HQQA043 How can you reduce your break-even rate point up 6 months in your plan?

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How can you reduce your break-even rate point up 6 months in your plan? – They get tricky here.

Here’s what they mean…

Insert groan. Tricksy little Hobbit.

Quick primer. The break even point is the point at which you are just getting to profitability. You have covered all your (current) fixed costs and are now covering your variable costs.pitch deck

So if you have it in your plan you are starting at a particular month you are going to get to break even. There are simply put, two ways to bring your BEP point closer:

  • Spend less money
  • Make more money

There are a lot of trade-offs though. If you cut your marketing spend, you will make less revenue in the future. Cutting paid spend could mean you are not making use of your fixed marketing costs (staff) so your fully burdened CAC will go up.

This the most devious question (“How can you reduce your break-even rate point up 6 months in your plan?”) I have read. Some famous VC likes to ask it (Bill Gurley or someone). This is grade-A hard if you don’t know your numbers.

You can’t answer if you don’t really know your model and all the drivers of your business. What can I say other than you need to know your stuff, or get your CFO to help you! Don’t just look and say, “Um, Jim!”

Do some quick, logical thinking. What are the key drivers of your business? It’s going to be around revenue, growth and cost, right? So what’s the derivation from those three points? List what they are, how they can change and what you would do if you had to make a move to profitability.

A great answer to the question (“How can you reduce your break-even rate point up 6 months in your plan?”) would be quantitative and revolve around the number of customers you would need.

What you need to say

“The basics of any business are revenue and it’s COGS, expenses to maintain the current client base and the costs invested to grow. To bring our break-even point closer means we either need to make more revenue or spend less which impacts our growth. Marketing spend impacts growth revenue and the variable component of our cost base, so that’s a delicate balance.

Given that we break even on customers in six months and then start generating profits on them, we will have to make this decision a year in advance. Decreasing marketing a year earlier would prove profitable cohorts. We could also be more judicious in customer targeting.

Making these changes would involve a change in our business model and our go to market plan, but it would be possible. We just wouldn’t hit our revenue targets.”

 

 

 

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