Social Media Marketer for SAAS Companies| Helping software companies sell their products and services through Content
A Girl with the heart of a child.
“Let him, I understand.” 🫡
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For years, I had the faulty assumption that “breaking even” on a fixed cost makes it worth it.
This was incorrect.
Here’s why:
To illustrate, let’s say we’re paying $7,000 per month for a TikTok growth agency.
The incorrect math is to think “alright, if this generates more than $7,000 in revenue, that’s a positive return.”
Wrong.
First, you need to at least break even on gross profit, not revenue.
So let’s say you’re a 70% gross margin service business. You need $10,000 in revenue to generate $7,000 in gross profit. So right away, your first “breakeven” point is the investment divided by your gross profit margin.
That’s now 1/70% = 1.4x
Second, with each additional fixed cost, you need more overall revenue to cover them.
And in our type of business, Customer Acquisition Cost (CAC) only goes up as you acquire more customers. So you need to model in a higher cost to acquire, call it an additional 20%.
That takes us to 1.7x revenue just to break even.
But obviously, we don’t just want to break even.
We want a clear and obvious return that generates free cash flow that allows us to reinvest in other things or pay ourselves.
So I want to at least double the money I’m putting in to make it worth it, which takes us to 3.4x.
But that fails to take into account the cognitive switching cost of managing another thing, which has the potential to worsen your returns elsewhere.
So again, you want to add an extra margin of safety.
And finally, you have to recognize the mental stress of having higher fixed costs in the first place and the demands that it places on your business.
Having $300,000 in fixed costs means you wake up every day with a -$10,000 bank account ($300,000 ÷ 30 days in the month).
So, as someone who is relatively risk-averse, I prefer to have a healthy margin of safety on any internal business investment.
Put all of those things together, and I now look at any fixed cost as needing a 5x return for us to be worth pursuing/holding onto.
This is true for employees, advertising channels, masterminds, software tools, and anything else that is a recurring fixed cost in the business.
Hope this helps your business ✊
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