Many business owners inadvertently focus on the profitability of their company in a moment and not Strategies to ensure that profits are sustainable over time. These are basically two conditions that define sustainability;

The first is for companies that make and sell products, physical goods typically, while the second is for companies that provide services or software to customers. The equation to calculate how sustainable your business profit is;
Q (P-C) MUST EXCEED F.
Q = is simply the quantity sold per unit time.
So in the case of the opener, it would be how many openers per year were sold? That’s Q,
P = is the price that the company receives when it sells one unit.
So, in this case, it might be #50 per opener.
Cost = is the cost per unit that the company pays to make the good.
In this case, it might be #20.
So p – c, in this case, is 50 – 20, or #30.

That, by the way, is called the gross margin.

And F is the fixed cost; those are the costs that are required to operate the business whether or not you sell any product.
And so for instance, that might be rent, advertising, salaries, marketing and so forth. And in this case, let’s imagine that’s #400,000. So in order for Belle-V to be financially sustainable, Q (p-c) has to be greater than F. Now let’s look at how the math might work out… Let’s imagine that Belle-V sells 20,000 units per year. It gets #50 per unit. It has to pay #20 per unit in cost, and so it’s able to get #600,000 in gross margin, or 20,000 x 30. Also, we assume that F is #400,000.
This shows that the business is taking in more than it is shelling out. 600,000 exceed 400,000 and therefore, Belle-V is sustainable and it can pursue the objective of creating heirloom quality products for the kitchen.

As a caveat, I want you to note that this analysis is an expression for long term sustainability. It doesn’t account for any investment that might be required up front before the business even opens its door. So, for example, it
doesn’t include the product development expense. The manufacturing expense associated with making molds and tools in order to create the product. Those kinds of investments are not captured here. But in the long run, if
Q (p-c) exceeds f then this business can be sustainable.

In particular, the condition that has to be satisfied for financial sustainability is that
LTV HAS TO BE GREATER THAN CAC.
LTV refers to CUSTOMER LIFETIME VALUE and CAC
REFERS TO CUSTOMER ACQUISITION COST.
If lifetime value exceeds acquisition cost, then we have a sustainable business.
Well, what goes into LTV? Well, a few different variables determine lifetime value.
For instance, what’s the churn rate? That is, what fraction of customers do you lose every month?

Obviously, the fewer customers you lose, the longer their lifetime value is. What are the service fees per unit time? That’s the #79 per month or the #150 per month.
What’s the duration of engagement on average?
How long does the average customer stay with the company?
And lastly, most of these customers don’t just buy one service, they might buy several services. So you want to think about their value in terms of the total value of services the customer uses. So for instance, with Gridium, we might imagine that the lifetime value is #5,000. And that could correspond to the average customer buying an average of #250 per month of services and staying with the company for an average of 20 months. 20 months’ times #250 per month would give me a lifetime value of #5,000. Now for some kinds of businesses, typically services and software related businesses, you aren’t selling a widget; you aren’t selling a product on a one time transaction to a customer. Instead, what you’re doing is entering into a relationship with a customer who often pays you a subscription or a monthly or an annual fee in order to enjoy your service. For those kinds of
businesses, we use a different analysis.

Let’s take a quick look at that.

Let me use an example, and the example is another company called Gridium. And what Gridium does is sell software that helps building owners operate their buildings. It does things like help them with energy efficiency decisions and also helps them with building maintenance operations. Gridium is a so-called software as service or SAS business, and it’s sold on a monthly subscription basis. In fact, Gridium has two main pricing levels, a #79 a month option and a #150 per month option. And so, we really need to think about the Gridium customer as paying us every month, hopefully for a very long time. Now there are some standard terms that we use to describe these kinds of businesses.

Okay, now let’s turn to CAC or customer acquisition cost; Customer acquisition cost is just what the term implies.
What does it cost me to get a customer to adopt my service? And this is typically mostly selling and marketing expenses.
So for instance, if the CAC is #3,000, that could arise because I paid my salespeople #90,000 per year and on average they acquire 30 new customers per year.
That would give me a CAC of #3,000. But in this case, if #5,000, the lifetime value, exceeds #3,000, the customer acquisition cost, then I have a sustainable business. As with the previous model, this model ignores any investments I have to make in building the product initially and in getting the company started, but it describes the condition that has to be satisfied for my business to eventually be sustainable.

So, while you as an entrepreneur will typically have some greater objective, improving math education, pursuing your passion for chocolate or bringing flying cars to the masses; While that might be your primary objective, an important secondary objective is that you achieve financial sustainability. And if you’re creating a widget, that is, a product which we often call a widget, then quantity time’s price minus cost has to exceed your fixed costs. That’s the condition you have to achieve. And if you’re in more of a service business,
more of a software business or a service-related business, then lifetime value has to exceed customer acquisition cost.