The Mathematics of Business, Explained

TL;DR Optimize business metrics by raising prices, accelerating cash flow, and prioritizing retention over industry averages. These actions create high margins and sustainable growth.

Pricing Strategy Depends on Close Rates

• If close rates exceed 80%, raise prices by three to four times.
• If close rates are between 60% and 80%, raise prices by two to three times.
• If close rates are between 50% and 60%, raise prices by one and a half to two times.
• If close rates are between 30% and 40%, the price is likely appropriate if sales processes are strong.

LTV to CAC Ratios Vary by Human Involvement

• Use a 3:1 ratio only for software with no human interaction in attraction, conversion, or delivery.
• Use a 6:1 ratio when one step involves a human to account for inconsistency.
• Use a 9:1 ratio when two steps involve humans to cover inefficiencies.
• Use a 12:1 ratio when all three steps involve humans to ensure scalability.

Volume and Speed Drive Initial Growth

• Execute 100 actions daily for 100 days on one acquisition channel to build momentum.
• Call leads within 60 seconds to increase sales volume and reduce customer acquisition costs.
• Maintain 70% calendar utilization for sales teams to maximize conversion rates.
• Avoid fully booked calendars as they lower show rates and increase acquisition costs.

Cash Flow and Margins Ensure Stability

• Recover customer acquisition costs within 30 days using interest-free credit.
• Target at least 80% gross margins for service businesses to cover overhead and profit.
• Collect cash equal to cost of goods sold plus acquisition cost within the first 30 days.
• Offer discounts or layaway plans to encourage prepayments and improve cash flow.

Retention Creates Long-Term Value

• Aim for above 80% annual retention for B2B businesses to stop filling a leaky bucket.
• High retention increases lifetime value without increasing acquisition costs.
• Ignore industry averages and focus on winning through superior execution.
• Scale the business model before expanding to avoid multiplying existing problems.