The Mathematics of Business, Explained

I've been a business for 14 years at position.com, our portfolio, this over $250 million per year, nine weeks ago, just at $106 million in sales alone making the Guinness fastest selling non-fiction book of all time we doubled the form record. And so that is just my credibility for what I'm about to share with you, which is 12 of the most important kind of rules of thumb that I've learned to picked up along the way in my business career that you can use to analyze your business to know where you are versus where you could or should be whether this is a problem to solve or something that you just need to manage and pay attention to. And so this will help you allocate where you're spending your time within the business with a clear yes-no answer of am I doing

a good job or not? So let's start off with the first one. The first one is close rates versus pricing. So if you sell people's stuff, now this would be specifically for yourself with a salesperson person or a salesman online, so on the phones or zoom if that's how you fancy it. I want to kind of give you kind of a tier ladder list to think through in terms of rules of thumb. And so the reason that there's a relationship between obviously pricing close rate is that if you lower the price, we know we'll supply demand curves, if you lower price, demand goes up, et cetera. The idea is if you're closing it 80% or more in whatever you sell. So four and a five people you talk to buy your thing. You were typically underpriced by three to four X. That might sound mind-blowing to

you, but that is just the data that I've again, rules of thumb, that I've selected over many years of business. Now underneath of that, let's say that your close rate isn't necessarily over 80% but let's say 60 to 80. So you close in between, you know, three and four out of five who are there. You're probably underpriced by between two and three X. So if you're currently charging 100, you might definitely consider going to 200 and you might have a 250 or 300 in you and you'd be able to make more money. Now, the next tier above that is between 1560%. So as we get close, you'll notice that the jumps compress. If you're between 1560%, typically you're underpriced by one and a half to two X. So that 100 dollar price point should probably be one and a half. So 150

or 200. Now, after between 40 and 50% close rates, you're probably between 1.25 to one and a half X underpriced, meaning now you should be at maybe 125 or consider 150 as upon a price point. Now, if you're like, okay, between, I'm at 35%. Well, you're between 30 and 40%, which for me is appropriately priced under the assumption, you have all of the solid mechanisms in place to educate a consumer prior to the purchase so that you're not creating a pitch or a spiel. Instead, they've already consumed all of this stuff prior to the pitch and then the entire close calls about personalization helping them make the decision. That is appropriately designed sales motion.

If you have that sales motion and you were closing 35%, you're appropriately priced. Now, sometimes people have that close rate, but they don't have any of that stuff. And in those conditions, then you still probably have a double or triple on your price if you set a proper sales motion in place. Now, if you're below 30%. So that means that less than one out of three people who you talk to buy, then you either have an avatar issue. You're some of the wrong person. You have a sales motion issue. And I fixed those two first, wherever considering lowering price because it almost always is the thing that the sales team might consider wanting to do if you have a bad culture under sales team or an entrepreneur who's afraid, but more realistically, raising prices is almost always the

direction that businesses go in with one clear exception, which is if you have a business that has unlimited scale, let's say you sell a software product. That pricing is going to be that pricing decision is going to be incredibly important to you because it balances two of the strongest influencers on the value of your company, which is going to be if you lower the price, it will also typically increase growth. And so you've got your gross margin, which is where the price dictates and also the growth as a result. So if you have these two things, then you lower the price, growth rate goes up. If you raise the price, gross margin goes up, but growth rate goes down. And so the idea is we want to maximize both those things. Now, that's only for SaaS companies to

probably like five percent of you here. For everybody else, that is kind of my point here, which is that you probably have an unskilled with business, which 80% of businesses are unskilled women in their service based. And in those conditions, there's only one way you go in service, which is up because if you play it out long enough, you get good, you get enough demand because you're good, you can't service everybody. So you change your chart, you go up, you go up in price, and then around and around you go. And the faster you spend that loop to go up in price, the more you will progress in business because your gross margins will go up, your reputation will go up, you'll be able to hire a better talent because you can pay them now and it becomes a virtuous cycle.

Versus the vicious cycle of trying to serve more people and paying less, having lower burst margins, hiring worse people, having worse customers at lower prices and around and around you go into the toilet. So that is the end end, I'll be all that is the pricing ladder that I use between price and close rate, which brings up rule of thumb number two. That's easy to catch.

So you'll notice a lot of these are relationships between numbers and the reason that's important is it's not like, oh, your price should be this. That would be ridiculous. Every business is different, but when we take two different pieces of the business, we're typically paired or identical in nature. So like, example, this would be like speed and quality. These are things that are going to be ratios. So you want to settle as many support takes as you can, but you want to make sure that these support tickets are done right. If you cleaned buildings, it would be I want my cleaners to clean as many places as they can. As long as we still get five star reviews, we still get we still get retention, we still go for all. So it's always going to be

relationships between two things that are paired with create rules of thumb. And again, these are not brand new stone. These are rules of thumb. So let's get the second one. Let's see if you can catch. So for those, you know, no, lifetime value, how much your customer spends, we get how much gross profit make over the entire lifetime of the customer? Cat is cost and getting the customer the door. So in plain speak, that's how much money does it cost you to make more money?

Cat is how much money costs you. Lifetime versus profit or less than value is how much you make. Yeah, a very traditional rule of thumb here in the software world was three to one. And this has been, you know, pushed all over the internet. And many businesses took that because all these big tech giants and very, you know, huge company CEOs talk about three to one as though it's a rule of law. And I want to say it is true under specific conditions, which only apply to like five percent of businesses. So let me give you the other scenarios and what I consider to be ideal for that.

So three to one. And this relates to, I don't have anything drawn, but I'll draw three to the sole weaknesses. So let's imagine. We've already came on. Okay. You guys taking this? All right. So we have our attraction, right? How we get people in the door. That's number one. We have our conversion, which is how do we actually get them to give us money?

Number two. And then number three, we have our delivery. So if we were to use a binary scale of zero or one, zero or one, zero or one, then we say, if we have zero, basically, of unlimited scale, I put zero operational drag for attraction, conversion and delivery, what is that? That's probably a SaaS product, right? You can run ads to a checkout page and then the SaaS or the software does the delivery, right? All the lose euros all across. And so for that, when you have all zeros, three to one, between how much it cost you to get a customer and how much you make is an appropriate ratio. But one of these three things includes a human. So let's give a simple example. You run ads to a checkout page and then you

have somebody who does delivery. You have a human being who does deliver. Well, as soon as that occurs, or said differently, maybe you run ads to a salesperson and then you have some sort of lighter touch delivery on the back end. In any of these scenarios, I want to now have six to one. Sorry, this is a one. I want to have six to one. Now, why would I double this? So let me explain.

As soon as you add a human in the loop, as soon as you're out of human to the system, you're going to have lumpiness or inconsistency. So what do I mean by that? If let's use the salesperson example, you're running ads to a salesperson. And as soon as you get to a certain point where you've capped that salesperson calendar, what do you have to do? You have to hire another salesperson.

And what happens when you hire a new salesperson, that person's not going to be as good as the main person, especially right off the bat and maybe even ever. And so we have to build into the business padding so that we can incur the cost of treating somebody up and also having them suck. Because if we're at six to one with our one guy around that, if we were at three to one, with one guy selling, as soon as the next guy comes in, we're below three to one.

And so we have to be at six to one. So that when that next person comes in, we have some, we have some, we have some cushion, you know, cushion for the push in, if you will, that that gives us again padding. I'm teaching padding. So you're probably going to be padding a bunch of times. But that's what it is. Now let's say that you've got two of these three. So now let's say we're, we're running ads and we have a, we have a main person who's taking the phone call closely and then delivery is also service. This is honestly, this is many of you guys is that you were in service businesses and this is like, this is what it is. Okay. When I'm in this situation, I want nine to one. Now, the reason this is so difficult for people to wrap their heads around

is that most people want to scale when their business model has not been nailed yet. And so that's why we say nail it, then scale it. And so people get ahead of their skis, they over expand, they, they bring on, you know, they try to open more locations or bring on more reps too fast because their ego is tied to the number rather than looking at the fundamental economics of their business and saying, is this ready to scale? Because if I had the pick of like, I would rather scare really fast with three years and then realize the business is broken or spend three years just nailing all my nailing the model, getting all the metrics right and then scaling it.

I would obviously pick the sector one. But the thing is is people, if I say that to you, most people were like, well, of course, I pick the second one, but people don't behave that way. And so what you say you would do versus what you actually do are typically very different. And so because now I have two humans in the, I'm going to have inefficiencies on delivery when I bring in a new rep or a new technician or new whatever, who's not going to be as good, not as not as effective as the other people, I got to be able to eat that. If I have a bad salesperson, when they come in, I'm going to have to be able to eat that. And so now I got to be at nine to one to have the cushion to scale. And then finally, along the same line of thinking, if I have three

people all the way through, I've got humans who are doing the attraction, humans who are doing the conversion and humans who are doing the delivery, then I want to be at 12 to one. All right. Now I want to put this in perspective for you guys. One of the gifts that I can hopefully give is frame shifts in the change of perspective. So we know on the chat the first year of gym launch when I started running ads. Okay. So we had automated here. And I would say we're like probably a point five here. It has half media. Um, but we had half kind of like some support reps to help with tech stuff. And then this was human based. All right. We have phone sales team. What do you think my else? You did a category issue was, let me know in the chat. Five to one, ten to one,

four to one, six to one. What do you guys? Let me see some numbs. Let me see some digits. Six to one, four, one, nine to one, two to one, thirty one, Liam, nice, thirty to one, three to one, fifteen to one. I appreciate the belief gift. Our hundred or one, you crazy mofo. Ronald five to one, twenty five to one, twenty to one.

I'll tell you the first year of gym launch. My LTVCAC was a hundred to one. I spent a hundred grand in me, ten million. Why? Recommend. Uh, it was wild, wild times. Okay. Now, what, how is that, how is that possible? Right. How is that possible? Most of the money that I've made in my life has happened during these distinct windows of opportunity where there was huge arbitrage to what it cost me to get a customer and what a customer was worth to me. And I've had that happen four times in my life. And each of those times have been above thirty to one. And so the reason I'm so adamant about this is that I know because I've had it happen that you have to just keep beating up the sister. You have to keep weakening the money model, which is why I made the book money models. You have to keep

ranking on this thing until eventually you crack through that lever. And so you see twelve, people are like, that's crazy. I'm like, this is the minimum. And again, this is if you want to scale big, you can absolutely run a business that does six to one, and you know, make a million bucks a year, a couple of bucks a year, like you can do that. I'm sick. If you want to see what the biggest companies in the world have, they have absurd, else you get a cat. Now what is there's only two ways to improve that ratio, right? Wait, one is you drive cat down to zero because there's only two long term money strategies in business have extremely low cat, which means you build massive brand A or B, you have a product that is viral. There's the two types of things that create really

big companies on the cost side. On the other hand, you have the extremely high LTV side. So look at the company, I'll give you an example of each. So Facebook is a company that wasn't, oh, we have a limited LTV. No, they have a business where CAC approached zero. And so if you can get cat two zero, you can creatively get eight billion people for zero dollars. And when you do that, even if you make a couple hundred bucks a year on them, you still make a lot of money. On the other hand, you might have a company that's like sales force, right? And a company like that, they might make a million dollars or five million dollars per year on enterprise level customer.

Now that customer isn't coming to them for free. Now they do have some brand, of course, that's going to offset some of those cat costs, but they're still going to be huge costs of getting these customers, especially the larger customers with contract, they have to bid against other CRMs, et cetera, et cetera. And so both of those are big companies. The idea is that you have to know what type of company you're going and you're winning strategy to scale. And so to make this of extraordinary LTV to CAC ratios, one of these has to approach zero or infinity. That's the gate.

So that's the second rule of thumb. Look at your three steps. Am I zero to one on attraction? Do I have unlimited scale on attraction? So if you're like, what's an unskilled version? This would be like, I do mean I'll reach that would be human in the loop versus iron as army content. Conversion here would be checkout page is scalable, human, fun team or sales team in person.

That has a human delivery. If I sell services, I'm going to have humans. If I sell software, I sell media, that's going to not have humans. I sell physical products. For example, that would still not have humans by my definition. That's the idea you can see what your LTV to CAC ratios are. You can see where you're at and whether you do a proof of them, which brings me to rule numero tres. That is, uh, span it for rule number three. I think you do it. But like, let's not get crazy. Um, I know. Yeah.

Why mess that one up? Either way, hopefully you're with me real quick. I have a gift for you. This is the $100 million scaling roadmap. It's something that I see when I put 200 plus hours into building and breaking the stages of scaling into 10 steps. All right. And so what we did is we broke down everything that got us basically got us stuck and what we did to break free at each level of the business. And if you'd like to know what product marketing sales, customer service, IT recruiting humans, uh, resources and finance look like it. The stage that you're currently at.

This is a free gift. So all you have to do is go to aquas.net.com for us. I show a map. You can plug in your business information. And if you want our help, you want my help to help you break through whatever level of scaling you're at. This is not a promise. I'm just saying I'd love to help. Um, on the thank you page, you can book a call, uh, every month we have a workshop out here at my headquarters. I actually talked to my real team that does, does our marketing, does our emails, does our ads, does our copy, does our, does our, does our sales, does our finance, does our recruiting.

The real people we're doing is at a very high level. And what's really cool about that is that they can typically find and spot what the constraints are in a business like that. And so it's one of the most valuable things that I could possibly do. Obviously, you know, space is limited based on our actual headquarters. Um, but if that's interesting on the thank you page, you can book a call, no pressure. This isn't gift either way. It's absolutely free. So rule over through is rule of 100. So fundamentally, if you're trying to grow the business, I have never seen a business not grow when they implement the rule of 100 when they're starting out. And to be clear, this works for all levels. So it's either rule of 100 on your first acquisition channel

or rule of 100 and ideally for 100 days, so 100 and 100 right. And if you're like, wait, 100 times 100, you're like, you're right. That's 10,000 actions. And what happens when you take 10,000 actions in one specific direction, you tend to get results. And the amount of like screenshots of content and reach and impressions that I've gone for people actually tick the box 100 days in road doing 100 actions. Then they get their first customer. Most people get it by like the third week, but you have to commit to doing 100 days. And it's kind of like the very, the, the idea of like the heart of the missionary versus the mercenary. If to commit in your heart, they're going to do 100 days. And then it happens very quickly. If you try to do this for other days to try and prove

me wrong, congratulations. You won. You're still not succeeding. Probably not the perspective, because it won't change anything in my life. All right. And so where this becomes a symptom that you can recognize in your business is volatility. All right. And I said this applies to all levels. So if you're a bigger business owner, you take the will of 100 and you just apply it to new channels.

And so if you're like, we run minute ads, it's a great. Well, we need to just take the same perspective on how we're going to run YouTube ads for Google ads, right? If you're on content side, it's like we make, you know, reels awesome. It's like, okay, we do it on this platform. We need to do this on a second platform. If you're doing outreach, you every time you expand into the new platform or medium or channel, you implement the world 100 yet again. Now, if you're a smaller business, which most businesses are small by by statistics and reality.

Now, if I present business left in a million dollars, so here we are. If your business feels feature fan meeting, if you get a sale this week and then there's nothing and there's nothing and then next week you get one and then two more weeks and then one two and then another three weeks of famine, the issue is not that you have quote inconsistent. Leave flow. It feels inconsistent because the timeline you're measuring it on is too small. So if I were to look at it, you over here, if you're the type of business that does a small amount of advertising, you might sell about the same amount of customers every single year, but that volatility or the perception of volatility is a symptom of insufficient value. You're not doing enough to get enough out.

Now, if we expand the time horizon, let's say that we spend it 30 days and let's say that you on average get three customers a month, okay, 30 days, three customers a month. That means you get one customer for 10 days. And so that means that in 10 days, what we can reverse this into is that there is an amount of advertising that is a career either through content, through what else, through outreach, through paid ads, whatever affiliates people referring to, who are partners, or centers of influence, if you will, or we're sending you business, that in that 10 days, there's enough advertising for one sale to occur. And so the idea is, okay, well, if I can just look at the amount of advertising that I'm doing probably haphazardly over a 10 day period and then do it

deliberately instead of on accident on a daily basis, then I could take what I do in advertising in 10 days and do it in one. And if I do it in one, then I'm going to get the same outcome as doing one sale every 10 and I'll get one sale every day. And so the companies that are doing 30 times more sales than you are typically doing 30 times more advertising than you are. And so I've put this to perspective, many, I've seen them in because obviously businesses fly out here every every week.

That's happens in our content. I know a lot of numbers are what businesses are doing at different revenue levels. If I look at a $1 or $2 million business and I look at how much content they're putting out just on a pure volume basis. And the thing is, it's like, of course, there's quality of content.

But the thing is is if if you look at it across all pieces of content with the outliers already baked in that you know that one out of 10 or one out of 100 going to be super outliers, of course, the top one percent, the top one out of 100, the top 10 percent, you know, one out of 10. With that volume baked in, things tended normalize again. And so we make whatever it is, 450 pieces a content a week, right? Almost 500 for simple math. So we're looking at 35, 30,000 pieces of content per year. And many of the people that are at $1 billion per doing something in order to like one a day. And so they're doing 365 and we're doing like 25 or 30,000.

And so we get 9 or 10 times the, sorry, way, way boring. That's all right. That's a thousand times a thousand times the outcome that they are. Now you can even make the argument that I'm even less efficient than they are. But diminishing returns are still returns. Right. So like if I do a thousand times more than you, but I get a hundred times the outcome. And I think this is the piece that people really mess up is they see diminishing returns and then think, oh, I should stop because my return per action has gone down rather than thinking I'm still getting more and it's still worth it.

And that's the part that I think most people who are smaller miss out on the amount of conversation I've had with small business owners who are all about optimization. Again, there's nothing wrong with that. You just can't have both. You can be like, I want to optimize. It's like fine. You can get the most for the least, but you're not going to get the most period. And the difference is that the people want the most are the ones who win. Which leads me to you. Leader response tops. So rule of thumb here for the love of God. Please call your leads within 60 seconds. I don't know how how many times I have to say this across how many videos. And it's just like, do you hate helping people? Do you hate having more revenue and more profit in the business? Would you prefer to pay

four times more per customer than you currently are? Because you are like, you know what? We're going to do. So this person just opted in. They're like, you know what? I really want to solve this problem. This company looks interesting. And then you're on the other side saying, let's let them cool off a little bit. They're a little too hot cotton handy. You know what I mean? Like let's make sure they don't make a decision that they would regret. You know, I don't want them to take that wall it out too fast because that might be unreasonable. And so let's let them simmer. Let's let them marinate for a couple of days. And you know what? Let's let them date around. Let's let them call some other businesses so that by the time we finally get to that, if we ever get to them,

they have a lot more information from different competitors so they can compare the pros and cons of our business and our offering to everyone else so that we can get it a pricing war all the way to the bottom. And so when we do that, not only are we spending four times as much as we should do a car customer, we're also not able to make as much per customer because your close rates will go down on top of that and so will your gross margins. And so it's one of those like, I think Brian Johnson from Blueprint was talking about this. You're like, where is he going with this? I'll bring it back home. He said, he is boiled down like however many years of doing all this research and stuff into one number, which is your resting hall right before bed. He said, if you show me that number,

I can see your soul. To me, I would say LGBTQ2K could be that number. But underneath of that number wouldn't be your lead response time. And the reason for that is like, it's how you do one thing is how you do everything. And I have some elements that I take, take offense to that particular term. But I do think that it is a way of doing business. How dedicated to excellence are you, right? And if you know, if you know, this has been proven over and over again in business studies and in the real world, right? Saying, hey, you're going to forex your sales. People think, yeah, but I can't, I can't afford to hire somebody to call my leads in that speed. Well, do you think if you had four times the revenue, you currently do that you'd be able to afford it with the revenue

that you would now make from that person. This is how business works. You invest and then you get something back. That's how it works. But this is the first time I think I framed it the other way around. Look at how much it cost you to get a customer. If you divided that by four, would that improve your else? You get a car ratio? Would that be the thing that you need in order to scale?

Do you think that your leads cost you much might be a factor of the fact that you don't know how to sell? So when I look at rules of thumb, it's like, well, I'm going to tag these areas first because there's huge returns for minimal effort. Talk about, you know, maximizing optimizing for the love of God, please call your lead quickly. Sorry, a little passionate about that. All right, take the spirit moves. I don't take it back. We can just move on. Okay. Which brings me to rule number five, 70% calendar utilization. Okay. So this is a rule of thumb.

When you have more sales people, there's another issue that starts to come up, which is my sales seems underutilized or they're booked out. So what's the sweet spot? The reason this is important is because, well, if you miss it, you will, let me go either stream. If you had your sales and completely booked out, fully utilized, here's two things that happen as a result that are back. Number one is that your totally conversion will go down. You will make more sales because they're booked out. For sure, absolute will go up, but your your conversion rates will go down, meaning your CAC cost to acquire customers will go up, which is depending on how sensitive your numbers are could be very bad for the business. And so that utilization happens. And as a

result, one, people have to start booking out further and further because tomorrow, the next day, they're all booked out. They can't find convenient times. So one, it's further out. And so, show rates on further on appointments compared to sooner appointments goes down. Number two, show rate on appointments that are inconvenient versus convenient. Maybe they do it a little sooner, but it's still not the time they'd ideally like. Show rates go down. Number three, what happens if a sales guy is making calls all day long? What are they not doing? They're not doing that. What are they also not doing? They're not following up on the calls if they should just, they have six cents pots. They have some tippings that they need to do that they just aren't doing

because they're all calls today. And rightfully so, they should be focused on like they should reasonably focus on the leaves that are in front of them. But it is your job as the entrepreneur to move their calendar better utilized their times. You can maximize conversion. Okay. So on the other extreme, let's say that you have 30% utilization. So you know, 70% of their calendars empty.

The problem with this that I found is that sales team morale can start to drop because they're, they don't really ever get in momentum. So if you have like two calls a day, like the calls sometimes mean too much. And so guys have kind of commission breath. They're like, I have to close the sale. Right. I'm not going to get paid. And so it's a balance between both this thing. So I've found 70% is kind of the sweet spot. I don't let it get above 85. I try not to let it drop below 60. And so that's kind of give you a range. I would say 70 75 is right around the sweet spot for this. And I'll explain the reason you want. When we see conversion rates as in we get 100 leads, we want to maximize the conversion of those leads. It's functionally is what a sales team

supposed to do. Why why you have to see rather than just to check out page. If we want to maximize that conversion, then we want to give the time we want to give one enough times for the prospect to book soon to enough time for that time to be convenient for them. Both of these things increase show rates. Number three, we want to have the sales person have enough blank space in their calendar so they can work their pipeline and break people back in. And I remember the realization I had around this was we would have high weeks to low weeks with ads in terms of book calendars, but our sales remained relatively the same. And I was like, how does that work?

And it was just because what a big wave came in, the guys were really inefficient. And when there was, you know, a famine, if you will, there's and more empty calendars, the guys squeezed their pipeline. And so I was like, man, if we just squeezed our plugboards all the time, we would just make, oh, the high week, you'd make so much more money. Well, how do you do that? You typically need a higher and more sales people. And I'll say as a, as a personal know, I have yet to make less money by hiring more says. So like, when in doubt, sales tends to drive business. And I also have some belief around the fact, and this is most cultures, not our shared acquisition, but the vast majority of sales cultures, guys will get fat and happy. They will make enough sales to make whatever

that nut is for them that they don't want to work that hard anymore. And so I would rather have the guys just below whatever that that that amount is. So they're always striving. They're always squeezed in the pipeline, rather than, you know, they can sell to their goal within the first two weeks. And then they take the last two weeks of the month off. And that's where, you know, entrepreneurs will say, hey, do I need to choose my sales commissions? Maybe. But more often than not, it's like you can just add sales people so that they can squeeze their opportunities better.

All right. Which leaves me to rule number six. Payback period. Except that's how I felt very aggressive. Payback. So is payment period. It's how quickly you can recover the cost of getting a customer. Now, for me, ideally, I try to do within 30 days. So payback period in general is how fast you get the money back from what it cost you to get somebody. My goal is within 30 days. Why? Because just about every business owner, at least in America, and at least the developed world, can typically gain access to a credit card, which gives you 30 days of interest free money. Now, the reason that's important is that if you have interest free money, but it means that you can grow that money on a pocket. And that allows you to have limitless growth. If it, if I can take

$100 of credit card money, which I don't have to pay anything for until the end of the month. And I can take that $100 and go get me a customer. And at the end of the month, make that $100 back. Then at the end of the month, I don't know what anything. And I now have a customer. That is the power of this. Now you can repeat that ad infinitum, which is laden for lots of times.

It's an infinity bill. That's not too time to roll. So the reason that I use that as my as my rule of thumb is for that very practical reason. Now, you might think yourself, well, our payback period is 90 days. There's nothing wrong with that. It's the same as like, you know, we had LTV to package a bunch of 100 to one. It didn't stay 100 to one. It was 101 the first year, right? And over time, it ended up being somewhere that you were going to 30 years to one. But the idea, because as you scale more levels of infrastructure, we'll get introduced to the business. And so that will drive out operating margins. And that's okay. As long as you have the business that skips. Now, back to payback period. I want to shift the perspective on this, which is that like, even if you currently

spend and get paid back in 90, you should still think to myself, like, is there a way? Is there a money model? Is there a setup? Is there a configuration of pricing and products of what I currently have that interesting operational drag or too much operational drag that could pull cash forward? And functionally, this is literally the entire book for money models is about was driving more cash flow forward. Now, if you have a business where you're funded from the outside, a or b, your very large business that has huge capital reserves, you have a huge base of a career customers, then you can get more aggressive. Of course, right? Like, if you're going to go ahead to head with, you know, Apple, then sure, they can, they don't need to get their money back

in 30 days. I mean, they are a bank at this point like they can, they can borrow money from the entire world and fund whatever they want. But for again, everybody who's watching this, most of you guys are bootstrapped. Actually, can we go pull real quick? All right. Let's say who here is bootstrapped versus has investors. That's bootstrapped versus investors. Okay. Great. So one out of 25 of you, guys, you don't have to worry about the payback period, but you still should, which is all the investor bros. Now, all the guys who have an outside investors, I promise you, you will get investors frothing at the mouth. If you can show that you can get payback period within 30 days. Number one, number two, if you have payback period within 30 days, guess what you also don't need investors,

because you don't need their money to scan, which gives you a huge amount of leverage into when you're getting to your fundraising period. Now, that's the one out of 25 for the other 20 out of 25 of you who are bootstrapped business owners, y'all are like me, which is that I like bank of allops is what's funding this stuff. And so we have to think, are there initiation fees?

Are there set up fees? Are there is there onboarding process? Is there an on rent? Is there a front end defined program or setup that I can sell? Can I can I bundle in some sort of physical product up front with my services? Can I sell a bundle of an extended period of time to cash flow at day one? Can I do a buy one get two? Can I get them to pay for the last month at front? All of these are different tactical versions of solving for the same problem, which is I want to pull cash forward so I can recover, cack within that first month, because when that happens, I'm telling you, like all of my businesses, every single one that's gotten really big, we have been able to recover what it costs us to get a customer in the in the first 30 days. Curie. So it's the strongest

recommendation I can give you. All right, with that being said, let's go rule number. That's a six. There you go. Rule number seven. Gross margins. So gross margins are wildly misunderstood, which is interesting. If you are, if you are a business owner, you have to learn the language of business. All right, it is for sure. There are different languages, but there's not a huge amount of words you have to know. You might need to know like a hundred terms. And think about this as like you were studying for its test, right? Like learning a hundred terms, not that hard to understand it. Almost all of them are relationships between two things. That's almost all of these terms are. So what is gross margin? It's one word that's relationship between two things. How much

you charge and how much it cost you to deliver the thing. And the difference between these things is your gross margin to be clear. That's not your net profit margin, which is a different ratio, right, between not necessarily ratio, but the difference between two different numbers, right? But your gross margin is very important because it is what dictates everything else in the business.

So what do I mean by that? It's like your net margins cannot exceed your gross margins. Think about that for a moment. If you have, if you're like, man, I'd love to run a 50% net margin business. That's an amazing goal. And I love that goal for you. If your gross margins are 50%, that means that you can have literally no other cost besides the thing you sell in the entire business. You can't have any cost of requiring customers. You can have any fixed overhead.

You can't have any employees that are not specifically in delivery. You can't have any ad and any help. Of course, now the likelihood of you getting to a 50% margin when you have 50% gross margins is basically zero. And so this is why and traditionally small business orders will undercharge because they sell to their own wallet, right? And they sell to their own wallet in two different ways. They sell to their own wallet because they don't have that much money.

And so they feel bad charging other people when they don't have much money because they're like, man, I get what it's like to struggle. And I think there's nothing wrong with that. It's just understand the business is not going to grow and they're not going to home with people. The other reason they sell to their own wallet is that they believe that the service they deliver is not that valuable because they know how to do it. So to quote the Joker, right? My father always told me when you're good at something, right? And so the idea is that like if you're good at fixing cars, right? You're like, well, it comes naturally. It's not that hard.

You got to know where the, you know, it's like, it's what we do is really straight forward. To you, to you. But to a customer, we have to sell off the value. What their life would be like if they didn't have this problem solved. That is what we have to charge off of. And when we charge off of those prices, then we create more opportunity for gross margin. Now, here's why this is so important. Let me give you a math example that will glow your modes. And I always, you know, everyone gets a hard conversation when I say math. So let's just say a money example. Okay. So let's give you a money example. That'll get you really happy. All right. So let's say that I've got some service that I that I deliver. Okay. Cost me a hundred bucks a month. Okay. That's what it

cost me and services is in whatever. So if I want to have 80% gross margins, which I said these are rules of thumb, my rule of thumb for services is at least 80. Okay. So I want to show you two different scenarios here. So at 80% at 80% this $100, I have to have $500 has to be my price. Okay. At 70% and I have a hundred dollar costs. Oh, who can do this math for me? All right. I got to do this. All right. 100 equals 0.7. Julian, you were pre-med. Do it for me.

All right. I'll say this. I'll say what does any presenter like? equals a thousand dollars. Chris, where is it? Where? Where? Why do jagged asses keep your seats a lot? Thank you, gross ones. Is it 350? Is that it? We should we should know this. I feel like as a collective community, we should be able to figure out when 30%. Okay. So it should be 100 divided by 0.3 is what it should be. So 100 divided by 0.3. Right. It's 330. Thank you. So that would mean that 233 should be 17%.

Okay. So 233 divided by 333. Correct. Thank you. Okay. So 333. Okay. So look at how big of a difference this is. Right between these between these numbers. Look at how like when people are like, oh, my margins are at 60%. So I'm close to 80. It's like, bro, we're not even like you're in a different stratosphere. Okay. So let's take this to the natural end. If you have a business, let's say that runs 20% margins at net margins at the end of the year, what you can pay yourself, right? If we say, hey, is there a way you think we could go from 70% to 90%? Well, that, that sounds like it's not that big of a deal. But when you go from 70% to 90, what happens to the actual margin? It double. You make way more money. And sometimes it needs a lot more than that,

because sometimes the incremental margin is all margin whereas every dollar revenue up to that point covered cost, right? And so what is our, we make $233 here, right? We make $400 here, and we make $900 here per customer. Big difference, right? And so when people hear these numbers because these numbers look similar, they think that these are going to be very similar and they are not.

And so this is why I'm so adamant that 80% is my minimum. I tarry, like, that's my baseline. And then front, like, I will not get into a business with less than 80% growth. I won't do it. Because I know that I then have to run everything else off of this 80, right? So if I want to have a 50% margin business, I only have 30% left. I got 30% to cover everything else. I got to cover length, I got to cover admin, cover insurance, I got to cover marketing, cover sales, I got to cover everything else with just this 30%. So I can have 50% left home.

Is this, is this ringing, is this ringing with you guys? Is this making sense? Even if it's a service-based business, pro, this is four service-based businesses, not to you in Australia. This is four service-based businesses. And this may, this is why, like, so ideally, I like to have, I mean, again, this is minimum.

And I know this is going to blow your minds here. Like, I, like, one of the first things we did when we fixed gyms is we made sure the pricing was at least 80% growth margins. That's a service business. So what you're like, well, that's not possible. Of course, it's possible. It's not possible when you sell commodity. If a customer could look at your thing and somebody down in street state and say, these are about the same, I'll buy the cheaper one, you sell a commoditized service, just like you can sell a commoditized product.

And so you might have salt and salt, and you got FSG salt, and whatever actually, you know, pink homelay, it's salt, right? And so how do we make these two things different? We have to bread. It's pink homelay and versus just normal stuff, right? And they charge a premium for that. And so you have to figure out how to reconfigure. If only there were a book written about how to make an offer that's decommoditized so that you could achieve 80% or higher growth margins, that would be amazing, wouldn't it? And for those of you who don't know, I wrote a book on this, it's called $100,000 offers of $27,500 reviews, as you read it. But I want to draw this because this like, if you're trying to figure out what's wrong with your business,

it's usually because your margins are off. You're mispriced. But again, sometimes this is, this is the, this is the fundamental mathematical problem with the business. But this might really need the symptom of the fact that you have a commoditized offer, a, b, you have a sales process that doesn't function properly, right? And that's the, that's the big idea. So if you want to run a high margin business, then you have to run exceptionally high gross margins for whatever it's that you sell. Okay, cool. That math was tough, wasn't it? All right. So let's do roll them in a little thumb number eight, if you will. 38 cash collected. So this is a, this is an add-on to the 38 payback period. So what is the exact amount of money that I want to have collected

within the 30 days? It's going to be COG. So the cost of delivering cost of goods sold, I'll just write it out, cost of goods sold. Now the goods sold can be services to you to be clear. So it's cost of goods sold. How much it costs you for the stuff? Plus cost of getting. Okay. So if we, the cost of getting the customer and the cost of whatever we got them, deck, we will both those things together. We want whatever we collect to be greater than this. We want the gross profit of the cash we collect in that first 30 days to be greater than this plus this. The reason this is so magical is that once this occurs, customer comes in, you acquire that customer, and then you have to deliver on that customer, and then that customer

pays you back all of that cost, and then what can you do? Go get you another customer. That is why it's so magical. And so that is what the whole point of this 30 day cash collect thing is, we want to pull it forward. Cool. Great. Now many facturing study with Zoro. Now, many facturing have different margins because you have cost of goods sold, and that's going to be a little different. I would, to be fair, I would still prefer to have a business that has a percent crossword. But with services for human services, I, I had that as my rule of thumb is that I always want 80% or higher risk margins. Okay. That brings us to rule number 10, which is to functionally rule number nine, but we're calling it 10 because I skipped number and let's just go, which is

turn a rotation. So I want to only have to acquire customers once. The reason that most businesses cannot get big is because they are always filling the leaky bucket. Now you've heard this terminology before, but think about how difficult it is to acquire a customer. It's a lot of work, right? And to go through that entire process, only to lose them to have to go get another one is exhausted.

And so you want to be, and this is John Holder's Oreo, uh, is the quote from who said, you don't want to be in the sales business. You want to be in the reselling business. And so what you meant by that is how do we get customers to just buy again and again, and again, which just come down to product primarily and then brand secondarily. And so the idea here is that for your business to be a significantly more valuable, but be way more fun to run, you want to keep the customers you have. And so when you're a small business owner, you're typically just barely figuring out what's going on. And so what happens is people will typically try to scale too fast before they actually figured out revenue retention and sure. And so what are,

quote, good benchmarks? Well, good benchmarks for anything B2B is you probably want to be above 80% in terms of retention annually. So that means that if I get 100 customers, Jan one, right? This is January one. Let's say 2025. Jan one, uh, 2026. I want to make sure that I have at least 80 of these customers. Now this is where people get confused. Let's say that they grow because they get better marketing sales throughout the year. They then they come January 26. And let's say they're at 160 customers.

Is how many they have? They think, oh, well, I definitely retained all 100 customers. And I also got 60 more. We're looking at of the original 100. How many of them made it to here? This is the issue. Now you can take whatever annual retention is. And then you can basically reverse engineer into what your lifetime value of customers. So if you have 50% to annual retention, then you can take whatever someone pays over a year, let's use simple math and say someone pays a hundred dollars per year. If you have 50% annual retention, then it means that you can basically double it so you divide it by 50%. Equals $200 is what you're going to make from a customer.

Now here's where the sketch really wild. Let's say that you have 80% annual retention. It doesn't seem like time is different, right? It's only 30%. What is it actually different from a math perspective? It means that you're going to get, functionally, four turns, five turns, five turns, because every year you're going to lose 20%, right? And so simple math on that is around the back of napkin. That is about $500. Combosities? A lot. Multidineato, all right? And so think about two businesses. And this is why this is so important. The cost of getting customers between different businesses is typically very commoditized. So CAC in an industry is a commodity. Think about where that is as a sentence. If there's two social media marketing agencies that both sell

generically similar services, of course, we don't want to do that. But this is how the industry by and large works. If you have two different businesses that are selling the same relative to the same thing, the cost of getting customers there is typically about the same. Here is where one business can become 5, 10, 100 times for valuable is that those customers are worth 5, 10, 100 times more to the other business. And so they are able to to play a huge arbitrage game so they can spend way more money in the acquisition than the business that only has to call it 50% retention, right? This guy is dating two and a half times more.

Puck, Mr. Murr, than the first company, even though maybe the cost of getting the customer in both these scenarios might be the same. This is where the huge amount of alpha or kind of arbitrage above what market could get in terms of improving a business. And so right now, if you don't know how many customers stay with you every year, definitely worth figuring out.

And so that is my rule of thumb is that I target. And so for each of these numbers as I'm sharing them, it's like, this is my target. This is what I want to get to. If I don't have that, I see this is a huge problem in the business and I have to go fix it. Otherwise, I just know that I'm going to create a scale problems, right? When you scale problems, they just get meaner, uglier, and they have more faces on them, right? You do not want to do that. And this is where most people's egos get tied up, which is why most entrepreneurs can't scale.

So rule number 11, what is a good rule of thumb for how many people prepay? So a lot of you guys, some of you guys follow my stuff. I'm obviously a big fan of pulling cash forward because of all the reasons I already mentioned. What is if someone prepays for a year, no one can share it if you prepay right here for the year. Can't really turn out, right? What compared to if it's happened when you prepay? Well, if you prepay, you get all that cash today. If you get all the cash today, we can do that. Go get more customers, right? Think about this.

Everybody here should at least give a 10% discount for getting paid full today. Why? Because the value of money today is typically at least, or at least that they value that money in a year will be worth 10% more. At minimum, you could take the money, put it in the dark stock market, prep, and then the way to year, and it would be worth 10% more. And so at minimum, that is the amount that I'm willing to give to pull cash forward. All right. Now, what percentages rule of thumb should you expect? So let me give you a couple. So if you have a like a by 10 get two type deal, like you pay for 10 months and you get you get two for free, you can expect some of the neighborhood of like 15 to 20% of people to take them. All right. If you give discounts and access of that,

and you give bonuses for people prepaying. And so the way I think about that is three ways you can do that. How can I, Calvin, I deliver something to them faster? How can I make it less risky? And then how can I make it easier? So if I say, hey, you can prepay. And if you prepay, skip the line. That sounds nice. Hey, if you prepay, you'll get a dedicated constierish versus being in group. Hey, if you prepay, I'll also add in our guarantee or I'll double the length of our guarantee. Right. So these are some of the things that you can manipulate in terms of variables to pull cash forward. Now, when you have a moderate discount, less one or more of those kind of like ancillary benefits that I just rattled off, you should expect 30 to 40% of people to prepay.

That's a monster difference in terms of cash forward. Now, simply offer that for many of you, if you're not doing it, we'll pay cash for it. Now, a core layer is whether you have a third party financing company. Now, this is directly from a firm. So I know a lot of the high upside firm, not a lot. I just know a very high up at a firm, I'll say that. I have a little bit.

And the metrics that they call is a 35% increase in sales boovering kind of interesting. So not only does that money come forward, if you have good financing, you could also increase sales overall. People who would not have been able to buy are now willing to because they have more convenient ways of paying. So that kind of gives you a double whammy of, oh, people who wouldn't buy did. And they went from not buying to me having a lot of cash today, which is why having very good financing partners can be a huge game changer for a business. Now, I will, I'll put this little caveat in place, which is that financing will not save your business. If you're, if your food stops in your restaurant, financing it, we'll just get more people to find out that the food sucks

faster. All right. So I've never seen a business get saved by this, but I have seen businesses grow for sure by making some of these deals and putting them in place. Now, let me give you a couple payment structures that you can use that have worked really well for me. So right off the bat, if you just say like, hey, people go into monthly, it's like, that's a way of doing things, but I would prefer to sell durations and then say, cool, prepay and get guarantee, priority, and concierge, right? Let's pull it forward. If they still can, I say, great, let's split it. Half now, half in a month. Now, this is a little, little pro tip on this. Half now, half in a month, I might sell three months or six months of stuff. There's no need for me to wait three to six months

to get paid. I still don't get paid now. And in 30 days, because they got the money, I might as well ask, right? But where's they can say is no. After the Z know to two, I say, great, let's go for a third payment. Again, one, two, three, even if it's a six month or 12 month, I want to pull that cash forward. Now, a little pro tip again, is always ask what if it's to, if you're talking to a Ouija, ask them when they get paid and then align the payments on those days.

If you're not talking to a Ouija, you can ask when they have the, the majority of their deposits hit, when they are the most cash flush, cash flush in the business. And then you can set it for those dates. You do not need to coordinate payments with your delivery. Now, one of my favorite methods of payment so that I can pull cash forward is something that came out of the depression in the 1930s, which is something called Leo. It might be something as old as time. I'm sure it was in 2000 BC, but I just know from the, for the pressure, because of course, I live there.

At that time, it's up. The way it works is simple. You start paying now. Then when you finish paying, you get very stressful. So you can, I remember, and I remember the first time I did this. I had our selling, this is with Alan. I was selling, we had this big onboarding, because what Alan was hired, that kind of enterprise, so we would sell agencies. It was 25,000 dollars, a white label, and then they would use it kind of as their own operating system. And so it cost 25 grand, you kind of like get on board it. And so I would do two, two agencies at a time, we'd use a full day onboarding with me and my team, and we'd help them get set up, walking through everything, etc. Right? No. I remember having two partners who were on the phone,

either like 25 grand, they were like, that's awesome. And then they said, can we split into payments and I said, sure. And they said, well, how many payments can I split it up to? And I said, as many as you want. And they're like, oh, amazing. We'll just fan, we'll just do two thousand bucks a month, and we'll pay it off this year. And I said, okay, cool. So we'll just sit your onboarding for a year from now. And they're like, oh, we got to pay before we come in. And I was like, and this was why I was such a reinforcing moment for me. They just said, oh, okay, well, we'll do how's now half and a month. And we'll be out next month. And so what's cool about layaway is that when people understand that like the faster they pay, the faster they get,

they are now incentivized to pay it off as fast as possible, rather than you trying to pull it forward, which is why I'm such a big fan of layaway as a payment option. In addition to that, collections become significantly easier because they haven't gone anything yet. And so they've already decided they want this thing. I also like layaway because people have anticipation.

Think of the last thing. Maybe you were kidding me to this, but like, I remember there was a pair of Oakley sunglasses. I thought were the coolest ones. You might have remembered them. They were X-Men, Cyclops said that like orange that orange pair. I think I was like, I don't know, young when that came out. And I thought he looked like the coolest guy ever. So I saved up for a whole summer doing chores to buy 160 dollars on the glasses, right, which is absurd. But I think they were 120 or 160 dollars at the time, inflation. And they were like the hottest coolest sunglasses.

As always, I saved up the money. I get the sunglasses. And I remember the anticipation of being able to get the sunglasses at the end of the summer was better than the sunglasses ever were. In fact, it was so good. I literally never wore them because I was so afraid of losing them because it's so long to save it, which was also very less than like sometimes you got to just learn to spend money and enjoy what you spent. A different thing for a different time.

But that being said, you also benefit from that customer anticipation when you set up the payment this way. So there's a lot of benefits to doing this way. And the biggest one of all, you risk nothing. They pay before you deliver it. And so you get to have the cash before you have to risk deliver it. So those are all different ways that you can start a cash flow in the business.

I'll give you a, let's see here. Do I have to have any more notes that I wanted to go over? Yeah, I was going to give you guys some rules of thumbs for like different tonic conversion metrics. So one of the simple ones would be like, if you're doing these things are so many variations. So it's like, if you're closing off of metal leads for in person, it's like, you close 10% of the leads that you have. So you get 100 leads for it in person service business.

You should close about 10%. If you're above that, amazing, if you're below that, probably if so, opportunity for improvement. If you're closing off cold webinar leads, if you're selling to broader markets, you're probably looking at two to three percent conversion of those leads is in Webinar opt-ins to sales. If you are a little bit more niched, then they have to go up to 5% of leads. The craziest I've ever seen. And like, again, that's leads, not shows, rival people who are there during the offer. There's just overall, like you had a hundred people opt-in for webinar. All right. If you have a salesperson that's in person, right? If you're going to someone's home, again, my rule of thumb with salespeople in general with a proper sales process is 35%.

I would like them to close at least one out of three of the prospects that they're getting touch with. Typically, if it's higher than that, I will raise price. I'm going to get below that then, then I will fix the process before I even consider lowering the price. Web pages, most times, it's going to be between one and two percent in terms of conversion rate on those pages. I'll give you fun factoid for a school. So I think school right now is at like 4%. It's really good for school about pages. It's because when you have trust in a platform that starts to increase your conversion overall. So I'll give you a wild example of this. Again, these are rules of thumb.

My Amazon page for my books, so like offers, for example, this is the last time I looked, we convert roughly a quarter of the traffic in the heads of the page. There I praise it. We went out of four clicks, buys. Now, when you trade off when you have a platform like an Amazon, right, is that I'm not making all that money. Amazon's basically making all the money, and then like paying me a small commission. And so you just have to play with the number there, which is like, okay, instead of it being, you know, 25% I'm getting two and a half percent. So I'm getting 10 acts the conversion per click. And I might be getting one third, the gross profit.

Is it worth it? Yeah, I'm still making three times as much money. But you just have to understand the difference in those things. I'll leave you with a final rule number nine, which is my, I'm filling the holes back up for rule number nine. Anybody who loves potion number nine, I'll be dating myself. That was a, that was a movie. You can Google it. Anyways, I'll bring this up, which is this industry averages are done. And so what do I mean by that?

The amount of times I've had a conversation where someone says, hey, you know, manufacturing, these, these, you know, these are, these are, these are pretty good for manufacturing, or, hey, you know, power margins are this in our industry. If the average American is in debt divorced twice, overweight, and just mid as fuck, right?

Why would I want to have that be my bar to compare myself against? You say you have this, I mean, so many, so many, you know, businesses owners have this hatred for their competition. They hate their competition. They want to crush their competition. And yet you want to measure yourself by the same stick that your competition measures themselves. What's a great way to be average, right? Is use averages as, as your determination of whether or not you're good.

And so I would highly encourage you to just ignore averages altogether. Play the wig. And that is just something that is, that is really served me well, which is like, somebody will come into his space. We'll say, well, you know, you'll learn, you know, I know you guys have seen this clip of Tiger Woods when he's doing his first interview before his first masters or something. And the guy's like, he's like, well, you know, how do you feel being so young, you know, come on the master's tour? And he's out of how it gets to it. He's like, I'm here to win or I'm playing a win. And the guy's like, you'll learn, you know, you'll see, and then they play forward like a year or two or whatever. And he's there with his jacket, talking the same

guy. And the guy just has to like, eat his words. Like, it's so visceral. Like the moment is amazing. And so like, that is what I envision when I go into an industry that I don't know anything about is like, that is the advantage. I'm not going to you. I'm not going to, I'm not operating within your frame of reality. Like, why would I operate within the frame of beliefs that with the average person has achieved is what I will achieve. Why would I say that is the appropriate outcome that I should be shooting for? What? Because fundamentally, when you quote an average to say, this is good enough, you have accepted that you were no longer going to try to get. And I just wholeheartedly reject that. Like, the winner of every category is not the industry

average. And I think almost promised you that they don't look at the insurance. Why would they care? Like, there's only like one rule that matters, which is physics. If it's as long as the rules of physics allow it to exist, there's no reason these that we cannot get this outcome that we desire. Period. So I'll get asked a question like, do you think you can have margins in a manufacturing business that are above 10 percent? Yes. You know how I know. I also have a friend of mine who does complex machinery. You know what his margins are? Net. 70%. Net. Well, what does that mean about his gross margins? That means they got to be way above 70. You want to know what how he did it?

He builds machines that he sells to big industries that automated huge function of different workflows. And he will charge 400,000 dollars and a machine will cost him 17 grand because he has no amount to be think about what a business is. A business is functionally a black box. That transforms raw materials into an output where the value is higher than the inputs.

That's it. That's all a business done is is we have raw inputs. We transform these inputs into something that is more viable feet. That is all a business does. And when we do this over and over again over an entire civilization, we take many raw inputs and we increase value. And that is how the entire world moves forward. And so without being said, there was my 12 rules of thumb that I'd learned in business, different ratios that I use as my guide post, my lights, my lights, my, what's the light towers? What are those things on the edge of oceans? Lighthouses. Those are the lighthouses that guide my path. And I hope they serve you as much as they have served me.

The Mathematics of Business, Explained | Ep 932

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