How to Scale Your Business Fast

Summary

• I discovered a key business equation when I wanted to predict my gym's financial success.
• This equation helps answer tough business questions with three variables.
• It's called the "PI Equation," and it stands for inflow divided by outflow (not related to the mathematical constant π).
• Inflow is the rate at which new customers or revenue enters the business.
• Outflow is the churn rate, or the rate at which customers leave or revenue declines.
• By dividing inflow by outflow, you can calculate the hypothetical maximum size or revenue for your business.
• For example, if you gain 5 customers per month with a 10% churn, your business will cap at 50 customers.
• The PI Equation also helps determine the lifetime value of a customer by dividing their average monthly payment by the churn rate.
• Understanding lifetime value helps estimate how much you can afford to spend to acquire a customer.
• The equation also reveals if your business is growing, shrinking, or plateauing.
• The concept extends to overall revenue; signing up $10,000 a month with a 10% churn predicts a max of $100,000 monthly revenue.
• Growth usually slows over time due to churn, with business often capping out around 80-90% of the hypothetical max.
• I introduce the "Golden Ratio" to potentially achieve net negative churn, where business grows without paid advertising because the referral rate is higher than the churn rate.
• Understanding and manipulating inflow, churn, and price is essential for business growth.
• I apply the PI Equation daily to assess businesses I coach and to make quick, informed decisions.
• It's important to be consistent and not get distracted by new opportunities – stick with what's working.
• This simple yet powerful equation should be mastered by every entrepreneur for business clarity and direction.

Video

How To Take Action

Here's what you can do to use the "PI Equation" for your business or personal growth:

• First, figure out your inflow, which is how many new customers or dollars you get each month.
• Then, calculate your outflow or churn rate, which is how many customers leave or how much money you lose each month.
• Divide your inflow by your outflow to see the biggest your business could get. For example, if you get 5 new customers and have a churn rate of 10%, then 50 is the max customers you'll have.
• To find out how much money a customer brings over time (lifetime value), divide the average amount they pay each month by the churn rate.
• Knowing the lifetime value can tell you how much to spend on getting new customers.
• Use the "Golden Ratio" idea to grow your business without paying for ads. If your customers refer more people than leave, your business will keep growing.
• Stick to what's working and keep it simple. Don't lose focus by chasing new things.
• Practice using this PI Equation regularly so you get really good at it.

Remember these three parts: price, churn, and inflow. Focus on increasing the price or lowering the churn to make customers more valuable. Or increase inflow to get more customers. This is the key stuff for making your business bigger and stronger. Keep working with these numbers, and you'll be on your way to success.

Quotes by Alex Hormozi

"This is the number one equation that I use in my entire life for business"

– Alex Hormozi

"What if I just divided it by this and that would just tell me the number"

– Alex Hormozi

"What's important about this is that the inflow is actually a rate thing"

– Alex Hormozi

"I'm using rough math, it'd be less than two thousand, you want to be a three to one"

– Alex Hormozi

"This is the equation, this is how everything that I do extrapolates off of this thing"

– Alex Hormozi

Full Transcript

podcast video for you today um what i want to talk to you about is how um to answer the hardest questions in business using one math equation that only has three variables all right and don't worry it's like it'll be worth it this is the number one thing this is the number one equation that i use in my entire life all right uh for business it's the one that i use most frequently and where this all started for me was um i remember when i had my gyms which is a recurring revenue business obviously um i just i wanted to know how we were doing but you know my data tracking wasn't great and and i you know it's just like stuff was all over the place and i just didn't know how what we were doing and what we were on track for and i just know how it worked and i was like man i wish i could just like see into the future i wish i knew what this would end up like right and so i was uh playing around with math stuff and this is actually at a time when i was trying to get better at math because i'm not i wasn't naturally good at math and so i would just like try and like write out what like how i would try and calculate this and i really struggled with it and one day i was driving and it actually just hit me i was like what if i just divided it by this and that would just tell me the number and it turns out i was right and so what i want to explain to you is the number one equation that i use the most in all of business and i call it the pi equation all right now it has nothing to do with pi p i right and it has everything to do with any kind of just i mean really just all business it is the sweetest equation ever i love it i use it all the time all right so what is the pi equation why is it called pi um i actually think i was dieting at the time so i called it pies it looked like a pie when i drew it out pi like the pie you eat no actual real reason i call it this and for some reason it has stuck all right and so it is a simple equation it is a division equation all right very simple draw a big line here all right and what it essentially is i'll draw a smaller one here just so you can see it is inflow divided by outflow all right so why is this useful so for me i like to have a very good idea of where my business is at where they're growing whether we're shrinking what if we just did this for the rest of a year or forever what we'd end up at and that is exactly what this question answers what's important about this is that the inflow is actually a rate thing so basically you're dividing rates to get an outcome all right i'm not going to get like super into it because that's not what's important what's important is understanding what it will give you which is your hypothetical max right and it gives you three different hypothetical maxes uh so you can calculate stuff for your business all right so for example let's say i have an inflow of five new customers per month all right i get five new customers a month and let's say that my churn on my membership am i recurring my service whatever right is let's say it's ten percent all right so that's point one ten percent all right so if i want to know what the max amount of customers i will be able to have given this inflow i can project that so right now if i have let's say 30 clients if i'm doing this and getting five new clients a month and losing 10 percent it means that i will be growing because 10 of 30 would be three and i'm getting five right but at some point in the future right as i go on there will be a point where 10 is equivalent to 5 and at that point i'd reach equilibrium and so that is when i would have reached my hypothetical max and so why this is so important is that when i do this little equation let's say it's 5 divided by 0.1 which is 50 right which means 50 is going to be my hypothetical max so i know that if i'm signing up five people every month and i'm losing 10 of my clients every month that i will reach a business that has 50 clients on average and i will not be able to increase that number ever unless i either increase the amount of people i sign up the rate at which i sign them up or i decrease the rate at which people leave and that's it pretty cool right like this equation has like changed my life so what it does is it allows me to make very quick uh calculations to understand where i'm at whether we're doing well whether we're shrinking etc so for example if we had the same equation where i said i had 30 people right now and i said i'm signing up two people a month right and i've got 10 churn then i know that the hypothetical max of that is 20 right is 20 which means that i'm going to be shrinking from 30 to 20 over the next how many months unless i fix this and so it gives me a very clear snapshot of what whatever i'm currently doing extrapolates into the future now you probably already have some ideas of how you could use this in your business right this gives you a hypothetical max it projects out your current rate so you can understand where you're going that's the point all right now let me draw a little dotted line here that is the first use of this equation the second use is understanding lifetime value all right so let's say that we have a client and the average revenue per client that we have per month let's say is uh 500 all right so let's say it's let's use a different number i'll say a thousand dollars all right that's a little simple all right so a thousand dollars per month is my average revenue per client now let's say that i can keep a thousand dollar per month client uh for five months so my churn right the percentage that would leave every month would be twenty percent all right so twenty percent which would be point two right is my rate of people leaving twenty percent of my customers so if i have ten customers two leave every month it's twenty percent all right let's churn now when i phrase the equation or whatever when i when i frame it this way i can now extrapolate how much this person is worth to me so if i know that my average person pays me a thousand a month and i know that on average 20 of my customers leave every month then i know that my customers aren't average worth five thousand dollars which is 1 000 divided by 0.2 pretty sweet right so now i know that if all customers that come to me if i change nothing are worth five thousand dollars then that gives me a number that i can go and market with i know that i can spend at least a thousand two thousand dollars to go acquire this customer right i'm using rough math it'd be less than two thousand you want to be a three to one i'm not going to get into that right now but that's that's the point here is that this would give me rough math to know how much i could spend to acquire a customer that's super useful now with these two things together i can know where my business is going to stall i can also see how i can manipulate these variables in order to know where my business is going to reach now i can also see if i'm increasing if i'm if i'm growing my business or if i'm my business is shrinking simply by knowing what my inflow of customers in versus my outflow now you can also do this on a bigger scale i said it's it's three variations of the same concept all right now let's say i'm signing up ten thousand dollars a month of new business all right so this is the same concept as this what i was talking about over here where you know i'm signing up five customers a month but this is just basically combining the first two things into one overall number right so i'm signing up ten thousand dollars a month of new business all right that's what i'm setting up in new business per month all right now if i know that i'm losing again ten percent of my revenue per month then i know that's ten percent oops which is point one right or point one then i know that this business is going to cap out at a hundred thousand dollars per month now again the reason that that's important and the reason that i use all three of these variations of this equation is because i can see if i'm shrinking or i'm getting bigger if i know that we signed up ten thousand dollars uh in a month and we're doing ten percent turn and we're we're i know we're going to extrapolate out to a hundred thousand dollars a month but if we're currently at 200 i'm like that's not good we need to fix something or if we're at 50 i'd be like that's awesome we're going to double but the thing is is that you're going to double and then you're going to cap and what's more is that as you do this unless you have negative churn which most people do not have in service-based businesses what's going to happen is that your rate of growth is going to slow all right so it looks like this all right and so this is going to be your hypothetical max right at the top here all right and so what happens is you quickly like when you have zero clients when you sign up 10 people right boom you have a huge explosion in growth right percentage-wise it's like a vertical line right but the next month when you have ten and you lose two now you have eight but then you gain another ten but you only gained eight right but then now you lose ten percent again right so you lose or sorry twenty percent again but now you lose three because ten percent is bigger of eighteen right so you drop down to 15 but then you add another 10 right but now you're at 25 but you notice how the rate goes from 10 to 8 to 2 to 7 right the growth continues to slow down over time because churn eats out a bigger and bigger percentage right and so with this you can know that this is going to be your hypothetical max realistically though most businesses have enough volatility that once you're at about 80 90 of your max which would be like right here right it's realistically where you'll usually end up capping out because your your your fluctuations in business are such that that's around where you're going to be now i'm going to add in a bonus thing for you which is called the golden ratio and so the golden ratio is the way to beat this equation so that you actually never end your growth here's how it works we're going to have two rates so you have the rate of people leaving right leaving percentage you can put that as whatever you want the fancy word is turn leaving percentage x is percentage cancel percentage whatever and then here you have your referral percentage this is where things get magical so if percent of your customers were to refer a new customer every month and five percent of your customers leave every month then you have ten percent over five percent and it means that your business will double every growth period or sorry it uh basically it just it will continue to unendingly grow because the more people who come in from referrals a smaller percentage leave every month and this is called net negative churn this is where you have a business that grows faster than it turns on its own without paid advertising because your product is so good that is where we all want to go this is the promised land this is the golden ratio which is what i call it and when you can achieve this you can grow forever now re realistically you don't grow forever because you'll get big enough and you'll mess something up and then all of a sudden your referral percentage will go down or your turn percentage will go up one of those things happen but when you can achieve this for a period of time that is when you have crazy growth right because not only are you getting customers from your normal acquisition channels but you're actually the percentage of customers who refer which is why it's important uh is it stays fixed and it's greater than your percentage turn and so it just continues to grow and grow and grow which is awesome um so as a quick recap for you the pi equation is the most used equation that i use in all of business especially if you have a recurring revenue based business but even if you do not it's still an awesome equation and i use it in three specific ways one is so that i can know whether i'm growing or shrinking number one number two i used to extrapolate out what my current uh my gr acquisition versus my outflow rate how much i'm going to level out at this equation gives me that answer to the same degree it also gives me my hypothetical lifetime value per client so i can know that how much i can spend to acquire customer because i can know exactly what they're going to be worth to me give them their churn and what they pay me on average per month and again i can put all those things together into one number where i say i'm starting up this much new business per month and this much business is lose is leaving and this is going to be my overall number this top number is going to be the overall number that i'm going to be able to generate per month in my business all right um and so putting all these things together is i use this equation i mean i five times a day i use it all the time i use it when i'm coaching people i use it when i'm thinking about how we're doing and this is the type of back in napkin math that i feel like every entrepreneur needs to have in order to be able to understand where their business is and how it's doing and let me show you one more way to use this because like i said i use this equation literally every day all the time and it's by combining two of those pieces so if i had uh like i said earlier let's say i had five thousand dollars was the lifetime value right that i had calculated right which was based off of uh you know a thousand dollars per month uh divided by uh twenty percent churn right that gives me my five thousand dollars now let's say that i know that i'm signing up 20 clients a month i can know that simply by these two numbers if i know what my inflow is 20 clients a month and i know that they're going to be worth 5 000 total then i know that my business is going to level out at a hundred thousand dollars per month all right this is like the biggest thing ever this is how this like the whole game works like this is the equation this is how everything that i do extrapolates off of this thing all right and so 20 right per month now here's where it gets tricky because you're like well that makes sense it's math yeah but it doesn't look like that when you're in it because when you're in it you signed up 20 customers and you're at a thousand dollars a month per customer you're doing 20 000 a month and you don't know if you're doing well or not because you don't can't see into the future to see that if you just keep doing what you're doing and you don't break it and you don't get entrepreneurial 80d and you don't get shiny object syndrome if you just keep doing what you're doing and every month you drop another 20 in right you drop another 20 and you drop another 20 in then you're going to get to 100 000 a month right it takes time for recurring revenue businesses to gain traction and so if you understand this it can give you kind of this peace of mind and understanding where you're going where you're at whether you're growing whether you're shrinking and what you need to do to fix it because with these equations you can say either i have to increase the lifetime value i have to by either increasing the price or decreasing the churn which is one of those two things or i have to increase my inflow and simply by understanding those three pieces piece number one which is your price piece number two which is your turn piece number three which is your inflow if you understand those three pieces then you can understand exactly how to make your business however big you want so that is the pi equation this is the most used equation that i use i wish i could have a sexier title for this um because everyone needs to watch it and understand it in absolute depth because this is everything when i when i talk to a business owner when they're struggling when they don't know what to do this is what i use this is it like this is what i use when i'm trying to figure out what their business i'm like what's your inflow what's your turn what's your average price per user it's the first thing i'm asking literally it's the first two questions i'll ask and then i'm like what's your revenue right now and just by knowing that i can know whether they're growing whether they're shrinking how fast they're growing i can know where they're going to level out i can know how many customers they're going to level out at i can know all of these things simply by asking those four pieces of of data and having this equation in my back pocket and so i use this every day it's like i breathe this equation and the more you play with it the more you understand it uh the more powerful you be as an entrepreneur and i promise you it will be worth mastering so anyways hope you enjoyed this hopefully uh you like this uh leave a review for you know the podcast or if you're watching this on youtube leave a nice review subscribe all that kind of stuff otherwise keeping amazing room for you and talk to you soon [Music] [Music] [Applause] you