The Game with Alex Hormozi - 5 Ways to Scale Your Business | Ep 483

Episode Date: January 10, 2023

“Growth just happened as a consequence of not stopping and steady, consistent improvements over time.” Today, Alex (@AlexHormozi) talks shares with us the 5 different ways you can scale your business to reach millions in revenue and the pros & cons of each way to scale. So, which way to scale suits you?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:(3:16) - 1st way to scale is going up-market(4:24) - 2nd way to scale is going down-market(6:21) - 3rd way to scale is going adjacent-market(8:39) - 4th way to scale is going broader(11:55) - 5th way to scale is to go narrowerFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

But bottom line, if you want to go fast, go broad. But if you want to be good, you'd be better serve staying narrow for a little than scaling out. Like, for example, Facebook started in colleges before expanding out. So it's not like you have to go broad immediately. Like, you start narrow and then you continue to generalize over time. The wealthiest people in the world see business as a game. This podcast, The Game, is my attempt at documenting the lessons I've learned on my way

to building Acquisition.com into a billion dollar portfolio. My hope is that you use the lessons to grow your business and maybe someday soon, partner with us to get to $100 million and beyond. I hope you share. There are only five ways to scale how many people you can sell to for any business. And I'm going to give you all five in a framework to think through that you can apply to any business that you ever start for the rest of your life. Right. So right now, if you're not selling as many clients or customers as you want, you might be able to fix that within just a few minutes. If you don't know how I am, my name is Alex Mosey. I'm the founder of acquisition.com.

Portfolial companies that is over $200 million a year. And I make these because I want you to use as much of my free stuff as you can. Grow your business to $300 a year in revenue and allow us to invest in your business to scale beyond that. Let me tell you how I discovered this scaling framework. You can scale any business this way in these five specific manners. So a few years ago, I went to this meetup that I got invited to by a buddy who had just sold for $200 million. And he invited me and six other businesses to this cabin by the lake. And so the businesses range between $30 on the low end and $250 million in top line on the high end. And everyone who got there got up and shared stuff that was working well for them in their respective industries.

And this was everything from phone repairs to solar sales. sales to solar to a massive international MLM selling supplements. So the experiences were super diverse. So as I listened to each of the speakers, and I was among the smallest in the room at the time, one became really clear to me. No one had any magic that I didn't have. As in, I didn't meet anyone and think, man, there's some Elon Musk super genius that is impossible to compete with. It was not that at all. Like, in fact, the two biggest observations that I had were that, one, people there had been in business longer than me, doing the same thing the entire time. That was a big lesson for me. Growth just happened as a consequence of not stopping and steady consistent improvements over time.

Like, that was my biggest first takeaway. They've been doing it a long time. They hadn't changed directions, and they've just been getting a little bit better every single year. The second thing is that they all attacked a much bigger market segment than me. In other words, they had a much larger Tam, which is an investing term for total addressable market. Basically, the amount of people you could reasonably qualify to buy your thing. So in the beginning, you want to niche down. So that's normal. So if you're new, you're starting out, it's normal to want to niche down. And mind you, that's always the advice for people starting out because it's much easier to attract a narrow field. It's also easier to deliver to a very

narrow segment. You can talk in their language. You can me exactly what they want. Over time, though, it's natural for a business to expand its scope and by extension, it's market. Now, if you look at Apple, for example, they're not niche, right? Netflix isn't niche. So it's not, it's not like if you're not niching, it's bad. It's just when. It's a question of sequence, right? So those guys sell to everyone. And over time, you start an inch and then you expand. And so that's what I'm going to talk about, the five ways that you can possibly expand from an inch.

All right. And over a very long time horizon, if you build an enormous business, you'll do all five of these expansion scaling methods. All right, you would only do one. So let's dive in. So the first thing that you can do, if you envision a triangle, right, it's like this is the whole marketplace, is that you can go upmarket. What that means is that every segment has a higher or more leveraged version of its core

market. And so if I were to sell to hair salons, I could go upmarket to multi-location chains or big national corps or franchises, right? That would be going up market. If I sold a widget to small business owners like Salesforce did in the beginning, over time, they went up market. And so they went enterprise. So they went to Fortune 500 companies.

They went up. They went bigger. The pros are the deals are worth significantly more, and they churn far less often because you're dealing with more sophisticated business owners. You don't have non-payment issues, et cetera. The cons are they're harder to sell, and it takes a much longer time. Sometimes it takes six to 18 months to close enterprise deals. So if you look at Neil Patel, what did he do?

He has SEO services, but he makes his money doing it for Fortune 500. Gary V., what does he do? A normal agency business, but he sells to Fortune 500. Going up market is harder, but it pays off in the long run. Bottom line, if you increase the quality of your customer, you increase the quality of your company. The second way to scale is that you can go down market, which is the exact opposite of what I just said, right? You can do any of these things that over time you would do all of them, but these are all directions. So you can go down market.

So if I were selling to hair salons, again, this would be selling to hair stylists. All right, if I were in gyms, it would be selling to trainers. If I were in Cairo, it would be selling to the employees who work in the clinics. If I went after S&Bs, small business owners, it would be going after aspiring business owners or entrepreneurs or business opportunity seekers, right? that's what going down market is. The advantages of going down market is you never run out of customers. They're always making new ones every day. People float in and out of the market because they're not established.

They're more emotional buyers. There's an ocean of them. The downside is it's hard to build a recurring revenue business from them. They are not consistent. They don't follow through. You have constant payment issues. They change their minds, right? And have, in general, unrealistic expectations because they're poor.

And they believe because $50 matters to them that it should all entitle them to you flying out to walk them through whatever it is in person every step of the way. It is what it is. You can try to educate them, but for the most part, it is the avatar. So the key to making it work in this market is having very strong marketing in sales. It's less about the product in this sub segment because even if you have an amazing product, 30% of them go out of business every year because it's who they are. So a friend of mine has a CRM that targets super small, entrepreneur, small business owners, and they have 4% monthly turn, which is insanely high for a CRM.

And he processes all the payments, everything. And I was like, where's your term come from? He said, 100% of my turn comes from people going out of business or starting new things. And I was like, oh, wow, that's structural turn. Like there's something he can't do anything about. And so the bottom line is, if you're better at marketing and sales, then you are at product and delivery, going down market might be a better fit for you in the beginning until you get better at delivery because you'll always have new customers to iterate and improve on

and then you can make another move over time. It's not going to make necessarily the most valuable business, but it will give you a lot of iterations because there's just so many of them, right? which brings me to the third move that you can make to scale your business, which is that you can go to an adjacent market. So these are markets that often sell the same promise, but deliver in a different way. So, for example, if I worked with hair salons, to reuse the same example again, they sell beauty, right?

So I'd go to nail salons as an adjacent market, like who else sells beauty that's a service-based business as a brick order? Okay, cool. Nail salon, that would be adjacent, right? They sell to the same avatar that often wants the same thing and likely suffer from the same problems. So if I work with chiropractors as an additional example, I look at physical therapists, as they likely have similar audiences with similar needs. If I sold to gyms, I could sell to dance studios,

etc. These are all adjacent markets. They're right next door, all right? Triangle, next door. The advantages of moving adjacent is that you can usually provide the same amount of value as your first market. It's a slower expansion play because you go vertical by vertical by vertical, but it allows you to extract maximal value. So oftentimes, you don't need to iterate your main thing or your core product too much. Usually it's just some lipstick and kind of a different wrapper since they suffer for more or less the same problem, right? So the same solutions work for them most of the time. So you just need to market it a little bit differently using their language. And so if you decide to do this, you need to get an ally in your company. So you need to find someone

from that new world, that adjacent market, and bring them in. They'll have enough trench in industry knowledge to help you bridge the gap. This often just comes from an enterprising motherfucker from that space that sees your success in your niche and says, hey, do you think it would work for me? And gives it a shot, makes the minor tweaks, and then they figure out how to make your thing work in their market, right? And then all you have to do is find a way to pay that person, and then they'll help you unlock this entire new category of revenue. And this can help double or triple your market size just with one move. Now, those are the advantages. The disadvantages are that this is a slower way to grow than the other ways. And so you'll need more special

knowledge to do it well. That's why that person's so key. So all the stuff you know about your industry, you're going to have to know that same depth about theirs or find someone who does. And so here's the bottom line for moving adjacent or scaling it in an adjacent market. It's a great way to extract maximum value. It's a slow way to grow, which is not necessarily bad, when you think about it long term, because you can keep copying and pasting the play vertical by vertical by vertical. And that allows you to get the most amount of money per unit effort, but it takes a little bit longer, but it can also build an incredibly valuable company. Which brings me to the fourth way that you can scale, which is going broader. So we've got

our triangle, you can go up, you can go down, you can go side, or you can go broader. All right? So this means that you generalize your core product or poor promise across all verticals that solve the same problem. So for example, going broader would be going from hair salons to beauty in general, right? That would include hair, nails, aesthetics, medsbao, massage, et cetera, right? All encompassing. So you'd put all the verticals together and then you generalize your life. language more and you go after them all. Like that's the big pivot that would happen there. So core promise, you expand the language and then it applies to all of them. That's going broader. 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 ask you do is You can just leave a review, but take you 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. As a different example, if I were in gyms, I would go to fitness centers in general.

This might mean big box gyms, microjim, boutique studios, dance studios, spin studios, martial arts, right? All the different verticals in one, all right? Now, the advantages are that you can scale up faster this way. You can 10x your total adjustment market overnight. The downside is it's hard to provide the same amount of value. So, like, if we're comparing this to going vertical by vertical, you have to generalize more. It's going to be more templated, right? So you're not going to be able to have the same depth of nuance as you could if you go vertical

by vertical, if you just go broader. But you immediately have access to 10 times the amount of customers, or sometimes 100 times the amount of customers. And so it becomes more like fill in the blank than copy and paste, right? And so the other downside is that you also now compete against every other person in all of those industries. So you widen your pool, but you also compete against a lot more fishermen. And many of them are more experienced and more entrenched than you.

because you're competing against all the vertical players who are just doing that silo as you try and hit all of them. So you have more customers, but all your competition are better in their micro niches. But once you've achieved a certain amount of scale and expertise, you may have earned the right to go broader, which does happen. It's not saying you don't earn the right. I will say, though, oftentimes people go too broad too soon because they're not good enough yet, and they haven't really earned the right. So how do you know when the right time is? when you have made it work in the other verticals, and you have champions in multiple other verticals

that have used your services or your products across them, and you have kind of case studies that demonstrate what changes you need to make, and you know that you can generalize it while still providing pretty significant value to each of them, then it becomes more of showing multiple case studies of how it works in each of them. So you still try and hit all of it at the same point,

but the overarching message is beauty industry, fitness industry, investment industry, whatever, clinicians, pain, et cetera. But bottom line, if you want to go fast, go broad. But if you want to be good, you'd be better serve staying narrow for a little than scaling out. Like, for example, Facebook started in colleges before expanding out. So it's not like you have to go broad immediately. Like you start narrow and then you continue to generalize over time.

Now, I said there was five, right? So we covered four. We said you can go up market, you can go down market, you can go adjacent, you can go broader. The other thing is you can go narrower. Now, I said that you can scale anything that way. And the way that you scale by going narrow is a little bit different. Now, part of that is the niching down component, sure. But I'm going to explain a very different way of going narrow that ultimately makes you more money.

So I like to think about this as becoming more specific. All right. So I actually wrote an entire chapter on this that got cut last minute from my $100 million offers book. And the chapter's free on my site, by the way, you can opt in anywhere you can get it. It's called your first avatar. And so anyways, you can go grab that, whatever. So the basic idea is that you go from a small business owner to, let's say, small businesses with $30,000 a month in revenue and at least two employees.

or hair salons with at least X clients, Y, staff, and Z revenue. Right? So you get narrower. And the idea is how do I increase the quality of my prospects without necessarily going upmarket? So you're not changing the nature of your avatar. You're just changing, you're adding qualifications to them. So I learned about this from the former head of packaging and pricing at Vista private equity. The quick story on this is that I was at this event, guy got up on stage.

I thought I was hot shit. And they're like, this guy manages, you know, runs pricing and patching at Vista, which is a $50 billion fund. I was like, oh, this guy is much bigger thick than me. So I was like, okay, I should listen to him. And then he went on to proceed to explain that the way that Vista would attack companies and get outsized returns is that they would do a huge customer analysis of every customer of a company that they want to acquire. And then they would do a fractal, basically analysis.

Basically, there's 80-20. They look at the 20% of customers that brought them the most money and look at the 80% that didn't. And they would say, how do we get more of these 20 and ignore these other ones? And so they would look for the common character traits, the channels, et cetera. around that 20 and say, well, what if we just made all of our customers that 20%? When they did that, they were able to five-ex a company without even having to incur a significant infrastructure costs because the actual total number of customers didn't change dramatically. And by doing that, became significantly more profitable and ultimately created a lot of value.

So I learned that concept from him. And that's where kind of this concept around going narrow where it comes from. So here's the process for doing this in your own business. Number one is you survey all your customers to find out what their stats are and what they like most about your services. I go in depth on this step by step in that chapter, which you can grab it. Like I said, it's free. You can grab it online, acquisition.com. Two, is you look at your best customers and the ones who spent the most and stayed the longest.

Number three, you do a common factor analysis, which is just a fancy way of saying, you see what they all have in common. Ideally, you want it to be as few things as possible. Think like two to five traits, no more than five. Because each time you add a layer, you narrow your target even more. And so what you're essentially trying to figure out is, who aren't my most qualified buyers, who are the people who get the most value from my stuff? All right, that's step three. Step four, once you find that out, you do two things.

Number one is you change all your marketing language to attract that specific avatar who has traits X, Y, and Z, right? And number two is you figure out what process they all went through to buy. Often, they consumed certain pieces of content or they came in through a specific channel. It might be SEO or might be a group or Discord or or YouTube ads or whatever it is, right? You'll figure out that these people consume this thing, they go through this process, they go through this channel.

And then what happens is you reverse engineer the buying process to force every customer to go through that process. And basically, you make your best and most qualified customers. And so you kind of force the on-the-fence prospects to become the higher quality prospects by reverse engineering, what the best guys went through by accident, except now you do it on purpose. And so the advantages of going narrower are that you can increase your prices and your profit significantly. Because remember, we're now finding the people who we provide the most value to, right? because you do, in a real way, provide more value to this sub-segment. And so you also stop wasting time with shitty customers.

And so you also have fewer people to compete against in this very narrow space. And it also costs you less to service fewer people. Right. So all of these things are good things for a business that, especially on the smaller side, that wants to just become more profitable. So if that's you, this would be a play, which is often one that we start with some of our portfolio companies. It's like we can three or four X the profit of the business just by going narrow and getting very clear on who the avatar is, right? By running this process, which there you go.

that's it. You can do it. Now, here are the disadvantages. You have fewer people to sell to, which is significant. But if you're not making $10 million a year or more, then you shouldn't be worried about that. So if you're not there, then don't worry about that. You just want to figure out who you provide the most value to and then focus ruthlessly on serving that avatar. And that means saying no to people who aren't the new, better, narrow avatar. It means saying no. That's what strategy is. You have to know who you're not going to serve. So bottom line, if you're starting out, there's a reason they say to go narrow. You can be laser targeted. in your marketing and delivery and start to build a reputation for yourself, which takes time,

right? But if you do it right, the other four plays going broader, going up market, going down market, going adjacent market, all of those plays opened themselves up to you. Think about this. Elon started Tesla super expensive, selling electric cars to the rich. And then once he had a reputation, he went down market one step, right? And then he just created normal expensive cars, right? And then he went down a step again, he reached the masses. Zuck, for example, went college kids. then he went broader. Sales force started with S&Bs and then they went up. You learn as you go. So no matter where you are, you can scale up your tim in any of the five ways that I just outlined and the number of people you sell to by going up market, by going down market, by going adjacent

market, by going broader, or we're going narrower. Or my personal favorite, door number six, which is just keep getting better at what you do and you'll ultimately make more money. Boise Nation, keep crushing. Love you guys. Rock on. Bye.