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This episode is a business coaching course that teaches what a fixed cost is in your business.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Jargonization Translation: Breakeven Point - The point at which gains equal losses. - Investopedia.com
  • Steps To Know Your Breakeven Point: Determine your fixed costs.
  • Jargonization Translation: Fixed Costs - A cost that does not change with an increase or decrease in the amount of goods or services produced. - Investopedia.com
  • Action Step: Avoid any expenses in the beginning of your business until you are at a breakeven point or ready to make the transition into your business income.
  • Steps To Know Your Breakeven Point: Know your variable costs.
  • Definition Magician: Variable Costs - Variable costs are those costs that vary depending on a company's production volume.
  • Steps To Know Your Breakeven Point: Determine your income
  • Lesson Nugget: Income per service - variable cost = profit per customer. Ex. $100 -$25 = $75
  • Lesson Nugget: Knowing your fixed expenses and your variable costs will help you determine the amount of business deals you have to achieve to breakeven.

learn business practices like edtech, business owner game changer

-The next thing we're going to talk about is how to get your breakeven point and this is a game changer. And your breakeven point is the point at which the business is-- again, we talked about how from an income perspective, we don't want to jump off a cliff and have nothing to land on. We only want to jump from maybe what we're making now to 70% what we're making now.

Now the breakeven point. What you're going to do is-- the process you go through this-- is do we have any idea how much we would charge a customer?

-Not a clue.

-OK. And the only way you're going to know is looking at your three competitors and seeing what they charge. And then we'll get some sort of pricing basis. So I'm going to make up an example.

First step you want to do is we want to determine our fixed costs. So what are our fixed costs? Well, you know this as a business guy. But I'm going to go over a few of them.

That would be my phone, that's going to be my lease. I highly recommend that you and everybody else watching this, you don't lease any space at all until your business is at jumping point. Until it's breaking even, I would try to avoid-- any expense you can avoid, avoid it.

But the phone, a lease, I'd look at your Dream 100 costs. I'd look at your website costs. Any cost that you have every single month whether you sell something or not, that's my fixed cost.

Get those all on paper. Get them on a spreadsheet. Figure out your fixed costs. Every single cost you can possibly think of-- put it on there.

Now, the next costs, the next area, is my variable costs. Now my variable costs are interesting, because those go up and down based upon the volume of the work I'm doing.

So if every time I deliver service to a person, let's say that my hard costs are $25 per customer. If that's what my cost-- it's $25 per customer to deliver it. That's labor. That's whatever my-- gas. I figured it out, and I'm like, hey, man, every time I do my labor, every time I do my gas, it comes out to that.

But I charge people $100. So I charge people $100 per service. My income is $100 per service.

So what I do is I take my income per service, and I'll subtract my variable costs. So minus my 25 in variable costs equals $75 of profit per customer.

However, I added up all my fixed costs. And I know that after all my fixed costs, gah! It costs me 3,000 a month just to be in business. Son of a-- or a thousand, or whatever that number is.

I believe with your model, some things you're working on, I just have zero way to forecast that. But I believe you can do it for 3,000 a month or less. Why? Because I've worked with similar businesses and I know it's possible. So 3,000 per month.

So now we take the tool that many entrepreneurs are afraid to use, the calculator. Because we're all about inspiration and visions and big ideas. And most of us hate calculators. But we do have to use one occasionally.

And we say, well, 3,000 is my costs per month, my fixed costs. And I make 75 per, so I have to do 40 clients a month just to break even. Equals 40 clients per month, break even.

Now obviously you know this, but just to give a little bit of context to it. In the retail world, I was shocked. I have a friend of mine who's very high up in Target. Like, the highest you can go up in Target without owning the place.

And he explained to me that the Black Friday-- I understand the idea that if we go from red, the accounting, we're losing money. And now on the Friday after Thanksgiving, we're now making money. Because of all the retail, the holiday shopping.

And I knew that was kind of a figurative thing, but I'm like, retail, do you guys literally lose money every single month? And then only make money during the holidays? And he's like, well, for Target our numbers are such and such, but for most retail, yeah. You break even all year. And then all your profits are made in the final quarter, November and December, in retail.

So most people in the retail world only make their money during peak seasons. Most people in the service-based business-- and I would say this is a number you should shoot for, David-- is I would want to see if you can make money during 50% of the

month.

Find that game change that could grow your business

Featured Coaching Excerpt - Notes & Transcript, Part 2
  • Action Step: Create a one page fixed expenses spreadsheet, be as detailed as possible, and continually add to that document.
  • Lesson Nugget: Avoid recording your business costs in different places, add your variable costs to your fixed expense spreadsheet.
  • Steps To Know Your Breakeven Point: Determine how many customers you need to achieve your financial goals.
  • Ask Yourself: How many customers a month do I need to achieve my financial goals?
  • Lesson Nugget: No matter what business you start, know your financial goals, fixed costs, variable costs, and determine the income you will need to make on each transaction for you and your business to prosper.

[MUSIC PLAYING] -So with my DJ business, before I sold it, we were doing about 80 events a month, or 80 events a week, which sounds great. 80 events a week, God, you guys are rocking. That's cool. That's 4,000 a year. Man, 80 a week, woo. What people don't understand is it took us about 25 a week just to break even. Got to pay the lights, got to pay the team, got to pay the costs, got to pay the human resources, got to pay the payroll company, got to pay taxes. Pay, pay, pay, pay, pay, pay, pay, pay. You don't even money until you do 25 events. After that 25th event, we made money. So [INAUDIBLE] you want to start off is you want to go ahead and be as detailed as you can about making these fixed expenses on a spreadsheet. And when you make it, you're never done. It's a living document, so you'll always add new expenses to it. You always want to revisit it. But get all of your costs-- I kind of want to scream it from the mountaintops-- you want to get all your costs of one sheet of paper. all your fixed costs, every one of them. Don't put some of them over here on a sheet of paper, and some over here in a notebook, and some on your credit card, and some on you're checking card. Get all on one sheet of paper. Then, your variable costs, you want to get all those in there. I mean, I'm down to the smallest detail. If every single customer that you work with, after providing service if you drop off a gift card, what's the gift card cost? Put on there. If you use two pumps of soap every time to watch somebody's head, figure out how many of those two pumps it takes to use a whole container. Now, the income, you want to get a good idea of what you're going to charge per service and get it detailed, so you know exactly how much it is per service. And then the final part, and this is the part, to me, that's exciting, is what you want to do is you want to ask yourself, how many customers equals my goal? And that's where it gets exciting if you say, how many customers do I need every month to achieve my financial goals? I bet you less than 5% of business owners have any idea what that number is. They just don't know. I know though. Oh, I know, I know, I know. So for all the businesses I'm involved in, I know for the haircut business. I know exactly how many haircuts we need to break even. So it's a deal of like most businesses, if you weren't building Thrive, if you're building a haircut business, or you're building your business, or I was building my DJ business, or any other business, I would start by knowing my goal. Then I would put in my fixed costs. I would put in my variable costs. I would determine how much income I make per transaction. And I would just marinate, and I would say so, with the DJ business-- I'll give you a number-- I made $167 of profit per wedding. So I got to a point I knew if I do this many weddings, this is how much I'll make per year. And so I knew exactly how many weddings we had to do for my wife to be able to stay home. So that was like my all consuming passions. It was like, every week, I'm going to get this many things, and my wife can stay home. She wanted to stay home and raise kids. So like, I knew that number. So every week, if we didn't sell, if we weren't selling like three weddings a day, I was so uncontrollably, irrationally, white hot pissed. I mean, I was out of my mind. Like, if we didn't book three events every day, I'm just losing my mind. And I knew that we needed to book one person, one wedding every half hour. If we didn't book one every half hour, I would sit there in the call center, and I'm like you got to get on the phone. Let's go, because I knew exactly what we needed to get to.

Featured Coaching Excerpt - Notes & Transcript, Part 3
  • Lesson Nugget: Providing a premium service in the beginning can limit the number of transactions needed to make a profit and give you time to evolve your services so you can offer a more affordable solution.
  • Lesson Nugget: Providing lower cost services requires your business to fulfill services at a massive rate, which can be difficult without experience and verified checklists.
  • Action Step: When starting a business determine your business value proposition and continually adjust the four financial components that will impact your business.

-So as you're doing helping hands, I mean, if your goal is to make the health care just unbelievably low priced, then you're going to have to be really, really excellent at marketing. And I would more-- if I were you, I would try to limit the number of transactions per month you have to do. And I would start with offering premium service. And then, as your business begins to get better, then I would begin to offer lower cost solutions. I don't know how familiar you are with this, but Tesla-- -Yes -You know, he started the first-- the first Teslas he sold were unbelievably expensive. Why? Because he want to sell to the taste makers. He wanted to sell to people who wouldn't mind spending a quarter million on an electric car. And then once he figured out the kinks and what people like and what they don't, now he's trying to make stuff that's affordable for the average person. Does that make sense? -It does. So I would start at the top. I do not recommend that you would-- now if you want to do it, if you want to start at the bottom of the value cycle where you offer the lowest price possible and that's your goal from day one, then you'd better be able to fulfill at a massive rate, which in order to do that, you'll have to become a checklist maniac. And I don't think it's reasonable that you'll become a checklist maniac and know exactly how to deliver the service in a scalable way until you've screwed up at least, you know, 20, 30 times. Does that makes sense? -It does. -And then once you've screwed up a bunch and you have the checklist for every service, then you can decide how you want to price it out. But right now, if you want to make 500,000 a year and we made $75 of profit per customer, then we know that just to break even, though, we have to do 40 clients a month just to break even. Let's look at that. So it's 40 a month to break even-- so the first 40 just disappears into the ocean. So let's take this $500,000 a year. That was the goal. And we divide that by $75. We need 6,666 clients after our 40 a month. So I'm going to go ahead and take plus 480. So it's 7,146. And I will divide that by 12. And here we go. So you would need to have roughly 595 transactions a month at this level. -Divide that by 4.3 please. -So per week, you need 138.5 customers a week under this model to get to your goal. One of the businesses I'm involved in is the premium haircut business. Well, I found that men who want a high quality service are totally willing to pay $35 or $40 for a decent haircut with a paraffin hand dip and hot towel treatments and straight razor shaves and all that. And I've also found there is another group of people who are entirely not willing to spend more than $15 on a haircut ever under any circumstance. So the idea of offering a high end service to people who weren't willing to pay more than 15 for it didn't even make sense to me. I'm like, why would we want to make the price that low and offer it to a group of people who wouldn't appreciate it anyway? So we've had-- and every business has their own value proposition and their own way to get there. But these are the four things you'll need to keep juggling and keep putting it into a spreadsheet and keep tweaking it until you come up with a model you're happy with. That cool? -That is cool. I can do that. -And if you look at your three competitors, you'll know if your pricing is within reason. I mean, if your pricing is like two times more, maybe you want to be three times better. And you can do it that way.

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