In this insightful discussion, the host introduces a transformative business tool known as the PI equation, which has become the cornerstone of his entrepreneurial strategy. The equation, which calculates inflow divided by outflow, helps predict a business's hypothetical maximum customer base and revenue, as well as determining the lifetime value of a client. By understanding and manipulating these variables, entrepreneurs can forecast growth or contraction, and strategize accordingly. The host underscores the equation's versatility across various business models and emphasizes its pivotal role in decision-making, growth assessment, and long-term planning. He also introduces the concept of the golden ratio, where a business can achieve sustained growth through a favorable balance of customer referrals and churn rate. This equation, he asserts, is a fundamental metric that every business owner should master to navigate the complexities of business growth and sustainability.
"What I want to talk to you about is how to answer the hardest questions in business using one math equation that only has three variables."
This quote explains the purpose of the PI equation, which is to solve complex business questions with a simple mathematical approach.
"This is the number one equation that I use in my entire life for business. It's the one that I use most frequently."
Speaker A highlights the significance and personal reliance on the PI equation in their business operations.
"And so I was playing around with math stuff, and this is actually at a time when I was trying to get better at math because I wasn't naturally good at math."
Speaker A shares their journey towards understanding math, which was not their strong suit, leading to the development of the PI equation.
"And one day I was driving, and it actually just hit me. I was like, what if I just divided it by this, and that would just tell me the number? And it turns out I was right."
The quote captures the eureka moment when Speaker A conceptualized the PI equation.
"And so it is a simple equation. It is a division equation, all right? Very simple. Draw a big line here."
This quote introduces the PI equation as a straightforward division-based formula.
"What's important about this is that the inflow is actually a rate thing. So basically, you're dividing rates to get an outcome."
Speaker A clarifies that the PI equation deals with rates, specifically the rate of inflow versus outflow, to determine future business performance.
"So for example, let's say I have an inflow of five new customers per month, all right? I get five new customers a month. And let's say that my churn on my membership, my recurring, my service, whatever, right, is, let's say it's 10%."
Speaker A sets up a scenario to illustrate how the PI equation is applied in a real business context.
"So I know that if I'm signing up five people every month and I'm losing 10% of my clients every month, that I will reach a business that has 50 clients on average, and I will not be able to increase that number ever, unless I either increase the amount of people I sign up the rate at which."
This quote concludes the example by explaining the outcome of the PI equation and its implications for the business's customer capacity.
"I sign them up, or I decrease the rate at which people leave. And that's it. Pretty cool, right? Like this equation has changed my life."
This quote emphasizes the simplicity and transformative impact of the equation on the speaker's business strategy.
"So, for example, if we had the same equation where I said I had 30 people right now, and I said I'm signing up two people a month, right? And I've got 10% churn, then I know that the hypothetical max of that is 20, right, is 20, which means that I'm going to be shrinking from 30 to 20 over the next however many months unless I fix this."
The quote illustrates a practical example of how the equation can be used to predict business shrinkage due to churn, highlighting the urgency of addressing the issue.
"So if I know that my average person pays me $1,000 a month, and I know that on average 20% of my customers leave every month, then I know that my customers are on average worth $5,000, which is 1000 divided by zero."
This quote demonstrates how to calculate the lifetime value of a customer based on monthly revenue and churn rate, which is essential for making informed marketing and acquisition decisions.
"Pretty sweet, right? So now I know that if all customers that come to me, if I change nothing, are worth $5,000, then that gives me a number that I can go and market with."
The quote highlights the practical application of knowing the lifetime value, which can guide marketing strategies and budgeting for customer acquisition.
"Now let's say I'm signing up $10,000 a month of new business, all right? So it's the same concept as this, what I was talking about over here, where, you know, I'm signing up five customers a month, but this is just basically combining the first two things into one overall number."
The quote explains how to apply the equation to determine the potential monthly revenue by combining the monthly sign-up value with the churn rate.
"Then I know that this business is going to cap out at $100,000 per month."
This quote provides a clear example of how to use the equation to calculate the maximum revenue a business can expect to achieve under current conditions.
"I have a book on Amazon. It's called 100 million dollar offers. At over 8005 star reviews, it has almost a perfect score. You can get it for Kindle."
This quote is a straightforward promotion of Speaker C's book, highlighting its success and availability on Amazon.
"It's my very shameless way of trying to get you to like me more and ultimately make more dollars so that later on in your business career I can potentially partner with you."
The quote reveals the strategic intent behind the book promotion, which is to build a relationship with the audience that may lead to future business collaborations.
"If I know that we signed up $10,000 in a month and we're doing 10% turn, and I know we're going to extrapolate out to $100,000 a month, but if we're currently at 200, I'm like, that's not good. We need to fix something. Or if we're at 50, I'll be like, that's awesome. We're going to double."
This quote explains how churn affects the projection of business growth. If the current earnings are not in line with the projections, it indicates a problem that needs addressing.
"And so what happens is you quickly, like when you have zero clients, when you sign up ten people, right? Boom, you have a huge explosion in growth, right. Percentage wise, it's like a vertical line, right? But the next month when you have ten and you lose two, now you have eight, but then you gain another ten. But you only gained eight."
This quote describes the initial rapid growth when starting from zero and how the growth rate diminishes as the business loses clients to churn, even as it gains new ones.
"But now you're at 25. But you notice how the rate goes from ten to eight to seven. The growth continues to slow down over time because Churn eats out a bigger and bigger percentage."
The quote illustrates the declining growth rate as the business scales up, showing that the impact of churn becomes more significant over time.
"This is called net negative churn. This is where you have a business that grows faster than it churns on its own without paid advertising because your product is so good. That is where we all want to go. This is the promised land. This is the golden ratio, which is what I call it. And when you can achieve this, you can grow forever."
The quote explains the concept of net negative churn, where the business grows organically through referrals at a rate that outpaces churn, leading to sustained growth.
"Now, realistically, you don't grow forever because you'll get big enough and you'll mess something up. And then all of a sudden your referral percentage will go down or your churn percentage will go up. One of those things happen."
This quote acknowledges the practical limitations of the golden ratio, indicating that as a business grows, it may face challenges that could disrupt the balance between referrals and churn.
"The PI equation is the most used equation that I use in all of business, especially if you have a recurring revenue based business."
This quote introduces the PI equation as a valuable tool for businesses, particularly those with recurring revenue models.
"It also gives me my hypothetical lifetime value per client. So I can know that how much I can spend to acquire a customer because I can know exactly what they're going to be worth to me given their churn and what they pay me on average per month."
The quote highlights the use of the PI equation in determining the lifetime value of a client, which is crucial for making informed decisions on customer acquisition spending.
"I'm starting up this much new business per month and this much business is leaving. And this is going to be my overall number that I'm going to be able to generate per month in my business."
This quote underlines the need to balance new business with lost business to estimate monthly revenue.
"I use this equation five times a day. I use it all the time. I use it when I'm coaching people. I use it when I'm thinking about how we're doing."
The quote highlights the frequent and versatile use of the equation in Speaker A's daily business activities.
"That gives me my $5,000. Now, let's say that I know that I'm signing up 20 clients a month. I can know that simply by these two numbers. If I know what my inflow is, 20 clients a month, and I know that they're going to be worth $5,000 total, then I know that my business is going to level out at $100,000 per month."
This quote explains how to use customer lifetime value and client inflow to forecast monthly revenue.
"It takes time for recurring revenue businesses to gain traction. And so if you understand this, it can give you kind of this peace of mind in understanding where you're going, where you're at, whether you're growing, whether you're shrinking, and what you need to do to fix it."
The quote stresses the importance of patience and understanding in the growth of a recurring revenue business.
"If you understand those three pieces, then you can understand exactly how to make your business however big you want."
This quote emphasizes the control business owners have over their growth by manipulating key business metrics.
"When I talk to a business owner, when they're struggling, 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 trying to figure out what their business is."
The quote conveys the practical value of the PI equation in understanding and advising on business matters.
"And the more you play with it and the more you understand it, the more powerful you'll be as an entrepreneur. And I promise you, it will be worth mastering."
This quote serves as motivation for the audience to engage deeply with the PI equation to enhance their entrepreneurial skills.