The Game with Alex Hormozi - 3 Steps That Will Double Your Profits in 8 Weeks | Ep 443

Episode Date: October 4, 2022

When something becomes more expensive, people perceive its value in a higher way. Today, Alex (@AlexHormozi) talks about the steps he did in order to make over $5 Million in 8 weeks, why doubling your price is the best option to choose, and explains these steps using a hypothetical scenario at the end of the episode.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(2:04) - Business growth wish: Double customers, double price, or extend retention?(3:37) - Best profit strategy: Double the price; Alex's successful example.(6:19) - Increase pricing by 50%, maintain product, boost sales.(7:52) - Pricing tied to emotions; fear of breaking established prices.(9:38) - Three steps to double profits: Pricing Survey, internal communication, customer communication.(21:21) - Alex's hypothetical business: Walkthrough of doubling the price.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

If you sell something for twice as much money and you get one third fewer sales, so you have two thirds of what you used to sell in terms of units, it might freak you out. But if you sell it at twice the price, you make more money. And so you've got to be able to just let the math do the talking. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion dollar thing with Acquisition.com. I always wished Bezos, Musk, and Buffett had documented their journey.

So I'm doing it for the rest of us. Please share and enjoy. We doubled the profits of one of our portfolio companies in less than eight weeks, and we made one single change. And we went from making $250,000 a month in profit to making over $500,000 a month in profit from one single change. All right? And so what I want to do is break down what that change was and how you can apply it to your business. First, I'll give you a hypothetical story that you can apply this to. Second, I'll tell you the service that we ran in exactly how to do it in your business.

Third, I'll tell you how you can communicate it to your team so you can have the highest, uptake rate in your team. And then finally, I'll walk you through how to communicate it publicly. And I'll walk you through a hypothetical example of a cabs business because that would be the best business that taught people how to grow their calves and sold a calf program and walk through the hypothetical example end to end so you can apply to your business using the same process. And so what I want to do is take you through an exercise that I've done on stages and at conferences and at workshops and it usually shifts the audience in a significant way. And so I want to just deliver that to you directly. So I want you to imagine a hypersticeice.

hypothetical business. It might be like the one you have now, but if yours isn't exactly like this, you can still apply the principles. Don't be one of those people. So I want you to imagine that you have a business or you'd like to start a business that has 100 customers that pay $100 a month. So I'm trying to use the simplest math possible. So 100 customers, $100 a month. So that means it's doing $10,000 a month in revenue. Okay. Now, let's assume that in order to fulfill those customers, we have $8,000 a month in costs. Okay? So we're making $2,000 a month in profit. So $10,000 top line, $2,000 bottom line, $8,000 of cost. Right?

That's the business. You got 100 customers doing $100 a month. Now, you rub a magic iPad. And a genie appears. And this is not any kind of genie. This is a business genie. All right. So it's a very specific type of genie.

It's a niche genie. And this niche genie has one wish that he can grant you. I tell you, he's a very, very nuanced genie. And so he says, I can grant you one wish in one of three, ways. And you're like, okay, Jeannie, I guess you're giving me the terms now. He says, I will double your business in one of three ways. You need to tell me which way you want me to do. And so you're like, okay, how do I do it? He's like, I will snap my fingers into what happened. You're like, oh, this is exciting. So he said, door number one, or wish grants is number one, is I will double the amount of

customers that you bring in every month. Okay. That's number one. First way I can double your business. Now, with this business, let's assume that your turn is not that good. Okay, so people stay for on average three months. Okay. So that's 33% turn. They stay month, one month, two, month three, and then they cancel. All right. That's the way this goes. Number two is he says, I will double your price. So you have the same number of customers and I'll double how much they pay you every single month. Nothing else will change. You're like, okay, got it. Door number three, he says, okay, now what I'll do is I'll double how long they stay. So instead of staying for three months, so I'll stay for six months. Okay. So you're the business owner. You're contemplating which of the three wishes, which is really just

one way of accomplishing a goal, which of the wishes do you take the genie up on? So I'll let you Jeopardy listen to this for a second. All right. Now, really, be honest. Tell me what your first guess was going to be, A, B, or C, okay? So with door A or wish number one, whatever I said, all right? If he doubled, because this is a male genie, obviously, I haven't seen any female genies, weird note. So the business genie says he doubles it. So now we have 200 customers a month. Okay. Now, what happens?

Well, if we have 200 customers a month, sorry, 200 customers paying us a month, we now are making $20,000 in top line revenue. And assuming everything scaled proportionally, we would have $4,000 a month in profit and $16,000 a month in cost. Okay? So double the number of customers, we doubled the amount of profit, doubled our business. Awesome. Thank you, business, Jeannie. Cool. And if that was you, great sauce.

Now, let's go to Door 3. I tricked you. You already know where this is going. Door 3, he doubled how long the people went or stayed with you and continued to pay. Now, in this instance, because people are staying twice as long, but you're getting the same amount of customers per month, eventually you will get to the same equilibrium point as the first one. The exception is that that wish accomplished does something more powerful, which is it increases your LTV. Now, because of that, and the additional months that they pay you, most businesses, it's more profitable the last month someone pays than the first month. Usually, cost of acquisition, cost of onboarding, there's more cost associated with getting a new customer than keeping someone.

And so if you can double the lifetime risk profit per customer, that that's what that does, then your cost of acquisition can be bigger than it could in the first example. because I didn't change how much a customer was worth to me here. I doubled it here, which means that I now have a much more valuable customer, which then gives me the capacity to scale in a much bigger way. And because of that, I still realistically would probably have more profit in this business because I'm spending the same amount of money to acquire the customers, whereas this one, I have to double the cost of marketing to get the new customers. Here, I eventually get to the same top line, but I have more bottom line because I didn't have to spend as much on marketing.

Does that make sense between these two? So between A and C, you pick C. You double how long the customer stays with you, all right, if you can do that. Now you're like, all right, well, what about door B or wish to or whatever it was that I said? Well, let's do the math. So let's say we had the same hundred customers. But now instead of paying $100 a month, they're paying $200 a month. Well, we still have the same cost of fulfilling them.

It's $8,000. And our profit went from $2,000 a month to now we have literally the extra $100 a month that's pure profit. So we get the 20 and then another 20 and then another 20 and then another 20 and then another 20 and then another 20. So we six-xed the profit of the business with one change. Now, for those in the audience who are thinking, but not as many people would buy. That story that I told you about, I told you that we increased how much profit the business made. I'll tell you the one change that we did was, was we looked at the entire marketplace that we're selling a similar service to theirs. And it was based on our research, we felt that the market could support a 50% higher price.

And so we literally, and this is already a pretty expensive thing, we literally did nothing, but add 50% to the price and changed nothing about the product. Literally nothing. We changed nothing about the product. And guess what happened? More people bought. Why? Because when something becomes more expensive, people perceive its value in a higher way.

And because of the brand that the person had, it was our belief that it was more aligned with the person to have a higher price tag. And so people, it actually felt more aligned with what the expectation of the prospect was. And I'll also bet because we're talking to the CEO, we're going to do another bump because we think the market can support it. Now, most times in most markets, you have supply and demand. And when the price goes up, demand goes down in most markets. Now, not all markets, and more times than not, it doesn't drop by the same proportion. So if you double the price, sometimes you sell a third fewer. But if you double the price and you've six-xed the profit potential on a customer,

If I six-x my profit on a potential customer and I do it at two-thirds of the price, then I tripled the profit of the business still. You still make way more money. And so finding the absolute perfect point of profit many times comes from raising the price. Not always, but many times there are pricing levers that you can move within the context of the business that will make you more money. And pricing is one of those very interesting things because it's very tied to emotions. A lot of people are very afraid of raising the price because they don't want to break it.

And so the last part of this is I want to talk to you about how to raise the price if that is your goal. Now, hopefully you thought this was cool because we just six X the profit of the business by doubling one component. We could double the customers and go to two to four thousand a month. We could double the LTV and go from two to probably like five-ish a month because we save some money on the marketing. Right. And we have a much stronger business overall. But when you double the price and if you assume that the same amount of customers would buy, you six-x the profit, how much you take home. That is powerful.

And a lot of people don't know that, which is why they, The number one lever that you have on profits is pricing and constantly testing. A lot of people split test their pages. They split test their scripts. They split test their offers, but the thing that they forget to test is their price. And it's the strongest lever of all three levers of getting people to buy more times, getting more customers versus just charging more for the same thing. That's where positioning how you charge can actually influence the price a lot.

Now, a good where you increase the price and the demand goes up is called a VEBLIN good. It is a type of good where the price itself confers value to the product, as in the, higher the price, the higher the perceived value people ascribe to it and are more likely to buy because it went up. And when you have that, you have a huge amount of profit that can be made. So that's, for example, like Chanel can take a bag and go from $2,000 to $10,000, and all of a sudden more people want to buy it. Their cost on the bag is the same. But imagine they have twice the demand at five times the price with the same picks cost. They can $20x how much money they make.

And if you're like, that's crazy. That's how crazy wealth is built. So if you're in this instance, you're like, Alex, I'm sold. I'm not going to focus necessarily on getting more customers or I'm not going to necessarily focus on getting them to buy more because the biggest lever is getting the pricing right. Agreed. How do I do that? So the first thing I would recommend doing is not necessarily changing your existing audience because changing expectations on people can be tough.

All right? And so what you want to do is grandfathered them in for now. And when you bring new people in, you can present the new price. Now, what happens if people who just bought last week find out that the people who are buying now get it for more or the flip side, the people who. buy for more, find out that last week somebody got it for less. Well, you market it. And so what you do is you advertise the price, the fact that you're going to change the price is about to increase. And so you clear the pipeline whenever that happens. Now, what you have to expect is that if you clear

your entire sales pipeline because you put some urgency on people to make a buying decision, that you're automatically going to have a dip in sales the next month because you clear the pipeline. So you have to give it at least two months of adjustment time unless you're absolutely bombing on the phone, which then you're like, all right, we need to really look at this. But the jump should makes sense. Now, that is the first way you test. Now, let's say that you make that test and you need to go back. So what you do is, and honestly, I'm trying to think of a time we've had to do this. It's not often. I actually can't remember a time where we have increased the price because we're usually pretty judicious about when we do the research of whether we think the price can be

supported. There are things about pricing surveys that you can run. And so what we do before we do a pricing increase is we run something called a Van Westport pricing survey. And so it works like this. you send a survey to your customers and you say, hey, you ask four questions. The first question you ask is, at what price point would this service that you have now received? These are customers, remember, would the price be so high that you wouldn't even consider it? All right? First question. Second question is, at what price point would this product need to be for it to be so low that you would never believe it could actually fulfill the promise we have?

The third one, you say, at what price point would you say it's really expensive and you'd have to think about it? you'd ultimately make the decision to buy. It would be a stretch, but you'd do it and it would hurt a little bit. The fourth question is, at what price point would you say, this was a steal or this was a bargain? But you'd believe it could fulfill the promise, but he just thought it was really, really appropriate, like really well priced. So when you have those four data points, you then can graph those, and you actually get the edges of something called WTP, which is willingness to pay. And so when you have those edges you see at this price point, and mind you, it's going to be a band. So you have four bans on this thing. And if you want to get really advanced with it, you ask for other pieces of data

about the person. What's your current revenue level? How many employees do you have? What industry are you in? And so then you find out that some industries might value your same thing more. So then what happens is you create a product suite that's appropriate to the right customers. And so from there, you're able to price appropriately to the needs or the value that a certain person's getting. So for example, if I'm very wealthy and someone can give me 5% more on my money, to me it might be worth $5 million a year, right? To somebody else, it might only be worth $100,000 a year. And so that discrepancy, we want to see if we can capture that in pricing by simply adding a couple of little features and making it specific to that avatar. Now, if you want to go, the third step on this survey,

that makes it even more powerful, is that you ask for two more questions. The next question is, of all the services that we offer, all the value that we provide. And you want to list everything out. So you're like, you might have 24-hour support. You might have a Facebook group. You might have calls that you attend.

You might have a promise of some sort that you make. You might have try and splinter out every little individual outcome that you have that you deliver with a service or product that you sell. And you list all of them out. It might be 20 things. And you say, if tomorrow we were to eliminate everything from our service except for one thing, which would you want us to keep? And then the second question is, if tomorrow you had to eliminate one thing of all of these 20 things, which would it be that it wouldn't affect your decision to stay

with us no matter what? And so there you get the most valuable thing and you get the least valuable thing. And when you have 100 people or 200 people take that survey, you get to see clusters of lots of people value this thing, not a lot of people value this thing. This is what most people are willing to pay on the high end. This is what most people are willing to pay on the low end. this is way too low and people won't believe that it's that's valuable and this is way too high. And so then you can actually plot those on a demand curve and say, okay, if we raise to here, this percentage of customers would buy. So you multiply a number of customers by number of people willing to pay the price and that will give you the gross revenue and you should know your cost of

fulfilling and that will give you the maximum profit point. On the flip side, if you say, what is the lowest bargain price perspective, you multiply the number of customers by the number of people who are to buy it that lowest price. And again, you multiply it by the gross margin. And so in those two instances, you'll be able to triangulate where I have the price point where I'll gain the most market share and where the price point exists that I gain the most profit. And then strategically within your business, you find the sweet spot where with your strategy of growth where it makes the most sense. If I were a platform, I might have a loss leader product that just tries to gain as much market share as possible. On the flip side, if I'm trying to build an enterprise business,

that pays me over time and cash flows because it's an asset I want to keep for a long time, that I might find this profit thing and kind of slow grow my way to enterprise value. And so when you run a pricing survey like this, you no longer make guesses at how to price. There's a science to pricing so that you can optimize for the right customers, the right price, the right profit for your business right now. And so if you don't know how to do that stuff, it's normal. You can Google more about it. But that is generally how we approach pricing at Acquisition.com with our portfolio companies

so that we can make the best pricing decisions, make the most profit, and ultimately grow the business in the way that we deem most effective for the strategy. And it's why we're able to triple profits for, on average, for the businesses that we work within the 12 months simply by reconfiguring the product suite and the pricing associated with the avatars that we serve. Real quick, guys, you guys already know that I don't run any ads on this and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the words

so we can out more entrepreneurs, make more money, feed their families, make better products, and have better experiences for their employees and customers. And the only way we do that is if you can rate and review and share this podcast. So the single thing that I asked you do is you can just leave a review. If it takes 10 seconds or one type of the thumb, it would mean the absolute world to me. And more importantly, it may change the world with someone else. So because we were coming in and we hadn't done pricing surveys yet for that business, but we really felt it was underpriced based on what we knew.

And so you're like, well, what did you know? Well, there were two other players in the marketplace that were both bigger, which is a great indicator, by the way, is if you look at the people who are the biggest in that space, they probably run a couple pricing surveys. When I say big, I'm really looking at businesses that are probably doing 30 million or more. Below that, people usually don't take pricing as seriously. And so maybe a 10 million, but like still, like multiple millions of dollars a year. And so both of the businesses had significantly higher price points and had similar value propositions. And so we felt really confident that we actually wanted to double the price. The CEO in particular

was really hesitant, as you can imagine, because it's an emotional choice and, you know, the fear that people aren't going to buy, but this is a really important point. If you, the founder and your team is not sold on the price point, it will not work because the psychology still matters more than the math. And I mean that, like, you have to be super sold. And so the way that we would communicate this to the team is I would ask them to sell me on why it's worth more than the price that I want to increase it to. So before you tell them the new price, have them sell you on why it's worth 50% more than the price you're going to change it to. So let's say we had a $5,000 product that we're selling. I would say, hey, and we're going to bump it to $7,500, for example.

I would say, hey, sell me on why this is worth $10,000. Okay? Because, like, guys, there's a price change coming, so I need you to sell me why this is worth $10,000. Every single reason why it's worth $10,000, right? And they're going to sell it and retest the memorials, et cetera, et cetera, get them amped up. Also, by the way, so those guys make more money when the price goes up, because the percentage of what they're making goes up, so they make more money.

So they should be usually pretty aligned. And if your sales team is very resistant, it might be the wrong culture of the sales team because any sales team that I've run always was like, dude, when can we raise the price, because every time we braised the price, they get a pay bump. They're like getting themselves pay raises. So like they should want to do this, right? So communicating the team and making sure that you the founder are super bought in on this. Like you need to pitch them. Like you need to sell hard on why this makes sense, why it's good for the business, why it's good for the customer, why a more invested customer will actually get better results, why this will actually help the back end

team fulfill in a better way. It'll give us more gross profit to actually deliver at a higher level and talk about that virtuous cycle of pricing, which is in the $100 million offers book. It's one page, virtuous cycle of price. You can read it and basically you can say that pitch to them. The book's not even sense. So, like, hopefully it doesn't break any of it as well. So how do you communicate the price increase to current customers? So there's two scenarios. Either you're increasing the price on current customers or you're not increased. So if they're grandfathered in, you can let them know that they got grandfathered in and to chill and to be like double down on the fact that they're getting even more value than they thought they were.

right now i have never really liked doing that because i like always having the card of if i want to raise the price on them in the future i can which is why i don't like lifetime deals lifetime pricing any of that stuff because i just don't know what the future's going to hold what if inflation doubles right like that's why i don't like lifetime deals so i don't normally do that if you want to do that you can and that's what you should do but that's not my wreck um and so normally to the existing audience i just won't say anything because it's not really a concern of theirs because they've already paid, we've already agreed to fill out this price and they've agreed to pay at that price. And so expectations have been set and met, done. For the new customers that are coming in,

we communicate externally that we're going to change the price so that we're going to raise the price so we can generate more sales and get people who are on the ledge to close. But beyond that, that is the communication. It says, hey, we've dialed in our processes. We've doubled our number of success stories. You talk about all the things that you've invested, the time taken and the effort spent to improve the quality of products and services. And you're saying, because of that, we are going to raise the price. And it's so that we can further invest in the business, further invest in hiring team and talent. My Jim Won's Secret Books actually has a letter, but that I have the exact, it's the Jim One Secrets book. But inside of the letter,

you basically just want to show that you're not just taking input in your pocket. Right. Now, certain percentage of that you are going to do. But you're taking that because you want to build the infrastructure of the business. And so you talk about the things in the past that you've done to further invest and the things that you would like to do, not that you're going to do, things that you'd like to do in the future. to further improve the quality of the thing that you're selling. And so that's why you communicate it. Now, if you are going to raise prices on your existing clients,

which is the hardest thing to do, but if you are going to do it, and we've taken many, many, many, many, many, many businesses through this process, especially on the gym side because we had to do it a lot. You have to really take it seriously, and you need to write a letter, and you want to hand sign it,

and it depends on many customers you have, but if you're a small business, I would recommend hand-signing the thing to show that you take it seriously. And after explaining all the pros of the things that you have done, done to improve the quality and the things that you would like to do to improve the quality. Then at the very end, this is a tiny human nuance.

I say, P.S, if this is going to materially affect your life as in like you won't be able to buy groceries or, you know, pay your rent, please let me know and I'll see if I can figure something out. And so what happens is most people read that, they're like, no, that's not going to happen. And so then it doesn't happen. And then if they do reach out, then you ask the question, it's like, are you not going to be able to pay your mortgage? Or you're not going to be able to buy food.

That's really important because, like, we will figure it out. They're like, well, no. It's like, all right, well, then is it just that you'd like to pay less? Because me too, you know what I mean? But I have to think long-term about this business, which is when you ask me to pay less, you're asking me to deliver less. And you're asked me to not invest in the business. So is that what you're asking me to do?

And then usually the person's like, well, no, I'm not saying that. It's like, okay, cool. And so you usually resolve those situations. So that is how I approach price changing in each of those scenarios. Okay, so let's walk through a hypothetical business and the steps that we would need to take in order to increase the price if that's what we decided was the right call. So the first thing we would do is we'd survey the existing audience using the Van West or pricing survey. We'd add in the segmentations. And let's say this business sold a 12-week

grill your calves program. And let's say it was $1,200 for 12 weeks, very simple. So that's what the program was. And on the first third of the survey, we're trying to find out more about the customer. So we're like, hey, what was the main reason that you bought this? Was there an event that was coming up that incentivized you to do it? What's your income level? What's your job? What was the primary way that you found out about us? Right. So it's like, okay, these are the things that we know about the avatar. All right, cool. And probably age. Yeah, age and gender. It's probably, probably of you guys, but you know what? Ladies, you probably want the calves too because who doesn't want calves? And so we've got those client demographics. Okay.

Second part is the four questions of the Van Westrop. What if it was super expensive? What if were way too cheap? What if it were a stretch? And then what if it were a bargain? Right? Those are the four questions. Cool. Now we say, of all the things that we do in our calves program, which is the book, the training, the nutrition, the stretching thing that we have, the one-on-one calls for accountability. The buddy system that we've put together, so you have an accountability buddy, the small groups that we have you guys train together, the cohorts, the intensifier exercise that we drop every Saturday. Like all of these things that we do in our value stack, which of these, if we only had one of them, you would keep, and which of these, if we got rid of one, you would

lose and not care. Cool. Now we know that's just good data for us in the future, because also in our messaging, we'll talk more about this stuff and less about this stuff. And if it doesn't add value and it costs us a lot of money, in one of our businesses we eliminated, and this sounds terrible, but customer support in that business was not deemed valuable. And it was the second biggest department of the whole company. So we actually, as unfortunate as may sound, we got rid of that entire department and nothing changed. No one left.

It didn't change anything. And so it just was not valuable. It was literally an appendage that we thought was providing value that wasn't. Anyways, that being said, you take that data in, number one. Number two, now we communicate it internally first. All right, so we got to communicate to the team. We've got to communicate the sales team, security to the marketing team, talk about how this pricing change that we've determined is the right change, why it's the right change,

exciting, exciting. Cool. Now, then we communicate it internally to our customers and our lists, right? So we say, hey, this is what's happening. This is why it's happening. Past, present, future. This is what we did to get here. This is why it's important now. This is what we're trying to do later. We're investing to the business because we want to fulfill our promises, which is a point that I forgot to mention, but I will say it right now, which is the strongest argument position is always the moral high ground in any negotiation, the moral high ground. And so if someone says, I don't think you should raise your price, you would ask them, like, do you feel like I shouldn't fulfill my promises to people? Is that what you're telling me?

Because out of integrity, I can't, I can no longer provide the service that I have now because I know what a better service looks like, and I will fulfill the promises that I make to people. So is what you're asking me to do, not fulfill promises and be out of integrity, made it is honest. The person's like, well, no, I'm not asking you to do that. And like, the moral high ground is unimpeachable. It's, it's, you can't counter it. right and i was like if you can't afford it that's fine i understand that but i if i'm making this promise to the public that i'm going to solve this problem this way then i'm going to do that and if this is the pricing changes that's required in order for me to fill that promise in the fullest

degree i will do that period and it gives you a moral high ground that'll that have those conversations okay so once we've done the survey we made the decision we've communicated internally to our team then we communicated to our existing customer base and then finally now we bring it up to the new customers we're coming in so we hit our list up to let them know us we had that urgency in step four, and then the last step is now we officially have this new price. Now, what we want to do now is expect the fact that the change in price will probably result in fewer sales by total volume. And the reason for that is because we cleared the pipeline before the price change. It happens. Now, once you have that, you have to let it shake out.

You have to let it settle. And it's really trying. It's very difficult to do that because it takes guts. But once you make that and you let it settle, then you just do the math and let the math do the talking, all right, which is we sold this many people at this much profit per unit. Will we make more profit at this new price? Because if you sell something for twice as much money and you get one third fewer sales, so you have two thirds of what you used to sell in terms of units, it might freak you out. But if you sell it at twice the price, you make more money. And so you got to be able to just let the math do the talking.

So in our hypothetical calf scenario, let's say we bumped it to $2,000 or $3,000 or $3,000 because we found out that that was the price that was right at that sweet spot. That was the stretch, but they'd still do it. We might have just two or three X the profit of the business by making that. that one change. And maybe, because cabs are the coolest thing ever, got even more people to buy it because they thought they really could get the results that we said we were going to help them experience. If this was interesting, you go to Acquisition.com, and I think the third video is on pricing. So if you go books, courses, and then you pick the pricing video, which is the third video on the site,

you can watch more about pricing as it applies to your business. It's absolutely free. You don't adopt it or anything. You can just watch it. All right. So go check that out.