https://www.youtube.com/watch?v=XZEjp2mP1U0

1 00:00:00.000 --\> 00:01:00.000 it is the sweetest equation ever i love
it \[Music\] what's going everyone i've got a super special podcast
video for you today um what i want to talk to you about is how um to
answer the hardest questions in business using one math equation that
only has three variables all right and don't worry it's like it'll be
worth it this is the number one thing this is the number one equation
that i use in my entire life all right uh for business it's the one that
i use most frequently and where this all started for me was um i
remember when i had my gyms which is a recurring revenue business
obviously um i just i wanted to know how we were doing but you know my
data tracking wasn't great and and i you know it's just like stuff was
all over the place and i just didn't know how what we were doing and
what we were on track for and i just know how it worked and i was like
man i wish i could just like see

2 00:01:00.000 --\> 00:02:00.000 into the future i wish i knew what this
would end up like right and so i was uh playing around with math stuff
and this is actually at a time when i was trying to get better at math
because i'm not i wasn't naturally good at math um and so i would just
like try and like write out what like how i would try and calculate this
and i really struggled with it 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 and so what i want
to explain to you is the number one equation that i use the most in all
of business and i call it the pi equation all right now it has nothing
to do with pi p i right um and it has everything to do with any kind of
just i mean really just all business it is the sweetest equation ever i
love it i use it all the time all right so what is the pi equation why
is it called pi um i actually think i was dieting at the time so i
called it pie because it looked like a pie when i drew it out pie like
the pie you eat no actual real

3 00:02:00.000 --\> 00:03:00.000 reason i call it this and for some
reason it has stuck all right and so it is a simple equation it is a
division equation all right very simple draw a big line here all right
and what it essentially is i'll draw a smaller one here just so you can
see it is inflow divided by outflow all right so why is this useful so
for me i like to have a very good idea of where my business is at where
they're growing whether we're shrinking what if we just did this for the
rest of a year or forever what we'd end up at and that is exactly what
this question answers what's important about this is that the inflow is
actually a rate thing so basically you're dividing rates to get an
outcome all right i'm not going to get like super into it uh because
that's not what's important what's important is understanding what it
will give you which is your hypothetical max right and it gives you
three different hypothetical maxes uh so you can calculate stuff for
your business all right so

4 00:03:00.000 --\> 00:04:00.000 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 am i recurring my
service whatever right is let's say it's ten percent all right so that's
point one ten percent all right so if i wanna know what the max amount
of customers i will be able to have given this inflow i can project that
so right now if i have let's say 30 clients if i'm doing this and
getting five new clients a month and losing 10 percent it means that i
will be growing because 10 of 30 would be three and i'm getting five
right but at some point in the future right as i go on there will be a
point where ten percent is equivalent to five and at that point i'd
reach equilibrium and so that is when i would have reached my
hypothetical max and so why this is so important is that when i do this
little equation let's say it's

5 00:04:00.000 --\> 00:05:00.000 5 divided by 0.1 which is 50 right
which means 50 is going to be my hypothetical max 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 i sign them up or i
decrease the rate at which people leave and that's it pretty cool right
like this equation has like changed my life so what it does is it allows
me to make very quick uh calculations to understand where i'm at whether
we're doing well whether we're shrinking etc 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 how many months

6 00:05:00.000 --\> 00:06:00.000 unless i fix this and so it gives me a
very clear snapshot of what whatever i'm currently doing extrapolates
into the future now you probably already have some ideas of how you
could use this in your business right this gives you a hypothetical max
it projects out your current rate so you can understand where you're
going that's the point all right now let me draw a little dotted line
here that is the first use of this equation the second use is
understanding lifetime value all right so let's say that we have a
client and the average revenue per client that we have per month let's
say is uh 500 all right so let's say it's let's use a different number
let's say a thousand dollars all right that's a little simple all right
so a thousand dollars per month is my average revenue per client now
let's say that i can keep a thousand dollar per month client uh for five
months so my churn right the percentage that would leave every month
would be 20 all right so 20 which would be 0.2 right

7 00:06:00.000 --\> 00:07:00.000 is my rate of people leaving 20 of my
customers so if i have 10 customers 2 leave every month it's 20 all
right let's churn now when i phrase the equation or whatever when i when
i frame it this way i can now extrapolate how much this person is worth
to me so if i know that my average person pays me a thousand a month and
i know that on average 20 of my customers leave every month then i know
that my customers aren't average worth five thousand dollars which is 1
000 divided by 0.2 pretty sweet right so now i know that if all
customers that come to me if i change nothing are worth five thousand
dollars then that gives me a number that i can go and market with i know
that i can spend at least a thousand two thousand dollars to go acquire
this customer right i'm using rough math it'd be less than two thousand
you want to be a three to one i'm not going to get into that right now
but that's that's the point here is that this would give me rough math
to know how much i could spend to acquire a customer that's super useful
now with these two things together i can

8 00:07:00.000 --\> 00:08:00.000 know where my business is going to
stall i can also see how i can manipulate these uh variables in order to
know where my business is going to reach now i can also see if i'm
increasing if i'm if i'm growing my business or if i'm my business is
shrinking simply by knowing what my inflow of customers in versus my
outflow now you can also do this on a bigger scale i said it's it's
three variations of the same concept all right now let's say i'm signing
up ten thousand dollars a month of new business all right so this is 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 right so i'm
signing up ten thousand dollars a month of new business all right that's
what i'm setting up in new business per month all right now if i know
that i'm losing again 10 of my revenue per month then i know that's 10
percent oops which is 0.1

9 00:08:00.000 --\> 00:09:00.000 right or 0.1 then i know that this
business is going to cap out at 100 000 per month now again the reason
that that's important and the reason that i use all three of these
variations of this equation is because i can see if i'm shrinking or i'm
getting bigger if i know that we signed up ten thousand dollars uh in a
month and we're doing 10 turn and we're we're i know we're going to
extrapolate out to a hundred thousand dollars 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'd be like that's awesome we're going to double but the
thing is is that you're going to double and then you're going to cap and
what's more is that as you do this unless you have negative churn which
most people do not have in service-based businesses what's going to
happen is that your rate of growth is going to slow all right so it
looks like this all right and so this is going to be your hypothetical
max right at the top here all right and so

10 00:09:00.000 --\> 00:10:00.000 what happens is you quickly like when
you have zero clients when you sign up 10 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 right but
then now you lose ten percent again right so you lose or sorry twenty
percent again but now you lose three because ten percent is bigger of 18
right so you drop down to 15 but then you add another 10 right but now
you're at 25 but you notice how the rate goes from 10 to 8 to 2 to 7
right the growth continues to slow down over time because churn eats out
a bigger and bigger percentage right and so with this you can know that
this is going to be your hypothetical max realistically though most
businesses have enough volatility that once you're at about 80 90 of
your max which would be like right here right it's realistically where
you'll usually end up capping out because your your your fluctuations in
business are such that that's around where you're going to be now i'm
going to add in a bonus thing

11 00:10:00.000 --\> 00:11:00.000 for you which is called the golden
ratio and so the golden ratio is the way to beat this equation so that
you actually never end your growth here's how it works we're gonna have
two rates so you have the rate of people leaving right leaving
percentage you can put that as whatever you want fancy word is turn
leaving percentage x's percentage cancel percentage whatever and then
here you have your referral percentage this is where things get magical
so if 10 of your customers were to refer a new customer every month and
five percent of your customers leave every month then you have 10
percent over 5 percent and it means that your business will double every
growth period sorry it uh basically it just it will continue to
unendingly grow because the more people who come in from referrals a
smaller percentage leave every month and this is called net negative
churn this is

12 00:11:00.000 --\> 00:12:00.000 where you have a business that grows
faster than it turns 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 now re 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 turn
percentage will go up one of those things happen but when you can
achieve this for a period of time that is when you have crazy growth
right because not only are you getting customers from your normal
acquisition channels but you're actually the percentage of customers who
refer which is why it's important uh is it stays fixed and it's greater
than your percentage turn and so it just continues to grow and grow and
grow which is awesome um so as a quick recap for you the pi equation is
the most used equation that i use in all of business especially if you
have a recurring revenue based business but even if you do not it's
still an awesome equation and i use

13 00:12:00.000 --\> 00:13:00.000 it in three specific ways one is so
that i can know whether i'm growing or shrinking number one number two i
used to extrapolate out what my current uh my group acquisition versus
my outflow rate how much i'm going to level out at this equation gives
me that answer to the same degree it also gives me my hypothetical
lifetime value per client so i can know that how much i can spend to
acquire 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
and again i can put all those things together into one number where i
say i'm starting up this much new business per month and this much
business lose is leaving and this is going to be my overall number this
top number is going to be the overall number that i'm going to be able
to generate per month in my business all right um and so putting all
these things together is i use this equation i mean i 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 and this is the type of back and neck and
math that i feel like every

14 00:13:00.000 --\> 00:14:00.000 entrepreneur needs to have in order to
be able to understand where their business is and how it's doing and let
me show you one more way to use this because like i said i use this
question literally every day all the time and it's by combining two of
those pieces so if i had like i said earlier let's say i had five
thousand dollars was the lifetime value right that i had calculated
right which was based off of uh you know a thousand dollars per month uh
divided by uh 20 churn right 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 five thousand dollars total then i
know that my business is going to level out at a hundred thousand
dollars per month all right this is like the biggest thing ever this is
how this like the whole game works like this is the equation this is

15 00:14:00.000 --\> 00:15:00.000 how everything that i extrapolates off
of this thing all right and so 20 right per month now here's where it
gets tricky because you're like well that makes sense it's math yeah but
it doesn't look like that when you're in it because when you're in it
you sign up 20 customers and you're at a thousand dollars a month per
customer you're doing 20 000 a month and you don't know if you're doing
well or not because you don't can't see into the future to see that if
you just keep doing what you're doing and you don't break it and you
don't get entrepreneurial add and you don't get shiny object syndrome if
you just keep doing what you're doing and every month you drop another
20 in right you drop another 20 and you drop another 20 in then you're
going to get to 100 000 a month right 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 and 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 because with these equations you can say either
i have to increase the lifetime value i have to by either increasing the
price or decreasing the churn which is one of those two things or i have
to increase my inflow and

16 00:15:00.000 --\> 00:16:00.000 simply by understanding those three
pieces piece number one which is your price piece number two which is
your turn piece number three which is your inflow if you understand
those three pieces then you can understand exactly how to make your
business however big you want so that is the pi equation this is the
most used equation that i use i wish i could have a sexier title for
this because everyone needs to watch it and understand it in absolute
depth because this is everything when i 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 i'm like what's your inflow what's your turn what's
your average price per user it's the first thing i'm asking literally
it's the first two questions i'll ask and then i'm like what's your
revenue right now and just by knowing that i can know whether they're
growing whether they're shrinking how fast they're growing i can know
where they're going to level out i can know how many customers they're
going to level out at i can know all of these things simply by asking
those four pieces of of of data and having this equation in my back
pocket and so i use this

17 00:16:00.000 --\> 00:17:00.000 every day it's like i breathe this
equation and the more you play with it the more you understand it uh the
more powerful you be as an entrepreneur and i promise you it will be
worth mastering so anyways hope you enjoyed this hopefully uh you like
this uh leave a review for you know the podcast or if you're watching
this on youtube leave a nice review subscribe all that kind of stuff
otherwise keeping amazing rooting for you and talk to you soon \[Music\]
\[Applause\] you
