The Game with Alex Hormozi - 5 Key Takeaways from The Frozen Yogurt Industry | Ep 466

Episode Date: December 1, 2022

There’s more to froyos than just the sprinkles on top… Today, Alex (@AlexHormozi) talks about how he almost decided to completely pursue his entrepreneurship path with a frozen yogurt business, the different lessons you can apply from this industry, and some interesting facts about froyos!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:(2:59) - Franchise aims: Cover bills, beat stock market returns.(4:27) - Industry entry tip: Explore foreclosure sites for affordable equipment.(6:11) - Frozen yogurt landscape: Poorly competed, franchise-focused, not brand-building.(14:41) - Lessons 1-3: Flexible pricing, attention redirection, variant control.(16:03) - Lessons 4-5: Utilize foreclosure sites, leverage "default option" power.(18:11) - Customer acquisition: Word of mouth, affiliates most profitable.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Frozen yogurt stores make $2,100 a day selling 500 cups at eight ounces each. And it was the business that I almost started instead of starting my gym. So I know a ton about it. And I will tell you how it works and what you can use from psychology that I learned from yogurt stores that you can apply to your business today. 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. When I was 21 years old, I decided that I wanted to be an entrepreneur and I was deciding between which business I should start. And after looking at the entire world of opportunities, the three businesses that I was considering starting was either a test prep business because I had done really well on my standardized tests and I thought I could teach other people to do it and charge money for it. Fitness, because I was in shape. I liked fitness. People always talked to me about it and I thought maybe I could make something there, open a gym. And the third was, frozen yogurt. And so I did an extensive amount of research on how to open a frozen yogurt store. And this was back in 2011, 2012, right when frozen yogurt was just booming, it was this brand new thing. It made a big comeback. And I wanted to ride that train. So a couple of quick things that you may not know about frozen yogurt stores in general. They on average make between $750,000, $800,000 a year. They run margins between 10 and 15%. The average Menchies owner, for context, makes nice. $93,000 a year take-home. Not as sexy as I thought it was when I was trying to get into it.

I thought, $800,000 a year, that means I make $800,000 a year. I'm going to be rich, right? It doesn't really work that way. And it's also a business that has variable costs that are high. So the more yogurt people buy, the more actual cost of goods that you have in order to fulfill on it, right? Now, the reason that I think frozen yogurt is interesting is that they have a handful of psychological features for selling more product that I think anyone can use. And so for context, 800-ish thousand a year, the average store that we're talking about, does $2,991 a day in revenue? So $2,000 plus a day. But what does that mean in take home? What does that mean in owner pay?

It means $328 a day in owner pay. Not as sexy, but still kind of cool, but still not as sexy as you might think. And so when you walk in, you're like, man, these guys must be printing money. Well, you've got strawberries that are going bad. You've got machines that are breaking in the back. you've got hard cost of yogurt, you've got a retail lease that's nice, probably, prominently located with good signage, good foot traffic, good traffic, like actual traffic in front of it, ample parking.

Like there's lots of other things that go into this business. And on top of that, if you wanted to buy into a franchise, most franchises have 6%ish of top line that goes straight to them. Now, that may not sound like much, but if you're running 10% margins, that's 60% of your take home. So they have figured out a way to take the majority of the, profit and their franchisees. And what most people don't know is that franchises will structure their fees such that they will get it so you make just enough that you can keep going and maybe if you're a good operator open to another location, but not so much that you're going to get

rich on it. So they're only looking to optimize to beat the return on capital of the stock market by a decent amount. And so if the stock market gets you 10, they're going to try and get 20 to 25. And they're going to squeeze off the top and take the rest because of how good their model is, things you didn't know. Now, the flip side of that is that if you are into a franchise, then ideally, you should be saving enough on bulk purchasing because they're buying for 200 plus locations that they can save you on hard costs of things like yogurt, fruit, spoons, cups, machines, et cetera, right? The converse of that, though, is that many times when you're starting the franchise, they will upcharge you on all of those things because they're trying to make money, too.

So there's the theory and then there's the practicality. Now, a fun thing that I did when I was looking at opening my first yogurt store is I went on a site called rasmus.com. And what they do is there, it's a business foreclosure site. And so I got my first gym equipment from that foreclosure site for 13 grand, all the gym equipment from a gym that went under. Now, I looked, I did a cursory search on there, and there were three frozen yogurt stores that were franchises that went under. And the most expensive in terms of I could buy everything inside the store, The most expensive of the three was 20 grand. So if you're trying to get into this world, you want to open a restaurant, you want to open a gym, whatever, go find foreclosure sites.

And if you're like, oh, well, there's no gym that's on there. Just wait. There will be. There will be a yogurt store. You just got to wait. And I sat there and I'd refresh every week until eventually one came up and I bought it. All right. And so if you can think like that, one of the things is a franchise won't let you do that because that's where they make their money.

But there are ways to open these things for cheaper. Now, the average cup size is eight ounces that people will buy. The average split between toppings and yogurt is 75, 25. So 25% of people's weight is topping. 75% is yogurt. It's best for the store owner to have as much yogurt as possible in the cup because the toppings are more expensive. So toppings cost between 10 and 40 cents per ounce.

Most places charge between 25 and 60 an ounce. And so they can even break even or lose money depending on which toppings you're going to. You get the fruit, it's costing. them money, right? But they make up for it in the fact that yogurt cost them about eight cents per ounce and they charge 50, even 60 sometimes. That's where the margin of the business exists. But I will tell you, when you're working on margins that are even like 70 percent, that means that you have 70 percent left to cover everything else. So if you want to run a 50 percent margin business, for example, then you'd have to take 20 percent of your top line

and pay every other bill. Very hard to do. So for that $2,100 a day-ish, that means that they're selling roughly 500 cups a day of yogurt on average with an 8 ounce cup. Now, you may have heard of some of these places, Golden Spoon, Yogurtland, Menchies, Pink Barron. Like the number of yogurt stores or frozen yogurts are endless. And the reason for that is because there's demand for it. People want yogurt and they go for it. And if you search frozen yogurt store near you, you probably have 30 locations that open up. The thing is, is that most people, and of all those brands, most of them are commoditized, meaning there's very little difference between a menchies and a yogurt land and a golden spoon. There's just not a lot of difference. And it's because, in my opinion,

it's been a poorly competed marketplace solely done by franchisors who are trying to sell as many locations as they possibly could rather than build a brand. So if you were to compare the yogurt world compared to the fast food world of like chicken sandwiches, there is no Chick-fil-A of the yogurt world because if there were, they'd be dominating. And I think the underlying lesson is that if you look at any industry, there is the potential to have an amazing business inside of it, even if it is a commodity today. You can out-compete them. All you have to do is walk into any yogurt land and see that the floors are sticky, the chairs are all over the place, the cups are a mess, the toppings are in between all of the stuff. Sample cups are strewn on the side, right? And one of the, one of the

nozzles is out and it says out of order, right? Everywhere. And the girl behind the counter is on her iPhone when you walk in doesn't say hello right like it doesn't take a lot to win right and most times just to beat everybody you got to be worse better than the bottom 25% and you make money right so it's not hard to win there now one of my favorite things that I learned from these yogurt places one of the big breakthroughs that I think they had was actually how they priced all right so hear me out they if you recall like the ice cream world the dessert world is usually sold by cup you get a small you get a medium you get a large, you got to kind of want to have it, got to want to have it, got to love to have it, right? They all have their different little sayings for it, but you got small, medium, large, whatever.

They flipped that and made it weight. The reason psychologically this is so important is that the consumer gets to pick how much they spend. And so what happens is in a normal setting, someone might fill up a cup, get to the counter, and see $7 and be like, oh, I'm such a fat ass. Rather than when you buy one off the shelf and then you see the $7, you're like, wow, this place is so expensive. Because there's an element of control on the consumer side, they are the ones who bear some of the accountability or responsibility for that fact. Now, the second thing that they did that I thought was brilliant, I don't know if you guys noticed this, but they used to have small, normal size cups at Yorga Lans. And this is what I'm guessing

happened, because this is probably how these types of innovations occur. Someone, I will bet you, a few years ago, ran out of small cups. And then people only had the medium and large cups left. and they realized that at the end of the day, their sales probably went up by 20 or 30%. And they wondered, I wonder why our sales went up. It was because when you give people a bigger cup, they will fill more of it. Because it is the projection of the expectation that they have.

They're like, oh, I guess this is standard. And so it shows you the power of the default option when selling anything. And that's why assumed closes and things like that are so powerful. When you say, hey, do you want this or this, if you say, and you can even listen for this at fast food places. They're like, hey, do you want a medium or a large Coke? They have a small option, but they want you to pick between the large ones. Your land and those ones went a step

further and just removed the small option because it is self-served. But if you got a small amount of yogurt in a bucket-sized cup, it just looks weird. You have to get your hand inside of it just to scoop the darn thing out. But they did that and by extension, we're able to raise the amount of yogurt that people bought, probably by a large percentage every single time and not take the blame for because they're the one with the hand on the nozzle. Now, you'll also note that the order in which they present the items are reverse order of the cost to them. So they start you with the cheapest option. This is exactly how buffets work too.

They want you to fill up on the salad, and then they put the seafood all the way at the end because they want people to fill their plates before they get the most expensive item. They'll attract you with the expensive thing, but they'll put it at the end of your self-service line. So you have the yogurt, which is the highest margin first, and then you'll have your dry items that don't go bad, waffle, you know, crumbled Oreos, things like that, whatever. And then you have the fresh fruit that goes bad that costs more money by ounce. And so they get people to fill up their cup in the beginning with the highest margin. Then they sprinkle on a little bit of slightly lower margin.

And then when you have almost no room left, then you put your few fruit on top. Because if you just filled the whole thing up with bananas, they'd be breaking even, right? Actually, banana's a cheap fruit, but you get the idea. If they filled it up, well, like, if you get one of these little pound of strawberries, it's like, if you get retail, it's like 10 bucks. like who you put that pound on the machine ounces there cost you 60 cents 16 ounces like they'd be pretty much breaking even on that right so think through it like that hey mosenation quick break just to let you know that we've been starting to post on LinkedIn and want to connect with you all right so send me a connection request and note letting me know that you listen to the show and

I will accept it there's anyone you think that we should be connected with tag them in one of my or layless posts and I will give you all the love in the world all right so let's get back to the show. Now, if you really want to have a fun, fun experiment, take one of the Hershey syrup things and just put it on, put it on the scale, and you can see what they're making from just selling that bottle. So you can actually see the retail price. Now, you can buy pounds of Hershey's for like 10 bucks, like one of these huge gallon things. And so that ends up being almost the same price as yogurt, but it's a fun mental exercise. Corporate noted that the number one way that they are able to get more customers and the highest performing stores did so with better service,

cleaner stores, more selection, and the most important one, word of mouth. Because when you have an average ticket that's so low, like yogurt cups, right? And you have margin even on that tiny little cup. The only profitable way to really acquire customers is either word of mouth or affiliates, meaning other businesses that send you business. And so they double down on that. Now, when they started years ago, Google Search was cheap enough that they could actually drive paper click campaigns to get people to their,

locations, but nowadays it's too expensive for most of them. So they must all have to rely on the quality of the product and the experience. And so the store that I wanted to open, the way that I was going to open my store, was that I wanted to create a better experience for somebody walked in. So I wanted to have floor to ceiling kind of candy see-through experiences. And when someone walked in, they were overwhelmed with these appearance of selection, right? And they would just turn the nozzle on there, which, by the way, I would have it so that it would be really clunky. so too much would fall through, so I'd get a little bit more weight on it. I'm just being real.

Hey, capitalist. Hey, did you get too many Oreos? I'm sorry. And I always felt like that you should have more selection because the more selection you get people, this has been proven with buffets. People eat more, the more options you give them. So I would want to have one entire side that would be yogurt nozzles with more options because people have more desire to do more selection.

They want to try a little bit of everything, right? And then on this side, I'd have the floor to ceiling things, right? And at the very end, and I might even consider removing fruit, I would probably look at it. But then my promotional effort, my plan, was to go to the university. So I wanted to be close to colleges. And then I was going to partner with all of the fraternities and sororities and have competitions between them to see who could get the most yogurt and then give some sort of swag or something for the fraternity or whatever that got the most yogurt during that period of time.

And I could do that. I could rinse and repeat that process with companies. I could rinse and repeat that process, basically with affiliations. And that is the cheapest form of advertising when you don't have a lot of money is going to find places where there's buckets of people that you can give them some sort of promotion to bring them in. And so if I could do a strong incentive to get people to join my list, like a text list, I could send out coupons on a relatively regular basis and acquire them for next to nothing. And so I'd run the competitions to bring them in. I'd have a crazy incentive to get the text number because normally the ask we have now is, would you like to join our text list? to which almost all of us are like, nah, I'm good, right?

Because you don't feel like getting coupons. But if you knew that your first order was half off, like, hey, do you want to save 50% today by joining your text list, then you could probably join them at. Now, some people, the smaller short-term business money was like, when do you give half my profit up? Well, to me, I just acquired a lead that I can get lifetime value on for $2. I'll take it because I know that I'm going to be able to get them back, right? Or get them to bring a friend. and I want to be able to remind them of my store on a regular basis.

So if you're looking at stuff that you can model from the yogurt businesses and also not do that they're doing poorly, here's my list for you. Number one, when you have the option to give a customer the ability to pick their own pricing by usage, do it. Because oftentimes people will blame themselves, not you, when they overuse or overspend. Think about minutes back in the day or text messages, right? like the over you if you have the power to use more, especially if it's something people like, they will do more of it. But they will associate part of that responsibility with themselves rather than you. Number two, you want to direct the prospect's attention in order of your margin. So you want the most people to see the thing that makes you the most money first,

not the thing that costs you the most money first, because that's where they're most likely to purchase and then purchase the most of it. So we want to use up as much of their spending wallet or spending power on the things that make us the most profit. Number three, selection can bite you in the butt, but in a buffet or consumption setting, more selection as long as they're not conflicting. If you have 26 jars of jam, they can only pick one, it's conflicting. But if you can have a little bit of all of them, like a buffet, they eat more. And so that's why the nuances of psychology is so important. But if you have a type of product or service where someone can sample multiple things, the more things you offer them, the more things like a

buffet they will ultimately buy and consume. Number four, if you were starting a business, unless it's something brand new and completely radical, there's likely somebody who started a business just like yours who failed. And you can oftentimes buy all their stuff for 10 cents or five cents on the dollar and dramatically decreased your startup cost. So if you're newer and you're like, I only have 20 grand saved up, you can start a business for that amount of money. right and you can get a decent amount of actual equipment for that amount of money when you go to the right seller and that is a motivated seller somebody who's lost all their money because they did a business because they weren't watching the right youtube videos because not part of mosey nation right and you can buy it from them

at a huge discount and then you can start your next thing it's a great way i always looked at that when i was like i'll bet you there's long care things there's whatever type of business you want going for business liquidation sales is a great way to buy those equipment back number five the power of the default option. So the fact that they went from removing the tiny cups to only giving large and bucket sized cups for yogurt, encourage people to use more yogurt themselves. And they do that because it looks silly in comparison. And so whenever there's a possibility that you can set the default where someone would be encouraged by implication to use more, just like the fast food upgrade of like, do you want medium, or I'm assuming you want a medium or, hey, I'm assuming you want a 32 ounce,

When you give the default option, many people, just like organ donors, which, by the way, it went from, I think it was like 10 or 15% of people opting in to being an organ donor to getting 80% of people to become organ donors by simply saying, do you not want to be an organ donor versus do you want to be an organ donor? So if you have the potential to get seven times more people to say yes to something, just imply that that's what everyone else is doing. And you can do that through those default options, which is one of the most powerful psychological selling tools in existence and no one even knows it's happening to this. them most of the time. But you will. It's part of Mosey Nation and you pay attention to this stuff. When you're trying to promote something that costs very little money, so this is very common in consumer businesses, especially consumer products, CPG, et cetera, most strategies, it's very difficult to acquire customers with paid advertising profitably. That's why a lot of these places raise funding, et cetera, et cetera, and they have to bank on lifetime value to pay back their

cost of acquisition. If you don't have tons of cash and you're not funded, then the two most profitable strategies for acquiring customers beyond just creating content and creating a brand, which still is very difficult on a local level, is to get word of mouth, which is referrals. It's good old fashioned, organic. People like your yogurt and they tell other people about it. And you have a strong referral system

in place, and this is key. It's not just having a very good product, which is important, but reminding and encouraging people to share it. So I'll give you a quick context on this. My podcast, same podcast, I just decided to say, hey guys, if you could leave a review and share this with somebody, that would be great. As soon as we did that, we 20xed the number of reviews that we were getting

and our growth skyrocketed, just because I asked. And so step one is have a good product. Step two, ask people to share about it because people just don't think about you because they're thinking about 100 other things. But if you remind them at least, they're more likely to do it. By the way, click subscribe and notification bell and all those things and share this on the story and tag me. Okay, cool. Back to the thick. The second way is through affiliates, which means other businesses that have your, other businesses or groups that have your desired audience. The difference between a referral is one customer tells another customer, this isn't their main game.

An affiliate is somebody who has a bucket of people who are just like your ideal customer. That's where if I was a yogurt store, I would go after the fraternity or the sorority or the business groups or the chamber of commerce for the local town. I would go find those groups. And it sounds silly. But if you give those people a strong incentive and you say, hey, just so you know at your clothing store, anybody who goes to your clothing store, I'll give them a free yogurt. All of a sudden, like, you just enhance the value of what they're selling, and then you just

get to clink your cart to every other person's horse, and you let 100 businesses carry you as they flood you with all their customers. Just give them something good enough that people actually want to consume it. That's the key. That's how all affiliate marketing works is you just have to make it good enough that it benefits the customer, A, and B, that the affiliate's actual thing becomes more valuable with the additional. of your thing too. And you could take, I said yogurt with a clothing store, but like you can think about that for anything.

If I was doing dry cleaning, then it would make sense that I go to all the luxury store and say, hey, all your people need dry cleaning, Tom, they get the first two or whatever item they get here is on me for the first two. Well, shit, if we can just know that they just made a purchase, they're going to have this need, they probably have other items that are just like that.

They'll probably start shipping stuff to you. And so the big thing is that if you don't have a lot of LTV on your customers and you just require a lot of them, then you have to go with the more viral, more grassroot ways. But what you do is you systematize that within your business so that the system itself is what becomes duplicatable. And as a bonus point, I will tell you my favorite frozen universe store because I've been to all of them.

My favorite frozen yogurt chain is orange leaf. I believe that they have the best flavors. And my opinion, I think the founder of that franchise or whatever it is, actually loves dessert. Because you can tell by the attention to detail, by the cookies that they bring in, they're always fire, they're so good, the flavors themselves. are decadent. They don't have all these weird fruit things. It's just like caramel, chocolate, peanut butter. You know what I mean? The good stuff. And that is my personal favorite of all

the different your oversource. And if you haven't been doing originally, if you should check it out, they're very good. I was not paid to say that. They are very good, though.