WEBVTT

1
00:00:00.000 --> 00:00:03.120
And if you don't have high quality data, then you will have poor decisions and you will not

2
00:00:03.120 --> 00:00:07.440
like the life that you end up leading. Welcome to the game where we talk about how to get more

3
00:00:07.440 --> 00:00:11.200
customers, how to make more customers, how to keep them longer in the many failures and lessons

4
00:00:11.200 --> 00:00:13.600
we have learned along the way. I hope you enjoy and subscribe.

5
00:00:18.080 --> 00:00:22.400
If you're an entrepreneur, then you need to be able to make decisions. In order to make good

6
00:00:22.400 --> 00:00:26.080
decisions, you need to have high quality data. And if you don't have high quality data, then you

7
00:00:26.080 --> 00:00:29.920
will have poor decisions and you will not like the life that you end up leading. And so,

8
00:00:29.920 --> 00:00:34.080
one of the important skills or attributes that I believe successful entrepreneurs have is an

9
00:00:34.080 --> 00:00:38.320
understanding of the basic equations of business. And so, what I want to share with you today

10
00:00:38.320 --> 00:00:41.920
are probably two of the most used equations that I use when talking to the portfolio companies

11
00:00:41.920 --> 00:00:46.800
that we have when analyzing decisions about what we need to do with the business, where our bottlenecks

12
00:00:46.800 --> 00:00:52.480
are, etc. All right. And so, I also think that understanding the equations will make you a better

13
00:00:52.560 --> 00:00:56.000
business owner because you'll understand the things that move the levers within how much money

14
00:00:56.000 --> 00:01:00.080
you're going to make in a business. And so, if you understand that these are the most important

15
00:01:00.080 --> 00:01:05.040
levers in the business, then you'll be more prudent in terms of when you make decisions around

16
00:01:05.040 --> 00:01:10.880
them. All right. So, there's the fundamental equation that I like as a simple understanding of

17
00:01:10.880 --> 00:01:16.880
business, which is just number of new sales or sales velocity, right? Number of new sales.

18
00:01:17.360 --> 00:01:23.280
So, this equation has three variables in it. One is the number of new sales per month,

19
00:01:23.280 --> 00:01:27.760
which most people know. The second is the lifetime gross profit per customer, which most people

20
00:01:27.760 --> 00:01:32.480
have no idea. And then the third is hypothetical max revenue, which most people also have no idea

21
00:01:32.480 --> 00:01:37.200
about. And so, then, if this is the equation that I want to get to, right? Because from here,

22
00:01:37.200 --> 00:01:40.960
I can tell if business is growing or shrinking because let's say your hypothetical max revenue

23
00:01:40.960 --> 00:01:44.560
is a million dollars a month and you're doing 1.5 right now. Well, it means that at your current

24
00:01:44.560 --> 00:01:48.080
sales velocity and current lifetime gross profit, you're actually going to be shrinking, right?

25
00:01:48.080 --> 00:01:51.120
So, like, ah, that's probably a company that I don't want to deal with or I'm going to know

26
00:01:51.120 --> 00:01:55.600
that there's a problem, right? The flip side is if I have a company that's a million dollars a

27
00:01:55.600 --> 00:01:58.400
month and they're currently doing 500,000 dollars a month, then I know that they're going to be

28
00:01:58.400 --> 00:02:01.840
growing and then they will cap it a million. So, I know that this thing, if we change nothing,

29
00:02:01.840 --> 00:02:06.800
will double, right? The third scenario, which is actually probably the most common, is when

30
00:02:06.800 --> 00:02:12.000
people or business owners have, they're at equilibrium. So, they're pretty much maintaining

31
00:02:12.080 --> 00:02:18.800
the same sales month over month over month and the revenue has remained more or less unchanged.

32
00:02:18.800 --> 00:02:22.240
That's actually pretty beautiful because there's other stats you can pull from that with very high

33
00:02:22.240 --> 00:02:25.600
degrees of certainty, the longer they've been maintaining that period of time. And so, then you

34
00:02:25.600 --> 00:02:29.840
can actually make really good extrapolations about the future, all right? And so, that is equation

35
00:02:29.840 --> 00:02:34.080
number one, which I would just call like fundamental to doing business. You have to know how much money

36
00:02:34.080 --> 00:02:39.040
you're going to be making and how many of those things you're going to sell, okay? Now, the second

37
00:02:39.040 --> 00:02:42.560
is, is how do we actually figure out what the lifetime risk profit is per customer, all right? So,

38
00:02:42.560 --> 00:02:47.920
you've got price, times margin, divided by turn. The alternative to this, this is in recurring

39
00:02:47.920 --> 00:02:54.640
base businesses. The alternative to this is simply price margin, price times margin times number

40
00:02:54.640 --> 00:03:01.040
of purchases. So, it's like if you sell a hundred dollar widget and the average person buys, you know,

41
00:03:01.040 --> 00:03:06.640
three of them and you make a 50% margin, then it's 50 times 50, you know, 50 plus 50 plus 50, which

42
00:03:06.640 --> 00:03:12.000
is 50 times three. And so, your lifetime gross profit per customer is 150 bucks. The reason that

43
00:03:12.000 --> 00:03:16.000
that's so important is that if you know that it costs you $10 to a car customer, then you have a

44
00:03:16.000 --> 00:03:21.360
15 to one LTVDCAC ratio, which is awesome, right? Which is high five, keep going, keep doing more

45
00:03:21.360 --> 00:03:25.200
of that thing. But a lot of times people don't know what these numbers are. And so, then they can't

46
00:03:25.200 --> 00:03:28.000
make decisions. They're like, should we increase our marketing expense? We do more reach outs,

47
00:03:28.000 --> 00:03:31.680
are these numbers good, right? Because people want to understand like, is this good or bad, right?

48
00:03:31.680 --> 00:03:34.640
Which is kind of funny, because you want to have weight for someone else's judgment on whether

49
00:03:34.640 --> 00:03:39.520
or not a number is good or bad. But anyways, we'll get beyond that. So, when I know this, right,

50
00:03:39.520 --> 00:03:44.400
when I'm dealing with a company that doesn't know, you know, what their numbers are, I will walk through

51
00:03:44.400 --> 00:03:48.960
these two equations with them. So, let's walk through one together, all right? I actually had a

52
00:03:48.960 --> 00:03:54.800
recent conversation with a company that had a service-based business, they were marketing agency

53
00:03:54.800 --> 00:04:03.040
of sorts, cool little niche. And so, they were selling $1,000 a month service. It cost them $100

54
00:04:03.040 --> 00:04:09.680
a month, right? In cost. So, there's price. They were selling 120 new units per month. They had

55
00:04:09.680 --> 00:04:16.080
a 40. So, these are the numbers that we knew, right, that they knew as of right now. And so,

56
00:04:16.080 --> 00:04:21.440
from these numbers, we're able to learn a lot about the business, right? So, one of these is that

57
00:04:21.440 --> 00:04:31.040
they have 90% gross margins, right? Based on their new units per month, right? We know that we can

58
00:04:31.040 --> 00:04:39.200
go 120 divided by churn, but we don't have the churn percentage. Ah, but we do. Because 50 over

59
00:04:39.200 --> 00:04:43.600
380 is your churn percentage, which I'm guessing is going to be like 13 or something like that. Let's see

60
00:04:43.600 --> 00:04:49.520
here. This 13, 13.1%. Right? So, I'm going to buy this by 0.13, which is going to give me my

61
00:04:49.520 --> 00:04:57.360
hypothetical max. Ready? This is how business really works. My friends, most people don't want to do

62
00:04:57.360 --> 00:05:04.560
this math, but this is why most people don't make money. All right. So, 923 is the max amount

63
00:05:05.520 --> 00:05:11.760
of clients that they're going to be able to have at this current juncture. So, if nothing changes

64
00:05:11.760 --> 00:05:15.360
about the business, their churn stays the same. Their number of new customers stays the same. That's

65
00:05:15.360 --> 00:05:21.200
where they're going to cap out, which means that this business will do $923,000 per month, right? That's

66
00:05:21.920 --> 00:05:26.800
where that's where it'll max out, right? Cool. Nothing wrong with that. And they have 90% gross margins,

67
00:05:26.800 --> 00:05:30.720
right? Now, there's obviously other costs that have to go into doing the business, but they probably

68
00:05:30.720 --> 00:05:35.840
run this at, I probably have 40 to 50% net margin. Because if you're running 90, you can probably cover

69
00:05:35.840 --> 00:05:41.520
that, right? It's a good business. Six million bucks a year. Good business, right? And so,

70
00:05:41.520 --> 00:05:46.080
the idea here is, if they're currently, because remember, we know what their current is,

71
00:05:46.080 --> 00:05:53.120
they're currently at 380,000, because we have 380 active customers per month, then this business

72
00:05:53.120 --> 00:05:57.200
is going to be a fast growing business, right? I mean, think about. They're going to 120 right now,

73
00:05:57.840 --> 00:06:01.920
and their churn is 13%. They're going to be, they're going to jump to, you know, 500 next month,

74
00:06:01.920 --> 00:06:05.040
and I mean, it's going to, they're going to, they're going to jump pretty quickly here, right? But

75
00:06:05.040 --> 00:06:10.240
what it'll do because of the churn is the churn will start evening out their growth, right? Because

76
00:06:10.240 --> 00:06:14.640
this point right here is the point of equilibrium. It means that the number of new sales they make,

77
00:06:14.640 --> 00:06:18.720
compared to the number of people that exit the business are the same. So, let me actually spell it

78
00:06:18.720 --> 00:06:25.760
out, because I think it might be useful. Most of the nation wrote quick. If you are a business owner

79
00:06:25.760 --> 00:06:31.200
that has a big old business and wants to get to a much bigger business, going to $50, $100,000 plus,

80
00:06:31.200 --> 00:06:35.360
we would love to talk to you. And if you like that, we would like to hear more about it. Go to

81
00:06:35.360 --> 00:06:40.000
acquisition.com and you can plan anywhere on the page and talk to one of our team and see if we

82
00:06:40.000 --> 00:06:48.400
can help you get there. So, I said, 923 is the max, right? That this thing can do. Why is that? Well,

83
00:06:48.400 --> 00:06:55.520
we said the churn was 13%, right? So, times 0.13, right? It is going to be equivalent to,

84
00:06:57.200 --> 00:07:04.560
120. All right? Now, if 923 is equal to 120, which is the number of new sales,

85
00:07:04.560 --> 00:07:08.800
then it means that you're going to have 120 new sales every month and you're also going to be losing

86
00:07:08.800 --> 00:07:14.000
120 every month, which means zero growth. All right? That is a point of equilibrium.

87
00:07:14.000 --> 00:07:17.520
The reason the equilibrium point is so important is that that's where we know we can, like,

88
00:07:17.520 --> 00:07:20.880
that's where we're going to level out again, we have to find a new channel for growth, right?

89
00:07:20.880 --> 00:07:25.520
Now, right now, if your business is plateauing, then you can make, you can make these assumptions

90
00:07:25.520 --> 00:07:28.480
and you can do this math about your business. A lot of people are like, I don't know what my

91
00:07:28.480 --> 00:07:33.920
LTV is, right? And I'll give you a simple another example of something like that of a business

92
00:07:34.000 --> 00:07:37.520
in equilibrium. So, let's say you've got a business that's doing 100,000 dollars a month,

93
00:07:37.520 --> 00:07:42.640
right? 100,000 dollars a month. Let's say, you know, the price point is, you know, I'll use

94
00:07:42.640 --> 00:07:46.640
simple numbers here again. So, let's say it's a thousand bucks a month, right, for the services,

95
00:07:46.640 --> 00:07:50.960
right? Which means that they have a hundred customers. Simple business so far, right? So,

96
00:07:50.960 --> 00:07:55.360
now the question is just going to be sales velocity and churn. So, let's say that they've got 10%

97
00:07:55.360 --> 00:08:00.240
churn and they've get and they get 10 new customers per month, right? And the thing is a lot of people

98
00:08:00.240 --> 00:08:04.080
don't know this number, right? Which is silly to me, but a lot of people don't know that number.

99
00:08:04.080 --> 00:08:08.720
But the thing is, is if you are in equilibrium and they're getting 10 new customers a month,

100
00:08:08.720 --> 00:08:13.440
then I can tell you the churn's 10%. I don't need them to calculate for me. I know I'm like,

101
00:08:13.440 --> 00:08:17.280
so you haven't grown for six months, yes. Let's average out the number of sales that you get

102
00:08:17.280 --> 00:08:21.440
month over month over the last six months and then they'll tell me it's been, you know, around 10.

103
00:08:21.440 --> 00:08:28.080
I'm like, okay, well, if you have a hundred current, right? And your outflow is 10 and you haven't

104
00:08:28.080 --> 00:08:32.400
grown, sorry, so your inflow is 10 and you haven't grown, then it means your outflow is 10.

105
00:08:32.400 --> 00:08:38.640
And then it's simply 10 over 100. It's 10%. That's the game, right? And so now, you're like, well,

106
00:08:38.640 --> 00:08:42.000
why do I want to do all that stuff? Well, now we know what the LTV is because again,

107
00:08:42.000 --> 00:08:46.080
they're probably not going to know what that number is. So, we say, okay, well, $1,000, remember,

108
00:08:46.080 --> 00:08:52.240
do-do-do-do times our margin percentage, right? I didn't put the margin in here. Let's just say

109
00:08:52.240 --> 00:08:58.720
it's 80%, right? Times 80%. And we divide it by churn, which is 10%, right? Which means

110
00:08:59.280 --> 00:09:04.080
that we're going to make $8,000 per customer, all right, in gross profit. The reason this is

111
00:09:04.080 --> 00:09:06.960
important is they might be like, I don't know how to grow. I'm like, we're going to make an 8 grand per

112
00:09:06.960 --> 00:09:12.320
customer. How much is it costing you to acquire a customer? And this is, this is where it gets funky.

113
00:09:12.320 --> 00:09:15.520
A lot of people are like, well, it costs about a thousand bucks to acquire a customer. I'm like,

114
00:09:15.520 --> 00:09:20.400
great, why don't we do 10 times more of that? And sometimes it's really that simple. It's like,

115
00:09:20.400 --> 00:09:24.080
I just we never saw like that. I'm like, right, you're spending 1,000 to make 8. Let's play that

116
00:09:24.080 --> 00:09:28.800
game as many times as we possibly possibly can, right? And if it's like, well, we can't do, we've

117
00:09:28.800 --> 00:09:33.600
maxed out this channel. It's like, okay, well, we have $8,000 to work with in order to acquire

118
00:09:33.600 --> 00:09:37.920
customers, right? But let's be real for a second. You don't want to run a nonprofit, even though a

119
00:09:37.920 --> 00:09:46.160
lot of people do. But if you're in the game to make money, right? Then this $8,000, right? Realistically,

120
00:09:46.240 --> 00:09:51.920
in order to have a sustainable business, you need to have a 3 to 1 or higher, right? It's called

121
00:09:51.920 --> 00:09:59.040
the LTV to CAC ratio, all right? And so for me, I personally really don't look at businesses that

122
00:09:59.040 --> 00:10:03.920
have less than this, 10 to 1. And that's just a choice. You can do that. But there's tons of

123
00:10:03.920 --> 00:10:07.040
research studies that have figured this out, especially in the software world, a lot of things

124
00:10:07.040 --> 00:10:12.640
are quantified or quantitized or whatever you want to say here, right? Is that 3 to 1 LTV to CAC

125
00:10:12.720 --> 00:10:17.840
ratio or greater is what is necessary for growth, all right? And a lot of this also has to do with

126
00:10:17.840 --> 00:10:23.920
cash flow. So imagine for a second that you had a $10 per month thing, right? Okay. And let's say

127
00:10:23.920 --> 00:10:29.040
you had someone and you know they're going to stay for 10 years, something super long, right? 10

128
00:10:29.040 --> 00:10:36.240
years. That's a very long LTV. But the total lifetime value of a customer like this for 10 years

129
00:10:36.240 --> 00:10:41.040
is 120 months. It's going to be 1200 bucks, right? And let's just assume it's a digital product

130
00:10:41.040 --> 00:10:46.320
so that there's, you know, almost virtually all growth marks, right? Well, the thing is is you

131
00:10:46.320 --> 00:10:50.800
might have a 3 to 1. So let's say it costs somebody, you know, let's say it costs you 200 bucks,

132
00:10:50.800 --> 00:10:56.480
right? To acquire this. You're like, woo, I'm going to be rich, right? But the thing is is $200

133
00:10:57.680 --> 00:11:03.040
is 18 months or 20 months, rather excuse me, is 20 months. It's going to take you 20 months to

134
00:11:03.040 --> 00:11:08.400
recoup off of your $10 per month, right? And so your cash flow is going to be horrible, right? Even

135
00:11:08.400 --> 00:11:12.160
though the business fundamentally is good. And that's why people raise capital and they take outside

136
00:11:12.160 --> 00:11:16.000
investors and all kind of stuff, right? But the game is then figuring out, which this is actually

137
00:11:16.000 --> 00:11:20.160
the topic of my third book that'll come out probably in a year or so. It's called Money Models,

138
00:11:20.160 --> 00:11:26.640
which is how can we figure out a way to make money getting this customer? How can we figure out a way

139
00:11:26.640 --> 00:11:32.000
that we can, we can do a little bit of, you know, money kung fu and figure out a way to either

140
00:11:32.000 --> 00:11:36.880
decrease the cost of acquisition, right? If we can get this from 200 to let's say 50, right? That's

141
00:11:36.880 --> 00:11:40.800
like, okay, well, now I got five months. It's like, okay, can we, can we put some sort of like, you

142
00:11:40.800 --> 00:11:47.760
know, buy, buy three months up front, you know, or buy, buy five months up front by your first,

143
00:11:47.760 --> 00:11:52.320
your first year is half off, right? If we know they're going to stick. So if we did first year at 50%

144
00:11:52.320 --> 00:11:59.120
off, right? Then we're going to have $60, right? That we're going to make upfront, right? And we know

145
00:11:59.120 --> 00:12:06.320
that it's going to cost us $50 to make this $60. So we actually have plus 10 in cash flow for the

146
00:12:06.320 --> 00:12:10.880
business within on the first transaction. And then we can keep spending our money around. And we

147
00:12:10.880 --> 00:12:18.000
just know that 12 months from now, this guy is going to start recurring at $10 per month, right?

148
00:12:18.000 --> 00:12:21.760
And then we're good to go. But this way we cash for the acquisition. And so that's the kind of

149
00:12:21.760 --> 00:12:26.000
little stuff that I think it just sometimes takes experience of having done this a lot of times to

150
00:12:26.000 --> 00:12:31.840
know. But I knew this is definitely a more in the in the in the trenches. How do how we look at

151
00:12:31.840 --> 00:12:36.720
businesses that we're looking to acquire percentages of in in the portfolio? These are the two

152
00:12:36.720 --> 00:12:41.520
fundamental equations you have to know, like the back of your hand did to do, right? You have to

153
00:12:41.520 --> 00:12:46.640
know this one and you have to know how to calculate LTV. If you have those two equations, you can pretty

154
00:12:46.640 --> 00:12:50.640
much learn everything you need to know about a business on the back of a napkin. All right, so

155
00:12:50.640 --> 00:12:54.080
hope you found this valuable. You keep being awesome. Most of the nation, a lot of people are broke.

156
00:12:54.080 --> 00:12:56.480
I don't want you to be one of them. That's why I made this click subscribe if you dig it.

157
00:12:56.480 --> 00:13:05.040
Don't click if you don't. Either way, love you. Bye.