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What is Profit Margin? - YouTube
Channel: ClayTrader
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profit margin what exactly is it I'm
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clay let me explain let's start at the
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very basics of profit margin and just
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from a mathematical standpoint is based
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as a percentage and will kind of build
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from this point so what exactly is a
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profit margin before I go any further I
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do talk about a couple these next points
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in the video I've done before so I'll
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put a link below such as revenue and
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expenses and actually profit margins
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profit margin shows up in that video but
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upon watching it back I feel like I
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could have done a little deeper dive
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into it hence the point of this video
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but if you're not sure what revenue is
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and expenses and stuff like that go and
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watch that video first but assuming you
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do then we'll just proceed on here so
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how is a profit margin actually
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calculated well you have a very very
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basic straightforward calculation here
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and it is revenue minus expenses and
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then you're going to divide all that by
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the revenue and again if you're not
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really exactly sure most people know
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what expenses mean but unsure about
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revenue just go and watch everybody roll
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from last week so you do that
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calculation and then of course because
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it is remember base as a percentage
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whatever that gives you you want to
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multiply it by 100 to convert it into a
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percentage so that is what how a profit
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margin is calculated but what actually
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is it how does it actually work well the
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way my mind kind of processes it is that
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a profit margin from from a business
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standpoint is more so kind of what I
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would call business flexibility I mean
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it's basically telling you how flexible
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a business can be or maybe just how
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constrained and how you know they can't
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really move that much but that's how I
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picture it as far as
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kind of just you know not necessarily
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you know counting weight up looking at
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it but just kind of a practical way is
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how flexible can a business be and the
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flexibility is based on this percentage
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meaning the lower that number is the
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lower the percentage a lower the profit
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margin the less and less flexible it is
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the higher that percentage the more
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flexible it is so what exactly do I mean
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by that well let me get do let me get a
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couple of scenario set up and then I'll
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see you back here in just a second so
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here we have two companies I know I got
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super creative with the names of these
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companies but company a company and B
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and let's quickly run through the
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numbers here do a couple calculations
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and then I'll show kind of how this
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flexibility would work in the real world
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oh but you know very simple look at
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things but you know it'll get the point
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across so company a revenue of $100
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again just keeping the numbers very very
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you know simplistic so they do a hundred
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dollars in revenue they be in the
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company expenses right here you can see
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so just to keep the lights on
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ten dollars labor so you know you got to
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hire people thirty dollars and then you
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know marketing twenty dollars you add
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these up which give you the total
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expense of sixty dollars so let's do the
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calculation real quick you'd have a
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hundred dollars minus the expenses so
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we're going to revenue minus expense
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divide that by the revenue and that's
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going to give you ultimate ly forty
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percent because after you multiply it by
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one hundred forty percent now let's look
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at Company B hundred dollars revenue so
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that's the same lights twenty labor
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fifty dollars marketing twenty so that
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brings a total of ninety dollars so here
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you have again the revenue minus the
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expenses and then you want to divide
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that by the revenue again multiply by a
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hundred and that's going to give you ten
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percent so here you know kind of make
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yourself sound cool
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forty percent profit margin for company
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a ten percent profit margin for Company
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B and I get it okay yeah now you can
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sound cool and press the friends you
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know whatever or maybe get made fun of
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by the friends I don't know but the
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point being you actually know what you
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you know you're talking business but
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what is that
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I mean in terms of flexibility well
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let's just say for example that you know
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company and a and B know they're
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competing against one another and they
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say you know what we want more customers
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we want more you know clients so what
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let's let's do this let's up our
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marketing budget so here they're going
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to just up it by and I'm gonna keep this
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even across the board but marketing is
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going up by ten dollars okay so each
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company increasing their marketing by
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ten dollars so this now becomes so from
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twenty to thirty this now becomes again
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same as that twenty to thirty so what
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does this do to our numbers down here
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well that's going to add ten more
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dollars here so this sixty now becomes
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seventy and then this 90 add ten more
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dollars to it now becomes one hundred so
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what does that do to our calculations
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down here well this raises it to 70 so
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100 minus 70 is now actually thirty so
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the profit margin has dropped down to
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thirty percent in this case though maybe
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you see where I'm headed with this this
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is now ten dollars more so one hundred
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so you do the math here and the profit
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margin now is zero meaning they're not
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making any money anymore
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their profit is gone even though both
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companies only raise at the same amount
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each you know invested ten dollars more
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into marketing because company a had a
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lot more flexibility going into this you
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know effort into this experiment however
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you want to look at it compared to
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Company B they just had a much bigger
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advantage now the one part I'm leaving
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out is because it's marketing
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potentially that marketing effort would
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have raised the revenue so that's one
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part that you know would ideally not
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remain the same because you're spending
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more on marketing that number right
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there you should get more sales but
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setting all that aside the point here
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being that both companies wanted to
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increase their marketing and both
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companies could do that but because
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Company A had more flexibility because
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they had a bigger profit margin at the
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start they were able to do that
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experimentation and still walk away with
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making money maybe a little less money
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because their profit margin was down but
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walk away with making money
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whereas Company B
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because they just had less profit margin
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begin with a que less flexibility yeah
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they did the same exact thing but that
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ultimately led them to now not even
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making any money so that's how profit
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margin works you know sometimes it can
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get a little waitwhat but at the core
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all it is is telling you how flexible a
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business can actually be in order to try
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to grow and expand into the future first
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off thanks so much for watching the
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entire video real quick before you go I
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want to invite you to a live webinar web
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class training workshop online event
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whatever you want to call it but it will
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be me live revealing to you what I
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discovered that has allowed me to
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transform myself from being an employee
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to being my own boss
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including how I had only one losing day
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out of 73 days in total I'm going to
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cover three keys that have helped me
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unlock profitable consistency within the
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markets the first key is super-weird but
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in a productive type of way the second
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key is super awesome because it quite
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literally is wired into our DNA as
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humans making it very easy to use but in
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a cruel way this becomes a pitfall for
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many traders I'll explain it all though
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including how to avoid the pitfall that
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it creates for some and yeah the third
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key when you hear it sounds way to get
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way too good to be true but it's not and
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I'll show you how it all works then at
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the end I open it up for a
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question-and-answer session that is
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again totally live even if you can't
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make the live session please still sign
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up as it will be recorded and you can go
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back and watch the replay then I will
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send you click the image on the screen
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or click the link down in the
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description box so you can get the date
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and time and claim your spot which I
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should know is limited due to the fact
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that this truly is a live event if you
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have any questions let me know
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if not I'll be seeing you soon
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