It seems that every piece of software sold these days is backed by AI and can solve every problem you’ve ever had! In every pitch I hear how AI and all these tools can
- “learn” who your customers are,
- lower your cost of acquisition because it “knows” where to spend your money,
- increase lifetime value through “intelligent” predictions about our your product,
- lower customer churn by “predicting” when they will cancel and winning them back.
The list goes on and on, but at the end of the day, what are these tools and people selling you? Do the AI tools actually help your business at the end of the day? Does it drive more PROFIT?
In many ways this AI revolution feels like everyone is shouting from rooftops that they know the sky is blue because AI told them it is true. The real truth is that there is simple math and logic behind why the sky is blue, just like there are basic formulas for building a profitable business. It isn’t rocket science, nor do we need AI to do it!
Here are two key formulas that every founder and business owner can use to drive smart, understandable, and profitable decisions.
Customer Lifetime Revenue
You don’t need fancy tools to predict customer lifetime value. The math is simple. This formula applies to subscription businesses, but is the same for all commerce businesses.
Lifetime Revenue = Average Order Value (AOV) ÷ Order Churn Rate
So, to fill in the data - if you have an AOV of $50 and Order Churn Rate of 20% the formula would be:
Lifetime Revenue = $50 ÷ 20% = $250
The way to calculate Order Churn Rate is to look at how many people buy again after each purchase. So if 2 people out of every 10 never buy again after their purchase, that is a 20% churn. This is different from dividing cancellations by active subscribers (active subscribers is a vanity metric!).
As you can see, lifetime revenue is a function that is tied to getting people to buy again and how much they spend. It is that simple. If you aren’t making money on your customers, you need to either focus on churn/repurchase rates or AOV. No need for fancy AI tools to tell you which small group of customers are going to spend $10,000 with you, that’s BS and a distraction!
Break Even Point
In order to know if you can afford to grow and if you’re making money, understanding your break even point is critical! No developers nor AI predictions necessary. The breakeven point describes how much revenue per customer you need before starting to earn anything. Just like Customer Lifetime Revenue, this is also a simple formula.
Break Even Point: CPA ÷ Gross Margin
So, to fill in the data - if your cost to acquire a new customer is $50 and your gross margin is 50% then the break even Point would be:
Break Even Point: $50 ÷ 50% = $100
If these are your numbers, now you can see that in order to drive profit in your business, you need to get a customer to spend more than $100 before you can start impacting your bottom line.
At the end of the day, with 2 simple formulas, we can easily understand the health and strength of our businesses. These basic understandings will allow you to call BS when some AI is being touted as the solution to your profit woes. What is it actually doing? Is it increasing your AOV? Is it decreasing your order churn? Is it improving your Gross Margin?
If these tools are doing anything else, call BS! If they can’t explain how they are doing one of those things, call BS!
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Jordan Salvit co-founded, and subsequently exited, KitNipBox after building a best-in-class eCommerce subscription brand for nearly a decade. A former consultant, Jordan has built his career off of spotting data-driven insights and knowing how to prioritize his next strategic initiative based on the numbers. Now, he helps scaling eCommerce founders do the same at Salvit Advisors.
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