense. It's math. Yeah,

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but it doesn't look like that when you're in it. Because when you're in it, you sign up 20 customers

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and you're at $1,000 per customer, you're doing $20,000 a month. And you don't know if you're

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doing well or not because you don't can't seem to the future to see that if you just keep doing

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what you're doing and you don't break it and you don't get entrepreneur ADD and you don't get

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shiny objects in it. If you just keep doing what you're doing every month, you drop another 20

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in, right? You drop another 20 and you drop another 20 in, then you're going to get to $100,000 a

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month, right? It takes time for recurring revenue businesses to get interaction. And so if you

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understand this, it can give you kind of this peace of mind and understanding where you're going,

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where you're at, whether you're growing, whether you're shrinking, and what you need to do to fix it.

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Because with these equations, you can say, either I have to increase the lifetime value, I have to

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buy either increasing the price or decreasing the turn, which is one of those two things,

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or I have to increase my inflow. And simply by understanding those three pieces, piece number one,

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which is my price, piece number two, which is your turn, piece number three, which is your inflow.

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If you understand those three pieces, then you can understand exactly how to make your business,

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however big you want. So that is the pie equation. This is the most used equation that I use. I

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wish I could have a sexier title for this because everyone needs to watch it and understand it

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in absolute depth because this is everything. When I talk to a business owner, when they're struggling,

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when they don't know what to do, this is what I use. This is it. Like this is what I use. When I'm

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trying to figure out with their business, I'm like, what's your inflow? What's your turn? What's

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your average price per user? It's the first thing I'm asking. Literally, it's the first two questions

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of the last. And then I'm like, what's your revenue right now? And just by knowing that, I can know

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whether they're growing, whether they're shrinking, how fast they're growing, I can know where they're

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going to level out. I can know how many customers they're going to level out at. I can know all of

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these things simply by asking those four pieces of data and having this equation in my back pocket.

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And so I use this every day. It's like I breathe this equation and the more you play with it and

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the more you understand it, the more powerful you be as an entrepreneur and I promise you it will

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be worth mastering. So anyways, hope you enjoy this. Hopefully you like this. Leave review for,

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you know, the podcast or if you're watching this on YouTube, leave a nice review, subscribe,

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all that kind of stuff. Otherwise, keeping amazing, I'm rooting for you. Bye!