MBA2421 How to Know if Your Business Will Succeed

Summary

The $100 MBA Show: Episode MBA2421 – How to Know if Your Business Will Succeed

Host: Omar Zenhom
Release Date: January 26, 2024

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In episode MBA2421 of The $100 MBA Show, award-winning host Omar Zenhom delves into a fundamental question that plagues many current and aspiring entrepreneurs: "How do you know if your business will succeed?" Drawing from over two decades of entrepreneurial experience, Omar provides a comprehensive, actionable framework to assess the viability and potential profitability of any business venture.

1. Defining Success in Business

Omar begins by establishing a clear, objective definition of success: profitability. He states:

“Every business should strive to be profitable. This should be the goal. It should be the standard. This equals success.”
(00:40)

He emphasizes that profitability means having more revenue than expenses, including the entrepreneur's own salary. Even a minimal profit margin signifies a sustainable business, laying a foundation for further growth and success.

2. Simplifying Business Operations

One of the key themes Omar explores is the importance of simplicity in business operations. He observes that many smart entrepreneurs derail their efforts by overcomplicating their strategies:

“Some of the best entrepreneurs I know personally are not that bright. They're simple people. But because they don't overthink it, and because they don't come up with every excuse under the book, they succeed when something works, they do more of it.”
(04:35)

Omar advises entrepreneurs to keep their business models straightforward to ensure clarity and ease of implementation. Simplicity not only aids in daily operations but also makes it easier for teams to execute tasks effectively.

3. Understanding Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

A significant portion of the episode is dedicated to explaining two critical financial metrics: Customer Acquisition Cost (CAC) and Lifetime Value (LTV).

• Customer Acquisition Cost (CAC): The average expense incurred to acquire a single customer. Omar illustrates this with his experience at Webinar Ninja:

  “There are two numbers, again, math, that really is important. One is how much it costs us to acquire a customer. At one point, it was about $87.”
  (05:30)

• Lifetime Value (LTV): The total revenue expected from a customer over the entire duration of their relationship with the business.

  “The lifetime value was $1,000. That means I spend $87 and I get $1,000 of value from that transaction.”
  (06:10)

By comparing CAC with LTV, entrepreneurs can gauge the profitability of their customer relationships. A higher LTV relative to CAC indicates a healthy, scalable business model.

4. Predictable Revenue through Controlled Customer Flow

Omar underscores the necessity of having a predictable stream of customers to ensure ongoing profitability. He explains:

“A real business that's successful is where you can control the cash flow, meaning you can predict how much money you can make every month.”
(03:45)

This predictability stems from a deep understanding of how customers are acquired and the costs associated with those acquisitions. By mastering customer acquisition strategies and optimizing CAC and LTV, businesses can create reliable revenue streams independent of external fluctuations like market trends or word-of-mouth referrals.

5. Addressing Profitability Challenges

When the numbers don’t add up—when CAC exceeds LTV—Omar provides strategic advice:

“If it's not mathing right. I'm not making more than I'm spending. What do I do? Charge more.”
(08:44)

He suggests increasing the prices or enhancing the value proposition to boost LTV. Additionally, expanding the market reach and optimizing marketing strategies to lower CAC are recommended tactics. Omar acknowledges that while some aspects like CAC may naturally increase over time, focusing on increasing LTV can offset these costs.

6. Practical Steps to Determine Business Viability

Omar encourages entrepreneurs to take a hands-on approach:

“Grab a paper and pen and you configure this out. Okay meaning you can write down all your expenses... and find out what the lifetime value of that customer is.”
(08:44)

He outlines a step-by-step process:

1. List All Expenses: Include operational costs and personal salary.
2. Calculate CAC: Determine how much you need to spend to acquire each customer.
3. Estimate LTV: Research industry standards or competitor metrics to gauge the average revenue per customer over their lifetime.
4. Compare and Analyze: Subtract CAC from LTV and multiply by the number of targeted customers to project revenue.
5. Adjust Accordingly: If the numbers don’t align, consider strategies to increase LTV or reduce CAC.

This methodical approach empowers entrepreneurs to make informed decisions and pivot strategies before investing substantial time and resources.

7. Final Takeaways and Encouragement

Omar wraps up the episode by reiterating the importance of understanding and managing business finances:

“One of the things I learned the hard way is knowing your numbers is going to make your business easier. It's going to make it more enjoyable.”
(End of Transcript)

He encourages listeners to embrace the mathematical aspects of business, assuring them that mastering these principles can lead to sustainable success and reduced operational stress.

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Key Quotes:

• On Defining Success:

  “Every business should strive to be profitable. This should be the goal. It should be the standard. This equals success.”
  (00:40)

• On Simplicity:

  “Some of the best entrepreneurs I know personally are not that bright. They're simple people. But because they don't overthink it... they succeed.”
  (04:35)

• On Predictable Revenue:

  “A real business that's successful is where you can control the cash flow, meaning you can predict how much money you can make every month.”
  (03:45)

• On Addressing Profitability:

  “If it's not mathing right. I'm not making more than I'm spending. What do I do? Charge more.”
  (08:44)

• On Knowing Your Numbers:

  “Knowing your numbers is going to make your business easier. It's going to make it more enjoyable.”
  (Final Remarks)

Conclusion

Episode MBA2421 of The $100 MBA Show serves as an essential guide for entrepreneurs seeking to validate the potential success of their businesses. By focusing on profitability, maintaining simplicity, and mastering financial metrics like CAC and LTV, Omar Zenhom equips listeners with the tools necessary to make data-driven decisions and build sustainable, thriving enterprises. His pragmatic advice underscores that understanding the numbers is not just beneficial but crucial for long-term business success.

Transcript

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[Omar Zenhom]

Oh. Welcome to the $100 MBA Show. Your business gets better with our practical business lessons. I'm your host, your coach, your teacher, Omar Zenholm. And in today's lesson, you will learn how to know if your business will succeed. Many entrepreneurs and aspiring entrepreneurs don't even get started because they're wondering, will my business succeed? Is it worth my effort to get started and build and invest and hire a team if my venture is going to fail? I'm so tired of this excuse that I'm going to show you today exactly how to find out how to calculate if your business will succeed or not. It's actually quite simple. It's actually not that complicated. So once and for all, you will know whether your business is up and running or you haven't started yet, if it's going to make it, if it's going to succeed, if it's going to win. I'll show you in today's episode. So let's get into it. Let's get down to business. Let's start by defining what is success. Let's agree on what success means. And I think the best definition to be objective is every business should strive to be profitable. This should be the goal. It should be the standard. This equals success. Everything beyond this equals is great. When I say profitable, I mean that after you've paid all your expenses in your business, including your own salary, so that you can sustain yourself, there's still more money than you are spending. Even if that amount is $1. That is success. You have a sustainable business. You have a business that is making more than it's spending. Now, obviously we want to have more of a margin. We want to make much more than what we're spending. But it's a start. There's levels to success. So how do we find out if we're going to hit that target? How do we know if the business that we're about to start or we are doing or are we trying to grow will be Profitable. We'll actually pay all our expenses, including our own expenses to be able to live. And we'll continue to do so day in and day out. Many people just break it down to, oh, let's just break down all your expenses and see how much it's going to cost and make sure you're making more than that. Oh, how I wish it was that simple. But I'm here to tell you it's not. I'm here to tell you that you need to make sure you have a steady stream of customers when you launch a business, when you start a business, it's a new thing, it's a novelty. It's even just a novelty to your own friends and family. So you're gonna see some traffic, you're gonna see some sales just off the novelty of it. But is this sustainable? Are you gonna see that number of sales coming in day in, day out, month in, month out, year after year after? A real business that's successful is where you can control the cash flow, meaning you can predict how much money you can make every month. You control the levers. A lot of people don't think this way when it comes to business. They just think for some reason it's just all about how good the product is and how smart the entrepreneur is. All this mumbo jumbo. Nothing could be further from the truth. Business is actually very factual, it's very mathematical. And many entrepreneurs, especially smart entrepreneurs, they overthink it. Why do I say especially smart entrepreneurs? Because smart people can think of so many ways of things going wrong. Smart people can convince themselves not to do something, or they can convince themselves of excuses of why things are not working out. Some of the best entrepreneurs I know personally are not that bright. They're simple people. But because they don't overthink it, and because they don't come up with every excuse under the book, they succeed when something works, they do more of it. When they see a pattern, they just repeat it. They don't get fancy, they don't try to outsmart themselves. So one of the first things you should take away from today's lesson is keep it simple. You have to simplify your business so that you can be able to clearly implement what you have to do day in and day out, month after month. It also needs to be simple for the team that you're going to be running so they can do what they're supposed to do. The best businesses are the simplest businesses. So if making more then what you're spending is not enough to be successful, what is enough? Well, I alluded to it before. It's having control over your customer flow, being able to predictably bring in customers. In business talk, this is called customer acquisition. You need to know how to acquire a customer. And not only do you need to know how to do it, you need to know how much it's going to cost you. So let me give you a quick story, a quick example. When I was running Webinar Ninja, our software company, we had to really understand what our customer acquisition costs are. There are two numbers, again, math, that really is important. One is how much it costs us to acquire a customer. At one point, it was about $87. That means I need to advertise, run ads, do all this kind of marketing activity to get a customer. On an average, it's $87 per customer. Now, it's not a customer by customer basis. Obviously, you might be spending, let's say, $8,700 a month on ads, and you get a hundred customers from those ads. That equals $87 per customer. So I know how much it costs me to acquire a customer. The second number that's important is the lifetime value of the customer. How much money do I make from this customer in total of the lifetime of this customer? So I was in software. It was a SaaS business. So there was monthly and annual subscriptions. Say, for example, the lifetime value was $1,000. That means I spend $87 and I get $1,000 of value of profit from that transaction. Now, there's other things involved here in terms of supplying this customer and other costs involved. But again, that's in the P and L, the profit and loss. That's in the expenses side of things. But now I know if I spend X amount of money, I can get a customer worth this much. This means I know the formula for getting customers spend this much money, and I get this customer, I spend this much money, I get these many customers. Once you nail this customer acquisition cost and you understand how much money you make from each customer in their lifetime, then you can predict how much money you can make from each customer each month reliably, and not just by the whims of the Internet, not just by the referrals or word of mouth or the traffic. They get your website because people are finding you, but because you know that when you input this much, you get that much. This is how you know your business will succeed, is when you can predict revenue via customer acquisition costs. This applies for any kind of business. Doesn't matter if you have a software business or you know, a reoccurring business or a membership or a coaching or you're selling one off products like courses or t shirts or dental services. It doesn't matter. The point here is, is that a lot of people forget the fact that you can't ignore that you need to spend to get customers. You need to have a formula to get customers. Marketing and sales is a big part of business and it's going to dictate your success or not if you can predictably bring in customers with a home.

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[Omar Zenhom]

So if you're thinking about starting a business, you can grab a paper and pen and you configure this out. Okay meaning you can write down all your expenses. This is how much I need to spend to run this business and pay myself. And then I'm going to need to spend this much money to bring in customers. How many customers do I want? Well, I got to multiply that by the cost per acquisition. So if I want 1000 customers every single month and I got to multiply the cost per acquisition per 1000, you then find out what the lifetime value of that customer is. It's going to be hard at the beginning because you're not going to have a lot of customers going through and buying and realizing okay, I'm, I'm getting customers to pay me this much every single year or on average during the lifespan of their tenure with me. But you can look into other businesses. Competitors just have industry metrics of what the lifetime value. Now that you know that term, you Can Google it and find out what the lifetime value is for an E commerce business selling T shirts. What's the lifetime value of a business that's selling B2B software? Or what's the lifetime value of a coaching program? Obviously, this depends on how much you charge and what your billing cycles are. If it's monthly, annual, all that kind of stuff, churn. But you get a ballpark number so that you can say, okay, this is how much money I'm going to make from each customer in their lifetime. Let me subtract that by the cost per acquisition. But you can get a ballpark number and say, okay, I now know how much money I'm going to make in the lifetime of this customer with my business. And then I just subtract the cost per acquisition from that number. Multiply that by the number of customers. That's your revenue. That's your true revenue. Because this is customers you're going out and marketing for. Now, anything on top of that is gravy. Meaning if you are profitable with that kind of revenue, with the revenue that you make from the customers after you've acquired them through marketing and it's more than your costs to run your business, including your salary, then you can declare victory. You have succeeded because you're going to get sales outside of that, through your branding, through your marketing, through your word of mouth. But this is a lever you can control. You can say, yes, there is a very good chance that I will win because I've worked out the math. Now you might go through this exercise and figure out, wow, I did the math and it doesn't work. It's not mathing right. I'm not making more than I'm spending. What do I do, Omar? And you probably already know the answer. Charge more. You need to charge more. You need to increase the lifetime value of that customer. And charging more means you might have to add more value to your offering. You might have to offer more, give them more of what they want and what they value so that they're happy to pay more money. Because there's certain things that are just not going to move or move in your favor, like cost per acquisition. Cost per acquisition is always going to go up. Just assess the nature of business. How much it costs you to acquire a customer today is probably going to cost you more next year and then year after that. That's not moving. How much does it cost you to acquire a customer? And yes, there's other ways you can optimize your cac, you know, offering trials, growing your Email list, nurturing the audience. Yes, and that's subject for another day. But for the most part, your CAC is not going to move too much, especially after those efforts. So you want to increase your prices, you want to increase the value you offer, and of course, you want to expand your market. You want to be able to reach more customers as much as possible. This exercise will give you the confidence that, yes, my business can succeed on paper. Right? The math will set you free. Right? The math will tell you if this thing is viable, if this thing can win, or at least it could tell you if you're close to winning. A lot of people don't want to do this work. They don't want to actually sit down with a paper and pen and do a few calculations. That's going to take them 30 minutes and a bit of research. But it can make or break your business. It can really save you a lot of heartache, a lot of money, a lot of time, maybe even years of investment so that you're starting on the right foot so you know what you're getting into and you know how to win before you start playing. If you're in the thick of it right now, you know how to pivot now you know how to change things, you know how to improve. You know how to increase your margins so that way you're not struggling and spinning your wheels at the end of every month. That's how you can know if your business will succeed. Thanks so much for listening to the $100 MBA show. If you love what you hear, if you found this episode helpful in any way and you want more amazing episodes, the best thing you can do is hit follow on your favorite podcast app. Whatever you're using right now to listen, Spotify, Apple Podcasts, whatever it is, hit follow so you get the next episode automatically and you tell that algorithm, hey, this show is all right. Before I go, I want to leave you with this. One of the things I learned the hard way is knowing your numbers is going to make your business easier. It's going to make it more enjoyable. It's going to relieve you of the pressure when you know exactly how much things cost you, when you know exactly how much money you could potentially make and are making, fall in love with the spreadsheet. It's going to help you in a tremendous way today, tomorrow, and years in the future. Thanks so much for listening and I'll check you in Monday's episode. I'll see you then. Take care.