Answering The Entrepreneur's Hardest Question

“How to Answer The Entrepreneur’s Hardest Questions In Business”

Every entrepreneur should know where their business is and how it’s doing.? Alex Hormozi?

This article is dedicated to the founder/entrepreneur seeking to determine the best way to move their business forward.

I know this sounds strange coming from someone who has been a CPA but I actually don’t like numbers.? I would prefer to “go with my gut.”? But it is virtually impossible to intentionally build a scalable business with no real baseline. The truth is that numbers don’t lie.? There may be some additional context that is needed to understand and interpret the numbers but in general, you can understand what to do next if you understand the numbers related to your business.? I spent hours reviewing the formula I am sharing in this article and I can tell you that it has changed the way I look at my business forever.

This formula was shared by Alex Hormozi and he uses this formula DAILY multiple times a day to help evaluate businesses. He is currently the G.O.A.T in my book when it comes to actionable help to grow my business.? He delivers!? But alas, we again have the conundrum that was the impetus for me to start this newsletter, the details.? This is by far the simplest approach that I have seen and still there is some work that the average founder/entrepreneur may need to do to leverage this calculation to the fullest.? But let’s dive in.?

Alex calls this the Pie Equation. Not related to PI but related to the fact that he was dieting when he discovered it.? This equation consists of just three variables but these three variables will unlock the knowledge we need as founders and entrepreneurs to move our businesses forward.??First, I will share the hardest questions in business, then the three (3) variables we can use to answer these questions followed by detailed examples I created myself to help understand the concept. So here goes...

The Questions?

1. Is my business growing or declining??
2. How much can I should I spend on marketing and advertising to obtain a new customer??
3. What is the monthly revenue capacity of my business??

The Variables?

1. Number of new customers added to my business in month XXX or Inflow.
2. Number of existing customers who left my business in month XXX or outflow or churn.
3. Number of referrals I have received from existing customers in month XXX or referral %

Is my business growing or declining??

This first variation of the formula gives the hypothetical maximum number of customers for your business.??This is calculated by dividing the number of new customers by the % of lost customers.

If I am adding fewer customers does that mean I am declining? (col A/B) ?Not necessarily. In this case, I am only adding 3 new customers a month.? With a 10% churn rate then I will max out at 30 customers.? However, if I figure out that I can reduce the churn rate in half by making a process change, I can increase my hypothetical max even with fewer new customers per month.?

If I increase my new customers by 40% am I growing? (col C/D) ?Not necessarily. If I keep the same churn rate and increase new customers by 40% then I increase my hypothetical max significantly.? However, if my churn rate increases, (bad press, product issue, politics,etc) then even at a 40% increase in new customers the most customers I will be able to maintain in my business is 35..

So with a few simple calculations, I can see where my business is headed and then make decisions on which to do next.? If my churn rate is pretty stable then I look at my sales process and dig deeper to see how I can increase conversion rates.? But if my churn rate increases I need to step back and see how I can reduce that churn.? Perhaps it is a change to the product, maybe the audience needs to change.? The point is, I am making data driven decisions versus throwing something up against a wall to see if it sticks.? (i..e, not wasting money on paid ads when I have a churn issue that requires a product improvement or better audience).

How much can I should I spend on marketing and advertising to obtain a new customer???

The second variation of the formula helps identify how much of a paid ads budget makes sense given the value of the customer to my business.? This variation divides the average revenue per customer per month by the % churn to calculate customer lifetime value (LTV).

?In the Example 0 column.? The customer LTV is $5000 or I could invest even $3000 to acquire a customer and still be profitable.? You can also look at the impact of a pricing change on your business.? So in Examples A/B, a reduction in price results in a significant reduction in LTV but managing churn can help.? It may make sense to invest a bit more in paid advertising as long as I am retaining customers right?? Finally in example C/D you can see that a significant increase in price may or may not support an increased advertising budget if the churn is an issue.??

What is the monthly revenue capacity of my business??

The third variation of the formula helps identify my hypothetical maximum monthly revenue. This variation divides the average revenue per month by the % churn to calculate the most revenue the business will be able to make all things being equal based on the number of customers added each month.

For example, if my business has an average revenue of $10,000 and a 10% churn rate, the most revenue I can generate is $100,000.

Once you have command over these ratios, you no longer need to guess at what size your business is. You can have a more realistic view.? These examples make it clear that the ability to deliver and satisfy customers is the key to the growth of your business.? When? you look at our example column in general a business with $10k monthly revenue with a 10% churn rate will eventually grow to $100k/mo.? However, even if that business ramps up its sales team (Example C) and doubles its monthly revenue, the maximum income it can generate will go DOWN with increased churn (Example D).? By adding data to help see how the business is performing, we can make better decisions.

Every entrepreneur should know where their business is and how it’s doing.? Alex Hormozi?

These are THE equations that Alex Hormozi uses multiple times a day to evaluate business, coach clients and grow businesses. Begin your journey by incorporating this formula into your daily business. Become a data-driven entrepreneur.

Need help capturing the data to grow your business bigger, faster? Register and Attend my next event entitled "Learn how to Leverage Technology and Build a Business that Scales."