Entrepreneurship

4 business equations

business-math

There’s 4 important equations that oversee the overall success of a business.

They are:

Cost of acquisition, service margin, churn rate and lifetime value.

Cost of aquisition

How much does it cost you to gain a customer?

If you own an existing business simply divide your yearly marketing expenses by the number of customers you’ve received.

Service margin

How much of the money do you get to keep?

The service margin is the difference between what you charge the customer and what it costs you to deliver it. Simply divide your service expenses by your total revenue and multiply by 100.

Churn rate

What percentage of customers are leaving?

Take the number of customers that you lost last quarter and divide that by the number of customers that you started with last quarter. The resulting percentage is your churn rate. As an example, a company that started last quarter with 100 customers and lost three over the course of the quarter would have a churn rate of 3%.

Life time value

What is the life time value of a customer?

Not all customers are created equal so you first have to figure out what your average customer spends with you a week and multiply it by the average length of time you customer stays with you.

Understanding and monitoring these numbers allow you to understand how much you should be spending on your marketing. They also paint a picture of weaknesses you may have in your business and ultimately allow you to scale a profitable business.



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