The ART Of the deal

Here's the deal. One useful way to look at a business opportunity is through revenue and cost models. One example of such a model is the ART O model:

• Acquisition: This is the process of acquiring customers (or initial sales).
• Recurrence: This is the so-called recurring revenue, but really it's more generally about retaining customers over time.
• Termination: This is the end of the relationship. Eventually all things come to an end.
• Overhead: This is the cost of continuing to be in business.

Acquisition (a.k.a. Marketing and Sales)

Generally, marketing brings in leads for sales to turn into customers. This takes time and money to do and thus we can get time to money and cost of customer acquisition. Here is the acquisition part of a sales sieve. A more detailed understanding is available in our article on Unit economics and sales and delivery projections.

From this part of a sales sieve, you can readily understand the time to money and cost of customer acquisition. In this case, on average, for the median case, it costs $432.27 to acquire 0.47 customers over 70 days. To acquire an actual customer would take about two of these cycles, (0.94 customers) and of course you can run these cycles every week (5 days to get leads). So start a 2nd cycle the next week and you will have 1 customer in 75 days (about 2.5 months) and it will cost you about $860. Then you wait... for 30 days to get your first money...

Recurrence (a.k.a. Fulfillment and Payment)

Recurring revenue and its associated costs are the good part of the process for most business people. This is where you fulfill the promises of your marketing and sales on a day after day (or month after month or whatever) basis and keep getting more money. It's where you dig out of the cash hole you created by doing the marketing and sales process. But be careful here. Fulfillment is not just fulfilling the promises. It's also the eternal process of ongoing marketing and sales. If you do it well, you are keeping your customers engaged and happy with their decision, and getting them to keep buying more from you. While there are some one-time sales, I'm not sure what they are. Even funeral services, while they are one time for the departed, are in fact evergreen opportunities because they represent the path to the family plot. The time frames are, on average, predictable, but they are (hopefully) long recurrence cycles. A hotel stay leads to more hotel stays, if only because of the rave reviews you get from your guests.

Recurring revenue and its associated costs typically decay with time as well. That's because customer retention is not usually 100%. They tend to fall off over time, if only because they become a customer of the local funeral home. But more often, it's because you have done your job and they have moved on - at least we hope that's why. After a year, for each week we try, we get back, in the mid case, $8336. Of course we are slowly losing the customer base, which is why we have to keep the sales and marketing process going.

Another phenomena can also happen of course. Customers can bring more customers. If you are doing a great job, your customers will tell their friends who will tell their friends, and word will get around. Here's what that looks like:

In this case, customers who lasted for a while told their friends who told their friends, and so forth, resulting in a 10% increase in the number of customers quarter over quarter, once it caught on. That $8336 from the end of year 1 turned into $26,259 a year later by growing the customer base by a factor of 2 once it caught on. And of course it grows from there as well. More sales efforts will of course bring in more customers, at least until you get close to exhausting your market.

Another important thing to note is that as long as customers continue to expand, by even a little bit year over year, the effect is cumulative, and the result is in fact exponential growth, in that every new customer brings in more new customers, and so forth. Getting over that threshold is incredibly valuable and a key to an explosive growth business.

Termination

At some point, you or the customer will terminate the relationship. While the averages may grow, we cannot really ignore the fact of termination. There is a cost of ending a relationship, but hopefully it's not too high. That's usually the case, particularly for for recurring revenue models like this one. But if there is a substantial cost of termination of a customer relationship, like from a law suit or a reputational hit, it can cost you a lot. So that's why you need to be good at fulfillment, meet all your promises, and make sure your customers understand and acknowledge their happiness.

Overhead

Here's where people tend to forget things. Those who have run companies before know that overhead is like the continuing effect of gravity on the plane that is your company. When your cash flow is not good, even if your unit economics tells you that you will be profitable in 18 months, you won't make it to then if your plane hits the ground, which is to say, you run out of cash. Overhead is simply modeled by an eternal downward sloping line, possibly adapting to volume of sales to a point, but there are limits on how high it can go and how low it can go.

One interesting thing about overhead is that every micro business owner and their family seems to have a clear grasp on it. It is the thing that takes food out of the mouths of their children to keep the company going, prevents them from going on vacations, keeps them in an old car, and so forth. And that means that they also seem to know how to minimize it. Especially in hard times, when they have to go without pay for months at a time to pay the critical bills and not pay or delay paying some bills.

My experience with larger entities is that overhead is cut by cutting non-essential workers, not renewing leases, and things like that. If they cut too deeply, they will ruin the company and if they cut too lightly they will end up in bankruptcy. The problem we sometimes see is that they cut the sales force, which means they stop making sales, except of course when they do it well so they keep the sales people who close more and better deals. For a good example of a bad way to do this, look at what Musk did to Twitter (now X and likely soon to be Z as in Zero valuation).

Adaptation

Models can be pretty cool. But beware. You need to track the actual business to update the model to continue to anticipate and constrain the outcomes over time. To get a sense of this, the models above have a success percentage and a +/- field. The bigger the +/- field, the less certain that step is about outcomes. The result is an envelope of futures that could happen.

The Min field shows worst case (according to the model) and the Max field shows the best case. Now consider that the worst case is usually business failure, while the best case is usually explosive growth. At least when you start out.

In the examples above, I discussed the middle case, the excepted outcome if the estimates are dead on. But look at the envelope of outcomes. The range in that last case went from $792 after 790 days (about a dollar a day) to $267,561 after 790 days, about 300 times the dollar a day level. That's quite a range. If we are near the bottom of that range after a few weeks (based on hitting the lower numbers in the range of customer acquisition) we are in big trouble and should know it right away, not wait till 100 days later when sales don't end up turning into money. And if we are below the worst case, that means even those bad estimates are not as bad as the reality of it.

That's when you need to look at how the process is working or failing. And that's when you need to fix it.

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In summary

The ART Of the deal is how a company survives or collapses. You can learn the ART Or you can choose to ignore it.