https://www.youtube.com/watch?v=FXzDLLdxsCk

1 00:00:00.000 --\> 00:01:00.000 so i was talking to an entrepreneur who
had applied through acquisition.com to potentially become a portfolio
company and one of the questions that i asked on the call was so what's
your ltv like how much you know how much you make per customer of a
lifetime and he honestly was like i don't know what what it is i know i
should know blah blah blah so i'm making this video so that you know one
of the most important metrics in entrepreneurship and i'll give you
three different ways you can calculate it i'm gonna try and remember i
had three before i started this video but when i'm on video sometimes i
forgot so the first one and the easiest one to do this is off of
lifetime the second way to do it is off of churn and the third way is to
do it is off sales velocity all right and i'll finish with sales
velocity because it's the one that i use most frequently but all of
these are good ways of getting and i'll give you approximations and i'll
explain how each of them is calculated now as a quick side note the
reason that this is so important if you don't know who i am
acquisitions.com i own it with a portfolio it's about 100 million here
nothing to sell you i just make these videos because i like doing this
and i'm a crazy person and i am what appears to be looks like i'm in a
closet uh which i am actually in a closet because i don't like having
windows where i work and i wear a wife beater out of choice rather than
necessity anyways so let's rock and

2 00:01:00.000 --\> 00:02:00.000 roll with the three ways to calculate
ltv okay if you are a growing business this will under estimate your ltv
but if you have especially recurring like recurring and it's you've been
doing this for a while and you are growing what you do is let's say that
you did uh you know one million dollars year one you did two million
year two and you did three million year three all right let's just say
that for a simple example and let's say over over that entire period of
time you sold let's say 600 customers okay so what you do here is you
add these up which means you have six million in total sales lifetime
over 600 total customers lifetime all right and so this will give you
the the it's just this is again back of napkin math of how to get to how
much you make per customer so it'd be 6 million divided by 600 which is
probably like 10 grand i'm guessing it's 10k and so that would give you
an underestimation because you will have customers who are still
continuing to pay you so if you it gives you basically from the
beginning until now but it doesn't take the future into account so it
will be under what it is in theory

3 00:02:00.000 --\> 00:03:00.000 but this will give you something to
work off of so that's number one so that's this guy let me give you a
highlight that's this one all right now the second way that you can
calculate lcv is based on churn and if you don't know what turn is it's
going to be the percentage of customers that leave at the end of the
month that were here at the beginning of the month so let's say you have
100 customers at the beginning of the month and let's say of those
hundred you've got 95 at the end note that the amount of questions you
sell sold between here and here does not matter in this calculation all
right just because people get really up with this so if 100 customers at
the beginning you have 95 at the end it means you had five that left and
you do five divided by 100 right which means you have five percent turn
all right that is your churn very simple okay now if you're like well i
had some people cancel beginning again all of these are rough estimates
because you can't ever have a beautiful snapshot in a business ever
because time is a component that fudges the world all right so once you
have churn this is how you use that churn so you take your price your
average monthly price so let's say you've got 100 people and

4 00:03:00.000 --\> 00:04:00.000 you're making whatever 100 000 a month
uh so you've got 100k per month divided by 100 people which means you're
making a thousand dollars per month per client that says client go for
it okay it says client so that's our average price and we divide that
which is this thing right you divide that by your turn so a thousand
divided by five percent would be 20x 1k which equals 20k so that is your
ltv and so if i had this business and let's say they were stable at a
hundred thousand dollars a month i would know that they're probably only
selling five new clients a month pretty interesting now if they're
selling more than that then i know that they are actually growing and
they haven't realized or tapped out what their with their new revenue
threshold is going to be kind of interesting this is why it's important
another stuff as an entrepreneur because you might be like why isn't it
growing faster but if you're in the situation you've got five percent
churn you're doing a thousand dollars a month you've got 100 customers
and you're selling 20 a month then your hypothetical max is gonna be
400k so you don't need to change anything you just gotta wait and you're
gonna have 400k a month all right that's why ltv is so important to

5 00:04:00.000 --\> 00:05:00.000 understand how to calculate it all
right so you can do it off lifetime which i showed you first the second
way you can do this off churn and the third way is off sales velocity
and this is the one that i do most commonly and the reason for that is
because the lifetime i mean it'll give you an approximation and this is
important especially if you have like a low price very high volume like
recurring membership lifetime one is helpful with churn you can do this
uh that one is also useful for that but it's more of a hypothetical and
sometimes it overestimates it so you're going to want to average out
your turn because let's say you get five percent turn one month but you
had 20 the month before and 13 the month that you know before that so
you want to average your turnout be like all right well we average 12
right and then you use that as the churn number that you use the
calculation to calculate for the business and you want to do it the most
recently because if you all of a sudden start selling more but then your
term goes up that is the new those are the new metrics your business you
can't use your churn from a year ago when you were only selling one-off
people and now you have a sales machine but you're not doing as well in
fulfillment because you don't have enough personalized attention right
that's why this is so important now sales velocity this is the third way
to calculate this so sales velocity number

6 00:05:00.000 --\> 00:06:00.000 three is you say how many people are
you selling per month you just ask them and you can say like last three
months what are you averaging let's say they say 10 people per month is
what we're averaging in new sales all right this is important new sales
now i'll say what are you doing in revenue now the reason the sales
velocity one or the conditions on which this one works is if the revenue
has remained relatively the same so for the last three or four months
let's say they've been at a hundred thousand ish a month all right now
that they're they're at a point of stagnation all right or close enough
stagnation that we can use it for a calculation so let's say 100k a
month is what they uh we're averaging in their business and they're
selling 10 10 deals a month you know where this is going then i can tell
them that the rough estimate for their ltv is going to be 10k and that
gives you a good idea because if they're just maintaining it this then
it means they're losing some they're gaining new ones and they're
staying at that level which means they've already hit that point of
equilibrium and so all of the thing with ltv is the relationship between
sales velocity and how much a client's worth and so the turn calculation
showed a little bit more depth around pricing and turn to get the ltv
right number but all

7 00:06:00.000 --\> 00:07:00.000 of it gets around to answer the simple
question which is how much the customer worth to us and then from there
we can make better decisions and so when we're looking at companies we
want to see companies with strong ltvs or the potential to have strong
ltvs so that in the future we could spend more in the acquisition and
scale the business right and a lot of times this is one of the weakest
points in uh in companies especially in that three to ten million range
is that they don't actually make enough per customer their mars start
getting squeezed which compresses their ability to scale i'm gonna go a
little deeper on this on this concept of using ltv to project and i just
want you guys to know like i'm not an excel whiz like i had to learn
this stuff because like i'm just not i just haven't naturally been that
good at it so i had to learn the back of napkin way of doing business
and i'll be real with you just about every major business system i make
i just make it on back of napping because even the most precise
calculations can still be done off of rough data sets and so you got to
just understand like where your gut is and just kind of like the
directional math around the stuff so let's say we have i'm going to give
you two scenarios so we'll give you scenario a it's an error b this is
important because it will help you make decisions for your business
about what to do to grow all right so let's say we've got a business
that's that's selling let's say

8 00:07:00.000 --\> 00:08:00.000 10 people a month and they're doing uh
a hundred thousand dollars per month and their churn is and let's say
their their price point is whatever let's say it's uh 5 000 a month is
the price of what they're selling for these 10 people right and let's
say their churn is uh 20 all right so that's that's the numbers that we
have in scenario one all right so this is new sales and let's say we
have the same the same ones so we have new sales let's say it's 10.
let's say price points 5k a month and let's say that they're doing 500k
per month and their turn is 20 now let's see the difference between
these two scenarios all right so if we have a 10k per month sorry 10 10
clients per month and they're selling at 5k and we know churn is 20 then
what do we have to figure out we have to figure out the lifetime value
right and so if we take the 5k per month and we divided by the 20 turn
we're gonna have a 25k ltv right this makes sense now if we're selling
10 new people a month then it means that this business is going to
continue to grow and it'll slow down at

9 00:08:00.000 --\> 00:09:00.000 250 000 per month this is a back of
napkin way that you can do projections so think about it if we have 10
new clients and they're signing up at 5 000 we're adding 50 000 a month
but we're also losing 20 percent and so as we the first month we'll make
50. the next month we'll do 50 plus 40 right in the next month we'll do
50 plus 40 plus 30. right so it continues towards this asymptote which
means it approaches zero but it approaches a number but it doesn't
actually hit it so this is the asymptote so 250 250 000 is the asymptote
and at that point we'd have to change something that this would have to
change the price we have to change the term the churn we'd have to
change the number of uh new sales that are happening in order to grow
this business now if i'm talking to somebody here or you are that person
there then i know that this thing is growing which is great even if we
change something the business can continue to grow awesome now here's
the flip side let's say we have that same scenario 10 5 except the only
difference here is it's at 500 000 a month right well if we know that
this thing is going to cap out right at 250k the line's going to look
different because it's going to do this so it's going to drop
dramatically in

10 00:09:00.000 --\> 00:10:00.000 the beginning and then it's going to
even out at 250k so if i'm talking to this business then i know that
they're at 500 today and this guy's at 100k today but they're both going
towards 250 000 because that is the reality of the business so if you're
selling 10 a month at 5k with 20 churn your business does 250 000. that
is what i want you to take away with this is that you will know and
understand what your cap rate or your hypothetical max is for your
business simply by doing the math and so you'll know if you have the
capacity to grow you are you're on a shrinking curve or what's common is
you're in scenario c right which is you're at 250 000 a month you're
selling 10 people per month at 5k per month and your turn is 20 and
you're stagnant like this which means that one of these things must
change we either have to sell more people we've got to change the price
we gotta add add some zeros to the price or we have to fix the churn now
here's where it's kind of interesting if we can fix the churn of this
business let's say we just get it from 20 to 10 turn doesn't seem like
it's a big

11 00:10:00.000 --\> 00:11:00.000 difference does it it's a hell of a
difference and so if you're thinking about the leverage that you're
going to pull in your business you could say all right if i wanted to
get to let's say a million a month which is probably common for somebody
who's at this stage right they want to get to a million a month that's
their next objective well let's talk about the ways they can get there
all right scenario number one to get to a million a month we could start
selling 40 people a month right and change nothing else we start selling
40 people a month equals 1 million per month all right because we just
forexed this number the second way we can get to a million dollars a
month is we could forex this price we could start selling 20k per month
right with the same number of sales and that'll get us to a million a
month assuming turn stays the same the third scenario is that we would
so that's this one the third scenario is that we would reduce churn to
five percent and change nothing else which of these seems easiest well
forexing price might be difficult right that might be uh you know
represents a serious risk to the likelihood you know the value exchange
might not be there and so you'd probably not choose this guy this one
probably wouldn't be the first bet right so then you're pretty much left
with i'm

12 00:11:00.000 --\> 00:12:00.000 going to either forex the number of
sales which means i need to spend more money on ads or i got to do more
reach out so i got to do more posts or get more affiliates or get more
word of mouth whatever or i got to work on my back end and reduce churn
here's the interesting tidbit if you fix this right if you fix that it's
easier to fix churn and then do this and then all of a sudden you're at
four million a month this is why business is fun and so that is how like
that's how we approach business problems in acquisition.com it's like
okay what are the biggest levers that we can use to transform this
business using the biggest rocks that we have available to us and i
wanted to make this video because i think it's important to think
through these business problems um strategically so you can think what
are these which of these levers can i pull that as the highest
likelihood and here's the problem if you do this in a different
direction let's say you 4x the sales you get to 40 a month you're going
to build infrastructure you can do this other stuff but the problem is
you might have built infrastructure too quickly and the people that you
hire suck and then you can't get the churn down right and then you also
can't fix things properly and so you basically feel like you have to
keep selling to keep to keep just keep the business afloat even though
you know

13 00:12:00.000 --\> 00:13:00.000 that you have this 20 turn which is
killing your business and so in order to make this thing a sellable
business or have a business of value or enterprise value is we have to
fix the product we have to fix the client experience so that people
actually want to continue to pay for this thing right i guess my four
million a month got cut off here this is four million a month there you
go and so this is how you can think strategic because if you fix the
back end first then guess what happens your ltv quadrupled now you can
go and spend whatever you want in the acquisition and still be
profitable whereas in this scenario you probably have to compress your
margins because usually when you increase acquisition margin two get
compressed but you already compress them right like you didn't expand
them to begin with so let's say you were at a 30 margin then you four
extra sales now you're at a 10 margin that sucks and so we want to do is
we want to expand the margin expand the lifetime gross profit per
customer by extending the ltv through churn and creating a better
experience better product better product market fix match excuse me and
then at that point then you can open up the opportunity to scale like
crazy and so this is definitely a more technical video than i normally
make and that is because i like to mix it in with some of the life stuff

14 00:13:00.000 --\> 00:14:00.000 because i do love business probably
more than just about anything business is awesome and so if you can
speak in these terms you will impress people and more importantly you
will impress yourself because you'll have more tools in your
entrepreneurial toolbox and if this was at all interesting to you please
let me know in the comments because i'll make more maybe i'll do a
little series on like entrepreneurial toolkits or uh things like that
but otherwise keeping awesome mozy nation i love you if you don't know
who i am or you're new to the channel my name is oxmoozy on
acquisition.com portfolio company says 100 million plus a year and i
have nothing to sell you alright keeping awesome see you next video bye
