This episode breaks down the two crucial equations every entrepreneur must understand to avoid staying "poor." It emphasizes that data-driven decision-making is paramount for business growth. Alex Hormozi provides practical formulas to calculate sales velocity and lifetime gross profit per customer, illustrating how these metrics dictate a business's growth trajectory and profitability, and how to identify equilibrium points.
Key takeaways
Entrepreneurs need high-quality data to make good decisions and understand the basic equations of business to identify levers for increased revenue.
The fundamental equation of business growth involves sales velocity (new sales per month), lifetime gross profit per customer, and hypothetical maximum revenue. Businesses reach equilibrium when new sales equal customer churn.
Lifetime gross profit per customer can be calculated by (Price x Margin) / Churn Rate for recurring businesses or (Price x Margin x Number of Purchases) for non-recurring businesses.
A healthy LTV:CAC ratio is generally 3:1 or higher for sustainable growth. Hormozi personally looks for 10:1 ratios. Even with a good LTV, poor cash flow can occur if the payback period on customer acquisition is too long.
Businesses in equilibrium (plateauing revenue) can back-calculate their churn rate by determining average new customers per month. If 10 new customers are acquired and 100 customers are active with no growth, the churn is 10/100, or 10%.
It’s all about understanding the formulas. Today, Alex (@AlexHormozi) talks about the importance of understanding the two fundamental equations of business to make informed decisions. He also emphasizes the need to know the number of new sales per month and lifetime gross profit per customer.
Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.
Timestamps:
(1:05) - Fundamental equation: number of new sales or sales velocity
(2:38) - How to calculate lifetime gross profit per customer
(7:13) - Equilibrium point is where we level out
(9:08) - Cost to acquire a customer
(10:10) - 3:1 LTV to cap ratio or greater is necessary for growth
Follow Alex Hormozi’s Socials:
LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition
(This episode is a re-run. Original airdate was November 16, 2021)
What does this episode say about analytics & attribution?
Entrepreneurs need high-quality data to make good decisions and understand the basic equations of business to identify levers for increased revenue.
What does this episode say about finance & fundraising?
The fundamental equation of business growth involves sales velocity (new sales per month), lifetime gross profit per customer, and hypothetical maximum revenue. Businesses reach equilibrium when new sales equal customer churn.
What does this episode say about founder & leadership?
Lifetime gross profit per customer can be calculated by (Price x Margin) / Churn Rate for recurring businesses or (Price x Margin x Number of Purchases) for non-recurring businesses.
What does this episode say about customer retention?
A healthy LTV:CAC ratio is generally 3:1 or higher for sustainable growth. Hormozi personally looks for 10:1 ratios. Even with a good LTV, poor cash flow can occur if the payback period on customer acquisition is too long.
What does this episode say about analytics & attribution?
Businesses in equilibrium (plateauing revenue) can back-calculate their churn rate by determining average new customers per month. If 10 new customers are acquired and 100 customers are active with no growth, the churn is 10/100, or 10%.
