The Game with Alex Hormozi - $50k Consulting in a Nutshell [This is 🔥 for anyone who understands strategy] | Ep 239

Episode Date: September 25, 2020

Profit is what begets growth. Today, Alex (@AlexHormozi) talks about what he does on $50,000 consulting days when he’s talking to high-level business owners and walks us through one of the biggest mistakes he has made that involves the front end. Remember: Once you have a product that is a very well-oiled machine on the back end, it takes a tremendous amount of effort to change your machine.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:(1:39) - Decrease business complexity, improve front and backend.(6:21) - Factors for front and backend; Alex shares scaling mistake.(11:59) - Bigger business needs simplicity for scalability.(15:59) - Create leverage, simplify backend for more profit.(17:16) - Greater arbitrage = more money and profit in the end.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

What could you do to add $5 million to your bottom line without doing anything, right? What could you do to add $10 million to the business without adding anything? Any humans, any people. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. Good morning, everyone. Happy Saturday.

I am super pumped for this podcast because I'm going to talk about, uh, What I do on $50,000 consulting days that I sell when I have higher level business owners that come in, and I'll walk you through the biggest mistake that I've made for a business standpoint. I think it's the number one biggest mistake that I've made that set me back, however long, and how you can learn from it. So how many, I mean, what is it? Two years ago, three years ago, Jim Launch was doing $28 million. We'd grown from, I think, $6.8 to $28 million in a year.

we had tremendous growth. And at that point, I made the mistake of thinking I should start another business, which was our sublim business. I mean, it still is a good business. It's great. But I think that if I had continued to work on the gym launch business, I would have been able to grow to $100 million. And so what I want to walk you through is kind of some of the mistakes that I made,

but also the two fundamental things that I look at when I do these consulting days. right and so if you want 50,000 dollars for the consulting in a nutshell that is what I'm going to cover in this podcast and so so buckle up number one whenever I'm trying to do some sort of you know high level consulting day the goal is not to increase complexity of their business but decrease complexity to business and that also means that whatever the intervention that I'm going to try and provide I want it to be as simple as humanly possible in an ideal world we want to ask questions like what could you do to add $5 million to your bottom line without doing anything, right? What could you do to add $10 million to the business without adding anything, any humans, any people, right? And so that's where, you know, one of the first things that we'll talk about is like pricing, right? So if we can price appropriately, many times we could add to $3 million to the bottom line

to a business without actually changing anything at all, right? And so I say that just as an example of what I would consider a very good intervention that's well worth the $50,000, you know, that someone would pay me, you know, for a day, right? And so, anyhow, the two things that I'll break this down into when I'm looking at someone's business or I'm trying to improve a business, my own or otherwise, is growth, right? So there's only two elements of growth. All right? So you've heard me talk about three levers, right?

You can get more customers. You can get them to spend more. You get them to stay longer. But if you want to go simpler than that, the way to grow a business is you can either get more customers or make the customers worth more. All right? So I'm going to just use a simple example. Let's say that your current sign up rate of customers is 10 per month. Okay. And let's say each of these customers is worth $1,000. That means that if nothing changes in your business, you will never grow past $10,000 per month. Right. And so this is how I do the back of napkin math to extrapolate

If someone's on a growth projection, where they're going to plateau, because I know, for example, if someone's selling 10 people a month and the lifetime value is $2,000 and they're currently making $10,000 a month, that it means if they change nothing, they're going to continually grow until 20 and then stop. So they're on a growth curve, but it will slowly slow down as it approaches 20. It's called an asymptote. So basically approaches that infinity straight line and every month the increase becomes less and and they pretty much stabilize around 20, right?

And so if we're looking at a business, the first thing on the side is whether we need to focus more on the back end or we need to focus more on the front end. So I made a podcast earlier called Good Enough for Growth, and that's where you're really focusing on the back end, right? And so there's a huge amount of ways that you can increase the lifetime value, right? Pricing appropriately is a first and obvious one. Second is adding in, you know, back in continuity or adding different levels of service for customers that want to upgrade.

Adding in retail products, affiliate deals, basically deals where you can refer portions of business to someone else, any of that type of stuff, right? And get kickbacks from them. All of these things are things that can increase lifetime value, decreasing churn. All of those things increase lifetime value. And so I'll look at all of the... of those components of what their numbers are. Now, there are certain benchmarks that I'll look for, you know, whether it's, let's say it's a brick and mortar service, right?

There's certain benchmarks that I'd look for if it's, you know, let's say a chiropractor, I'd be saying, okay, well, what are you currently making per customer? If they, if I find out that the average customer comes in for five back cracks for 50 bucks each, $250 is a really, really bad LTV, right? Now, if you were closer to $2,500 to $4,000, then I know that because, and the reason this is important,

is because the cost of acquisition and many times is relatively the same. So the cost of acquiring a small business owner in most markets will be between $500 and $1,500, right? The cost requiring a B to C customer in a local market might be around $100, right? And so you can see these things kind of in a factor of, factors of 10, right? And so anyhow, the reason that like when you get good enough for growth, it means for me, I would like, to look at this is my metric at least a 10 to 1 return from cost of acquisition to lifetime value now that doesn't mean up front all right it's really clear here it doesn't mean up front now i mean perfect world i'd like to be 20 or 30 or 40 um the the lTV to cac ratio for gym launch for

example is 33 to 1 all right so we spend uh for every dollar we spend in marketing we get 33 dollars back over the lifetime of the customer. Now that being said, because we knew our metrics, I actually lost money or often lose money in the first one to two months. But I'm okay with that because I have, I just know the longevity of the customer's worth and all that kind of stuff. And so many people come to me like, how can I achieve this level of growth? It's like, well, we made our customers worth more to us than to anyone else by a very, very wide margin, right? For the same people who were trying to compete for gyms, Most of their LTV was $5,000 to $6,000, right?

Which is what the vast majority of, you know, agencies, gurus, coaches, whatever. That's most, typically that's around where their lifetime value is, right? And so they're spending a thousand bucks and they're making six and that's where they're at. And they have trouble scaling from there and usually marketing, you know, represents 20 to 30% of their total cost every month. Whereas for us, it represents less than 5% of our total revenue, right? And so that's when I'm looking at the back end, okay? the front end what I'm looking to do is how can we get more customers all right and so again one of these things is simply spending more on marketing for many times we'll accomplish that right

a lot of people have very limiting beliefs about how many people you can acquire on a specific channel all right i had a call recently with one of the agencies that we work with on the software side and they're like i'm really afraid that i'm i've i've tapped out this market right they're in a market that's bigger than jims i'll just put it that way um and there's the there's hundreds, probably thousands, maybe a thousand, agencies that serve this one particular avatar. Right. And this client was selling about 20 of these a month.

All right. And so for me, it's always laughable because 20 clients a month in a marketplace that has, you know, 100,000 clients is just like, come on. Like there's another hundred agencies that are also selling five, 10 people a month. So there's a thousand of these, let's say, chiropractors, for example, that are getting sold every month and you're selling 20 of them and you think that you are now tapping out the marketplace, right? So there's usually a ton more growth that you can have in a specific channel than you expect, right? So that's the first thing that I'll look at is like, okay, if the LTV on the backside looks right, then I'll focus on the front end. And where most people get weird is that they say, cool, well, I've got this machine to make more money, I'm going to do, I'm going to serve another type of thing.

customer. I'm going to go downstream. I'm going to go upstream. I'm going to also work with another type of thing, right? I'm going to go from fitness to sports performance. I'm going to go from female weight loss to male weight loss. I'll go whatever, right? So a different customer because they only have one channel and they don't know how to scale it. Right. And so the way of scaling adequately, and this is why this is one of the biggest mistakes that I made early on in gym launch is that I just didn't know how I could scale past the amount of sales that we were coming in. So I was like, well, the only thing I can really do is add supplements on top. And so there was actually a clear strategic meeting where we did the pros and cons of going gym launch international.

So that means gym launch China, gym launch Southeast Asia, Jim launch South America, right? Versus starting the supplement company. And to me, starting the supplement company honestly just sounded easier. And so rather than stick with the core avatar and simply do more, bring more customers in. by opening up more markets, which I could have done, right? I ended up adding complexity to business. Now, it probably took me a year to re-simplify that business, but that was a year of growth that I lost.

Hey, guys, real quick, if you're new to the podcast, I have a book on Amazon called $100 million offers that over $8,000 five-star reviews and it has almost a perfect score. You can get it for $0.99 on Kindle. The reason I bring it up is that I put over 1,000 hours into writing that book, and it's my biggest gift to our community. It's my very shameless way of trying to get you to like me more and ultimately make more dollars so that later on in your business career, I can potentially partner with you.

So that's my give. Go check it out. Amazon and back to the show. Right. And so there's multiple ways that I could have gone through, like if I could go back in time, this is what I would have done. All right. Number one is I would have looked at other acquisition channels.

So I would have prioritized getting channel partners, all right? Which is people who can refer your business on a regular basis. second would be going international. So that's another way of scaling. Here, I would have the same channel. It might be like Facebook or Instagram, right? But I'd be doing it another marketplace, right? So that would be a way of scaling.

I could find channel partners in the United States who own lists of gym owners. So that would be equipment dealers, flooring people, shoot, you know, financing companies, CRMs that serve gyms. All of these are people who serve the same customers. me that could have certain that would have been it would have been beneficial for them and me for their clients to work with me because they knew that their clients would stay longer they'd be more profitable and and far less likely to go out of business etc right or they'll make more money and then buy more stuff because they'll be broke right so those are examples of just like

two ways another way I could have done it would have been you know focusing all in on email outbound or cold calling outbound or cold messenger right all of these are different channels that I could have used to scale the front end of acquisition. Now, where this gets really interesting is that when I was in the room with the guys who were doing half a million, sorry, half a billion a year, excuse me, you would be astonished at how simple most of their businesses are. The bigger the businesses, typically the simpler it has to be, because simple is the only thing that scales.

And so basically, once they've created the mousetrap, once they have LTE that is good enough, right, then really it becomes scaling acquisition. Now, many times people have a really fucked up backend and you have to fix that, right? But once this is good enough, right? Once we know that, let's say, a small business owner that walks through this mousetrap, whether it could be an agency, it could be consulting business, the information, doesn't run that. But if the backend, let's say, is making is $20,000 on average. I'll just say, we'll just use that, $20,000.

And we know that the cost of acquisition for a small business owner is going to be around $1,000, bucks or around $1,500, right? Then we can get to work knowing what that cost of acquisition is and see if we can match that another channel. Typically, outbound is actually cheaper than inbound, believe or not. It scales more slowly, but in some cases, that can be good because then it just allows you to appropriately scale your back end. One of the blessings and curses of inbound lead gen is that you can, you know, 4X overnight,

whereas, you know, scaling all of the people who fulfill the services, 4xing that overnight, you need more difficult, right? And so backing this up, if I'm looking at a business owner who's coming in and says, hey, I'm currently at, I'll give you a real older example. I had one the other day. This was in a 50 consulting. This was for all the agencies that are doing $100,000 a month or more using Allen, I work with them for 30 minutes to kind of help them with their business. And so one of the things, this is a real example. So they were doing $200,000 a month, and they want to get to a million dollars a month. And so, think they were selling i'll just use rough math they were selling uh 30 people a month okay so they're

selling 30 people a month and their current lifetime value was 12 000 okay so if they're selling 30 and their lifetime value is 12 then it means that if nothing changes in the business they're currently on a growth trajectory because they were doing 200 all right that means and they've been growing since they've been with us right and so that means that if they don't do anything they'll cap out at 360 right which is just 12 times 30. That's it with a zero. That's all those. So it means that they're going to cap at 360 per month, which is well shorter where they want to be. And so the question is, how do we triple the business, all right, to get to the million dollars a month, which is what they

decided was their goal? And so we look at that. I'm like, okay, well, you're currently using this one channel. They're using Facebook. All right. And I said, I think you could reasonably get to 60 on this one channel without really breaking a lot of stuff, just increasing your ads been adding one or two sales people, right? That seems simple. Now on the back end, if we can do these two things, we can raise this price by 25%, and we can ask people to open more availability, and we can do whatever, the steps that I had for them.

I think that reason we get from 12K to 16K, which is not a massive increase. And you'll notice that when we're doing these things, we're tweaking. It's very rare that there's like a huge underhaul or overhaul of the entire model. It's usually small adjustments, right? And so let's factor the example in.

So if we go from 12K, to 16k and we take the acquisition on the front end from 30 to 60 and they actually had an organic method they had stopped doing that was generating them I think it was 10 or 15 new customers a month and they stopped doing that to do the inbound legion right and so we said cool well work the actual plan was we're going to increase your inbound legion by 50 because you're going to have some your the cost actually ends up going up when you scale just left FYI but we're also going to restart this outbound method right And so they're going to get 15 here and go from 30 to 45.

And so total to have 60 new sales per month reliably. And now on the back end, we're just doing these small things to take us from 12 to 16. And so if we go 60 times 16, now we're at 960. And just like that, from those two tweaks, we're able to get them to close to a million dollars a month. And so that was literally like that, what I just walked you through is pretty much what these, you know, massive consulting things look like. And the objective for me is to not give someone a hundred things to do, but one or two things they're going to have the most leverage, right? And the definition of leverage is something that has a smaller input than it does output, right? And that's why

you can have, you know, the biggest lever in the world. You could, you know, you give me a lever long enough you can move the world. That's the, that's the objective when we're going to these things is like, how can I create the most leverage for the person that I'm talking to in looking at how they can scale acquisition and then how we can simplify and make the background more profit right and so when you're looking at your business or I find this useful when I look at my business is I'm saying okay do we is the back end metrics in terms of what we're what we're making per customer what our turn is what our pricing is you know what percentage of people are taking the upsells all of those things are they right are they good enough yes okay I'm

comfortable at this number let's say it's 15 it doesn't matter you could you can add zeros remove zeros if it's $1,500 is your cost of that is your cost of that is your your lifetime value and your cost of acquisition is $100, then you're at 15 to 1 and that's awesome, right? Same thing. And so you're just looking at the arbitrage between these two things and in general, the greater the arbitrage, as in the greater the difference between the cost of acquisition and the lifetime value, then the more money you'll ultimately make, the more profit you'll make. And profit is what begets growth, right?

A lot of people want to get bigger in order to get better, but usually it's getting better that allows you to get bigger, as in you need to have lots of profit in order to scale. rather than say, I'm going to put all my profit back and not have a big margin in my business because I want it to grow. And it's backwards. You have to have lots of margin in order for the business to grow rather than think, I don't want to have any margin because I want to make it affordable to everyone so that it grows. And eventually I'll start making money. Whatever you scale, expanse. So if you have low margin, you're just scaling low margin for the most part.

There's a handful of exceptions, but the vast majority of people who are probably listening to this, have what I would consider normal businesses that have services and employees that have to scale as the product scales, right? An exception to that would be, you know, if you had an app or some sort of software. And that's why software gets, you know, has crazy multiples, but it's also a very hard business and very competitive. So, anyway, back to the main point. The numbers that you need to look at and the three numbers that I'm looking at are, if you're

curious, if you're like, want to do this mental example with your own team is what's my lifetime value what's my cost of acquisition and if you're worried about cash then what's my 30 day LTV what am I what am I collecting in the first 30 days of the customer and that's if your cash constraint if you're not cash constrained then you're really just looking at cost of acquisition compared to lifetime value all right and so in looking at that it simply becomes a factor factor of how much more can I bring in the front end once these back metrics are correct rather than adding more businesses adding

more services, serving more avatars, which is the mistake that I made and this mistake that many people who are entrepreneurs will make. Because I think that if I just said, cool, we're at X inflow per month from this channel, we're going to add, I'm going to take the next three months and focus on partners. I'll focus the next three months on YouTube or focus the next three months on building outbound, right, whatever it is, right? I would have been able to continue to add channels and go from and literally triple the business that way rather than trying to add more things on the back. Right. And so hopefully that makes sense. That is the process that I go through. Those are the two sides of the coin or the equation for growth. I hope you find that

valuable. For me, it was very eye-opening. I wish I could transfer like the simplicity that I've seen from people who have the biggest businesses. But basically, once you have a product that has a very, that is very well-oiled, very well-oiled machine on the back end, it's, it takes a tremendous amount effort to change your machine, right? And so in those instances, once it's good enough, you can always make the tweaks and whatnot, but like fundamentally changing your overall on the machine takes a lot of work and takes a lot of time, right? Also, it has a certain amount of risk. Whereas if you can just focus on, like, take your entrepreneurial ADD hat, and instead of trying to use your ADD on figuring out a new product or figuring out a new avatar or anything like that, take your

entrepreneurial ADD and learn another acquisition channel and let that be the focus of your entrepreneurial you know distractiveness and shiny object so um hope that makes sense hope you enjoyed that hope you've been that valuable if you did please drop a like or drop a question and I will try to answer all of them as they come in so lots of love stay amazing you found this valuable leave a review and I'll get you guys on flipside happy Saturday bye