The Game with Alex Hormozi - Get It Right Before Making It Big & The Power Of Compounding | Ep 759

Episode Date: October 16, 2024

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 and will learn on his path from $100M to $1B in net worth.Wanna scale your business? Click here.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Hey guys, welcome back to the game. This is the fifth in our series of audio first podcasts. Again, let me know if you enjoyed these or this style. Today I'm talking about compounding and building compounding assets, both in terms of building businesses that compound and specific to me with this podcast, building media and audience that compounds and seeing the output of the effort that you put in and how to or how I approach figuring out how to get it right before I make it big. So I actually wanted to talk about this podcast, and I'll maybe be able to give you guys an update later when I have more data on this. But I'll tell you something that might shift how you see growing business in general that has just taken me a really long time to get. And it's the

concept of compounding, which is fundamentally there's only two ways that you can build a compounding asset. Number one is that you sell stuff that people never stop buying, or you have a network of people who never stop selling. And so the idea is that you can make one sense. and get paid for life. That is the goal. That is what every amazing business has in terms of its character traits. You buy Coca-Cola once, you buy it for life. You keep buying it. And so to be clear, this doesn't mean that you have to have a recurring subscription. You can also be a reoccurring customer who buys again, again and again. And Facebook, for example, you become a customer of Facebook as soon as you make a profile and they sell your eyeballs for $10 to $40 a month

through advertising. And as long as you continue to use the product, they continue to sell your eyeballs, they continue to make money from you. A wonderful business, right? I have, you know, in the beginning, you don't know how to do anything, right? And that makes sense. You don't know how to, you don't know what you're doing. And so you have to learn how to promote because otherwise no one knows you exist and you can't make sales. So you have to do one-on-one promotion in order to do that. One of the difficulties is that as you begin promoting, you begin making more money. And so then you think, ah, the secret of life is that I just have to promote more, which it kind of is, but it also kind of isn't. The thing is you're like, how's this related to the podcast?

Don't worry. We'll get there. I used to just think, okay, so in order for me to grow this business, I will go from, you know, this year I'm going to sell 100 customers. And next year, to double the business, I'll sell 200 customers. And to double the business, I'll sell 400 customers. And the next year, to double the business, I'll sell 800 customers. But it always came with the assumption that I was losing 100% of my customers every year. People weren't coming back. Obviously, you do have some return customers. But if you, but the majority of people that I had to bring in were always new. I had to reload every month. And so I got exceptionally good at marketing in sales. But when I saw the difference between the massive companies that existed and my

companies, it was because they had leverage. They had compounding. They got more for what they did. When I sold 100 people year one and then 200 people year two, they sold 100 people year one and sold 100 people year two. But guess what? They had 200 customers because the first 100 were still there. And the third year, when they chose to sell 200 people to my 400, so they had half the sales velocity that I had, they still had 400 customers because they had year 100, year 200, and then they had the extra 200 from that third year. So they're also at 400. But they're able to run with significantly higher margin because all of those additional customers, they didn't have to acquire. And so the cost to acquire the additional 200 that the 400 person had to

do went straight to the bottom line. The key, level one is don't lose customers. Level two is not only do you not lose customers, but those customers bring you more customers. Something called a viral coefficient. I seek out businesses and products that have compounding built in within them. And so I'll give you an example of the second type of compounding. So everything I said up to this point has been when you sell something that people don't stop buying. The other way of building a company business is a business where you find a network of people or you build a network of people and never stop selling for you. So if I had a real estate brokerage, for example, I would have realtors who sell houses. And so the houses they sell are not recurring. Not really.

People buy houses every three or four years and they don't always use the same realtors. And it'd be great if they do, but they don't always, right? They move, literally a lot of them move to different areas and they don't use the same realtor. But if I were the owner of the brokerage, then I would see that I have, let's call it, five agents. And I acquire five agents every year, and those agents are responsible for X houses per year. And so over time, the compounding asset that I have is that every year I sell five agents, but by the fifth year, I have 25 agents doing the same average as the five. So I've still five-x my business, even though I only sold the same, sold, onboarded, whatever word do you want to use,

onboarded five agents, because the real customer of the brokerage is the agents themselves, less than the homeowners. In thinking about businesses this way, there's basically those are the two ways that you build compounding businesses. Networks of people who do the promotion for you or people who never stop buying so that you don't have to do as much promotion. Either way, you win. Again, how does this relate to the podcast?

Don't worry. We'll get there. So my podcast manager was like, hey, I think to grow out of the podcast, we could run ads on other people's podcasts, which is a very sound logical strategy, right? But I have this obsession now that has kind of happened as the businesses we have have grown and compounded and gotten bigger and bigger, then I'm just very obsessed with this idea of compounding, which is I hate the idea that in order to grow, I just have to double my infrastructure. That sucks. Like I'd rather just sell 100 people every year for 10 years than have a 10x bigger business. Like that sounds way more fun and way more profitable. If you, for example, have a YouTube channel and you want to grow your YouTube channel. You could. of course run ads to your YouTube channel to grow it. But why? If you can't retain the people who are watching your YouTube videos, why get more people to watch your bad YouTube videos? If you can't retain the people who listen to your podcast, why advertise your podcast? Right. And so I'll be

transparent, which probably a lot of people aren't as transparent about their stuff. So right now, my podcast, so this is what you're listening to right now, gets about a million downloads a month. And we've been at about a million downloads a month for, I want to say, since the book launched last year. So I want to say it's been 13, 14 months, whatever it's been. And so we've been about at the same level. Now, before that, we continue to grow a month after month every month, and we kind of just maintained here. And so what that indicates to me is that we are good enough to keep the audience we have,

but not good enough to have those people share it. I then looked at what was I doing during the hypergrowth period versus what I, I was doing since the hypergrowth period. In the hypergrowth period, I was making audio content like this, which is me just making direct podcasts. Now, the reason that that stopped was because, honestly, it was just time constraint. And podcasts have slower growth rates than like YouTube does.

And so from a return on effort perspective, it made more sense for me to allocate effort towards growing YouTube and short content for the platform. So I just actually did a big tier list breakdown of platforms. And so you can see podcasts, is actually the third tier down on my platforms list. And so you're like, wait, I thought you said you weren't investing as much.

Well, I'm choosing to do this experiment. And that's really it. I'm just choosing to do this experiment because I have an inkling, a hunch that the more audio-first content I make, the more the podcast will grow. And I think that for me, now, I don't know yet because I'm making this out of time before I'll find out what happens. So I could just be wrong. and I'll have an update and let you guys know that it was wrong. If this doesn't work,

then I'll have one very short podcast. It was like, hey, by the way, the direct audio didn't work. And so this is the last one you're going to hear by. Right. That'll be it. That'll be it. But if it does work, right? And people do enjoy this style better. In some ways, I actually like that because this is the stuff that's top of mind of like what I'm actually thinking about right now within the business. And a lot of it's conceptual. And, you know, it's hard for me to, I'll just be transparent with you. One of the difficulty about the role that I have right now is that what's relevant for me is, not relevant for just about anyone, just percentage-wise. The difficulty is, for the vast majority, so it's like 76% of businesses are non-employers, meaning they don't have a single employee.

They're just one guy who has an LLC and makes money, which you could maybe define as contractors or 1099s or, you know, just independent vendors, whatever. And underneath of that, you have all the people who would like to start a business. And so there's this massive market of people who want to start. And there's like 30,000. businesses that are doing over 300 million a year. And we're on track to doing that by the end of next year. On one hand, I want to make stuff that's really interesting for me. But on the other hand, I want to make stuff that's interesting for you. If it's over 10 million, it's one in every 250 businesses. So still not a lot, right? This may end up just shifting my podcast to being more higher

level business stuff because, I mean, this is what I think about. And so it's actually been kind of hard for me because I feel like I'm trying to reach back in time to be like, okay, this is a This is what a business of this size is dealing with because I've gone through it so many times. And just for context, right now, we've got three nine-figure businesses. And I say nine figures in terms of enterprise value, close to a fourth, that are all nine or multi-nine figure businesses in the portfolio. And so, like, we've done it more than once. Like, I'm pretty confident, like, what it takes to do each of these stages.

But in going back to the compounding concept, I didn't want to run ads because we were maintaining. And so you could make the argument, well, then we'll just run ads and we'll just maintain a larger audience, but I want something that grows. I want something that grows on its own. When I started my first business, I got referrals, and I got referrals in excess of the people that I served. And I try to keep that as my North Star.

And like with school, for example, for every person who joins school, we get more than one person who comes on as well, just from referrals. So that's that viral coefficient. And so it's like you get more credit for the work you do, and it just, no matter how small the growth is, If you grow every day, you get really big.

Like the first rule of investing for Warren Buffett is don't lose money. The second rule is don't forget the first rule. And fundamentally, what he means is just don't make the number go down. If you've got 100 customers, even if you kept 100 for two years, the next year you get one customer, you're still bigger. When you have a hole in the bucket, it just makes for so much more work just to stay the same. And so it makes more sense to fix the hole in the bucket when things are smaller, when you have fewer variables to consider

so that then when you pour more on the top, it just grows that much faster. Rather than having the rate of pouring be the way that you grow, because then the only thing you can do to grow is pour faster or pour more. And that gets really tough. I've scaled direct response companies really big.

Obviously, really big is relevant. But like, let's call it 200,000 a day and spend. Like I've spent, you know, I think that's still real money. So 200,000 a day is a decent amount of ad spend. I know there's some guys on here we're doing billions year, so fine, but you know, still decent size. And it's exhausting. It's exhausting in general to think that every month when you start, you have no money and you have to make it every month to pay all of your bills and then have some left over for a profit. It's a tough way to make a buck. And I get it

because I've done that for, I did that for a while because I got really into marketing and sales and obviously got decent at it. I have learned a slightly more balanced approach, which is back to front. And so when we buy a business, I spend the majority of my time on the back so that I can finally open a can of whoop ass on the front and do all the marketing and sales stuff that I know how to do. But it feels like such a waste of time to do that when you have a product that doesn't get good reviews. When you have a product that doesn't bring other customers, when you have a product or service that doesn't keep the people you sold. It's soul crushing. It's crushing for you. It's crushing for your team. If you're like, well, why do you make content if content disappears, right? And so this was actually a huge belief of mine that actually kept me really poor.

And so I want to break this for you. I never wanted to make content for years for a variety of reasons. One is I didn't want to be famous. But the second reason was because it felt like a waste of time. I was like, I have to make content every month. It's just like it just disappears into the ether. It goes into the news feed. After it's ever seven days old, no one sees it again.

What a waste. But what I didn't realize was that media is a compounding asset, not because of the media itself, but because of the audience that gets built. And so the audience is the output of the media. And so if your audience grows by, call it 10% per month, you retain audience and then you multiply audience. And so if those people, on average, like if one out of 10 people brings one more person every month, then my audience will compound and so will yours if you shift your perspective

around it. And this was very helpful for me because it felt so fruitless and so irrelevant in the beginning, especially with the early numbers, right? You're getting 100 views on a YouTube video. And like, you guys forget, because like you see me now, but like when I started on YouTube, when we got 100 views, I was like, woo, got 100 views, right? And then we got our first thousand.

I was like, we got 1,000 views. I was like, can you imagine we're getting 10,000 views in a day? And I used to think to myself, man, 10,000 people. Like when I was, you know, in the gym, if I had a lunch and learn with 10 people, I was stoked. Right? And I tried to think about that way to kind of get me through the earlier times. Like, hey, this was 10 people who watched this.

That's not bad. That's 10 people. Like, that was okay. The thing is, is that if you see those 10 people, and this is the key point, if the thing that you made was good enough that those 10 people click to watch the next video you make, or the next short, or the next post, then you've retained that audience. And so then that audience becomes a compounding asset. And so basically, the point of doing more in the beginning is to learn how to get good enough that you can keep the audience you build. And then once you get good enough, that you can keep the audience you build, and ideally, the next level is multiply the audience

you build where they share your stuff, not just you telling more people about it, which would be like me running ads to build my audience or me, you know, doing drops, right? Now, if you do hear a podcast ads from me in the future, it's because I have figured out how to go from maintenance to growth again, and maybe this will be the thing. Who knows? I just wanted to share that with you because I see a lot of businesses basically artificially inflate their growth by just dropping more and more in ad spend. And there's nothing wrong with advertising work. Dude, like I advertise. Obviously, I like advertising.

I like it. But I want to do it to stuff that I know I'm going to get credit for in three years. And so I think Dan Kennedy is a quote that I like a lot. He says, you don't get a customer to make a sale. You make a sale to get a customer. You don't build an audience to get views. You get views to build an audience. And so until your stuff's good enough, I would recommend not promoting it,

which sounds counterintuitive. Again, growth, counterintuitive. But keep doing it until it's good enough that you retain and multiply audience. At that point, then you become inevitable. You become an inevitability. Growth becomes something that must occur, that happens without your consent, without your permission. It keeps growing. Whether you like it or not, you just keep getting bigger.

You keep multiplying. You keep amplifying the message that you have because your audience does that for you, because there's more of them than there are of you. Because there's only two people that can promote your stuff. You and other people. And again, there's more of them than there are of you. And so unlocking how to get them to promote it. And again, when I say them promoting, I'm saying very, you know, dollars and cents here.

But it's really making it valuable enough that they deem it worthy to share. Thinking about it from this perspective of one, when someone has this listens to this, level one is this is good enough for me to come back and listen to something else. Level two is I want five people I know to hear this message so that I don't have to tell them. So me sharing this saves me the time of having to share this message with them. And I think their lives would be better off. And I get social status from making the share because I've made their lives better and they'll associate that value with me. And so basically it's like you doing this work for somebody else so that they can gain benefit without working.

So we basically give them a shortcut to social capital by making the gift that they can give somebody else without putting the time in. And so I think that is the very nature of value creation within an audience and how audiences compound. And it's much more difficult with education that it is entertainment. Because anyone can be entertained, which is why all of the biggest creators in the world are entertainers. Because anyone can get value

from watching a car blow up. Anyone can get value from watching, you know, people jump off a huge cliff and then tuck and roll at the bottom. Like that's entertaining, that's cool. Every human being can get value from that. But if you make something that's more niche, then they're gonna have fewer people they can share it with

because there's fewer people where it's a gift, to whom it is a gift. So if you make content for dentists, right, they can only share it with other dentists. They're not going to share it with their wife. Maybe they will. I mean, if it relates to like, hey, this is why I'm working late, honey, listen to this podcast. But again, if it was about working late, then it's wider than dentists. Just like we want to make an offer so good, people feel stupid saying no.

We want to make content so good, people feel obligated to share. And so this is my effort to try and bring some of that soul back to the podcast. And for those of you obviously who've been listening this whole time, I appreciate you so much. I mean, we obviously, we've continued to maintain a million downloads a month being a non-interview podcast, which is honestly pretty rare. All the biggest podcasts. And also, if you have a podcast, don't, at least I don't. Compare myself to, I mean, I do compare myself to the Rogans.

Believe me, he's better than I. That's not my point. But, like, I aspire to have that level of growth. But if you have somebody who brings an audience with them every single episode, then you're always going to have something that's going to grow faster than if it's just you only grow. Because like if it's just you, then you only grow on the quality of the things you share. That is the only thing that grows your audience. If you bring other people on, then their audience becomes your audience. Some percentage will stick. And so that creates a much faster growth cycle. And if you're

like, well, if that's what it is, then why don't you do that, Alex? Well, I'll explain the tradeoff. You may listen to some interview podcasts. Interview podcasts tend to not. position the interviewer as an authority. Now, once you become Larry King, you know, there's a, there's an element of that, like you had, like your platform becomes so big that you get status, you know, by association. But the biggest authorities will still have higher influence over an audience than someone who curates, which is what I see to a large degree what an interviewer does. And as soon as they transition, you guys have seen this, as soon as someone transitions to,

hey, by the way, listen, you know, buy my thing, they don't have the same pull. And so if you have an interview podcast, to be fair, I'm not saying there's anything wrong with that. Hey, anything's better than nothing, right? And it is a way faster way to grow your platform. But I have a friend who says this

as his way of measuring audience. He says, butts in motherfucking seats. He said, if you say you're showing up at one city, he said, who fucking shows up? Who gives a shit? And to me, that is the metric that I optimize towards. And until I feel like the stuff that I have is good enough, I don't want to drop the pin.

That is why I care so much about compounding. That's why I see media and audience as a competent asset, even though you have to continue to create media over time. It's also irreversible in that once someone recognizes you, they continue to know who you are. And so there's lots of benefits. So like, you might stop having a customer, but it's very rare for someone to, quote, leave your audience. They can hate you, that's different, but even at a most basic level, they still know who you are.

And if someone knows who you are, they have a higher likelihood of buying, then if someone doesn't know who you are. And so with that, I will leave you. This is the fifth of our little mini podcast, audio first series. I have asked on every one of these podcasts for you guys to let me know if you like this. It would mean a lot to me, and it would help me, it would help me make this better for you. Share this, and that tells me in the stats that you liked it. Tag me if you liked it, because that also tells me. liked. So anyways, keeping amazing. Shoot for the Stars, all that stuff.