The 5 Things I Look For Before Starting Any Business | Ep 967
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What are the five structural advantages for starting a business?
If I wanted to start the perfect business, these are the things that I would focus on. So think of these like the five advantages that make any business easier to grow and way more profitable. And this is what's helped me build a portfolio of companies that generated over $250 million in revenue last year alone. And so for each one, I'll describe what it is, I'll give examples, and I'll show you industries that excel in them and industries that suck. There are very few businesses that have all five, and even having one of these makes the business that you have better than others. And so just think this video is like an S tier ranking for opportunity vehicles. So if you've ever heard or thought, man, like I feel like I've got a level 10 skill set and a level two opportunity, then this video is for you.
So let's get started with number one, sticky. It's the most important thing. If you do not have what's called revenue retention, you have nothing. Revenue retention just means how much revenue from last year you retain to the next year. That's all it is. If you don't have that, you will always be in the sales business. So John Paul DeGioia, who started Paul Mitchell, he started Patron, he says this quote that I always remember. He says, you want to be in the resale business, not in the sales business. And so there's two types of retention that people discuss. One is logo retention, which is if you had 100 customers in January, how many do you have now? And then the second is the revenue retention piece, which is if you made $100 from those customers in aggregate in January, how much do you make from that same cohort or group of customers today?
And so logo retention, just to be clear, you almost never have 100% logo retention. Like you can't get more than 100%. You only have a certain amount of customers and it only decays over time. And so some reasons for that is that there's something called structural churn. So someone moves away, they die, their business dies, they fire the employee if you do a payroll thing, who used the subscription or the service. And this is called involuntary churn. It's because it's just structural to how businesses operate, right? On the other hand, there's something called voluntary churn. And this is the one you really want to avoid. That's when people leave because they just think you suck, right? And so those are kind of like from a logo retention perspective, how many of the number of people are still here?
The revenue retention side, you absolutely can have over 100% net revenue retention. And so that means that even if you lose some of those customers, the ones who stay increase how much they spend enough to make up for the ones you lost. And so the easiest way to do this is have a clear way for cheaper customers to spend more with you. And if you're a service, keep doing the thing they need you to do, which part of it is making sure that that person that you sell actually needs it in the first place. And this is why qualifying customers is so important. But for example, if I have a $9 a month membership and a $99 a month membership, like school.
How does revenue retention impact business success?
If someone comes in at $9 and then goes up to $99, then I get an 11x in terms of value from that customer. And so even if 20% of customers leave from the nine, if I get even 10% of customers to take an 11x, I have more than 100% revenue retention. And that means that when a customer enters the business, that means that the business will continue to grow whether we do nothing at all over time. And that becomes a very valuable company. Now, let me give some interesting data on Skool that manages hundreds of thousands of memberships that you can use for any recurring business. Number one is that the first amount of churn that's the greatest is month one. So if you ever have to focus, focus first on your first 30 days.
Across all categories, it was over 20% plus churn in that first month, all right? The next big kind of like drop off point in churn is about 10%, and that happens at about month three.
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Chapters
7 chapters
1
What are the five structural advantages for starting a business?
0:00–2:21
2
How does revenue retention impact business success?
2:21–4:21
3
What examples illustrate sticky versus non-sticky businesses?
4:21–7:40
4
Why are high gross margins crucial for profitability?
7:40–10:43
5
How does operating in expanding industries benefit businesses?
10:43–13:49
6
What is the significance of low operational complexity in business?
13:49–17:06
7
How can uniqueness create a competitive moat for businesses?
17:06–20:16