Learn the business economics - the metrics that matter - for your business. Matt Reynolds dives into macroeconomics and microeconomic or unit statistics, healthy rates, and how to calculate these statistics. You don't know the health of your business if you don't know these metrics.
Business Economics: Know the Health of Your BusinessYou cannot go off how you feel about your business to know if your business is doing well. The reality is real, and if you fail to know the economic realities of your business, the economic realities will confront you when abject failure slaps you in the face.
It's okay, though. Even if the metrics are bad or trending in the wrong direction, have a true, clear picture helps you identify problems and where you need to put your energy and effort to turn things around.
If your waist goes up month after month, you're getting unhealthier, whether you're measuring it or not.
These metrics give you an objective measuring standard to assess your business' health.
Business Economics: Metrics that Matter for Your BusinessMatt goes through each metric one-by-one. First, though, here are the metrics, organized into macroeconomic or business-level and microeconomic or unit-level.
Macroeconomic (business-level) top line revenue cost of goods gross margin or gross profit operating expenses net profit Microeconomic (unit-level) churn rate (or retention rate) number of subscribers average ticket price lifetime value of client (LTV) per gross revenue per gross margin/profit customer acquisition cost (CAC) CAC:LTV ratio (as gross margin) monthly recurring revenue (MRR) Business Economics: Macroeconomic Metrics that MatterThe first and easiest metric to calculate is top line revenue. This is the money that is coming in over a period of time, typically calculated monthly (and eventually quarterly and annually - though quarterly and annual numbers matter more for larger businesses).
Whether you're looking at Stripe, ACH, the business bank account, this is simply calculating all the incoming money in a month.
The cost of goods is the cost to produce the good itself. So, for producing a product, this is the cost of materials you purchase that go into the item and costs such as shipping. For a service business such as Barbell Logic, this looks like the pay to the 1099 contractor coaches per client.
You calculate gross margin or gross profit by subtracting the cost of goods from top line revenue.
Next, you need to identify operating expenses. These are things that are required for the business but not directly related to producing the individual service or good. This might be payroll for full-time employees, printer ink, paying for a new computer, squat racks, or taking a client to lunch.
The last critical business-level metric to determine is your net profit. You calculate this by subtracting your operating expenses from your gross profit. This is truly how much money the business is making each month.
If you're a one-man team, then you get paid from this. If you lose money, you don't get paid. As the owner or CEO, though, while you get paid last you also get fired last.
Business Economics: Microeconomic Metrics that MatterCalculate your churn rate. This is the percentage of clients you lose each month. The retention rate is the opposite (100% - churn rate).
Next note your number of subscribers. Matt says subscribers, because a customer who makes a one-time purchase (a one-time coaching session or purchases one widget) does not lead you to know what your recurring revenue is. You don't have recurring revenue in this situation.
Next know your average ticket price. What are your subscribers paying each month on average.
The number of subscribers multiplied by average ticked price equals your monthly recurring revenue (MRR).
An important statistic to calculate is your lifetime value of client (LTV - especially at gross margin).
The first thing you need to do is calculate the average customer lifespan. Divide 100 by the churn rate. So, for example, if you have 10% churn your average customer lifespan is 10 months. Below are more business economics metrics.
MRR x average customer lifespan = LTV (at gross revenue)
LTV (at gross revenue) x gross margin = LTV (at gross revenue)
Calculate your customer acquisition cost (CAC) by adding together all efforts to acquire customers. This includes marketing, sales, ads, and content you produce to market (e.g. you create a weekly newsletter, podcast, or maintain a YouTube channel).
The CAC:LTV ratio is important. 1:2 ratio is considered unhealthy or unsustainable. 1:3 is considered healthy.
If your ratio is significantly less than 1:3 (e.g. 1:28) you should likely spend more money to acquire customers.
These are the metrics that matter to your business. These are your business economics.
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