I am a numbers person so have always loved equations. There is a set formula that provides a certain output. I was recently speaking with an entrepreneur who was talking about how they have now optimized their current equation and are looking to create a new equation. I thought that was interesting so wanted to share some further thoughts.

Examples of startup equations

There are many examples, but here are two common ones:

• Gross margin: (Gross profit/revenue) - essentially every time you sell a new product, what percent of that revenue do you make after your variable costs to deliver it (product, sales, etc.)
• LTV/CAC: (Lifetime value of a customer/cost to acquire that customer) - a measure of your efficiency of bringing on new customers. If new customers are worth a lot and it costs little to acquire them than keep growing; if it costs you more to acquire a new customer than they are worth be careful doing more

How you optimize an equation

Within any given equation, you can make changes to improve some of the inputs to the equation that affect the net result. In the gross margin example above, you could make operational/manufacturing changes to lower your cost to produce the product (i.e. instead of $100/unit now $60/unit). You could also change your sales process and commission structure to reduce your cost of selling the product (i.e. from 20% of sales down to 10% of sales). Either of those can improve your gross margin and better optimize the equation. You could also change your go-to-market strategy to revamp your channel mix, leading to lower churn and higher customer lifetime value.

How you change the equation

There are times when you know the current equation, but are not happy with it. How can you change the equation and create a new one? For example, you can create some additional product/service that now when bundled together helps you have a better value proposition and higher price point, thus improving gross margin and LTV/CAC. 

Early on in the business you are trying to figure out what your equation is. As you learn that equation, you can then optimize it to the point where you like the results and want to keep doing more of it. At some point, you then may need to change the equation to keep growing or capitalize on a new opportunity in the market.

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