The Game with Alex Hormozi - High-Level Acquisition Strategy and how LBOs can work for you | Ep 103

Episode Date: February 7, 2019

Are you paying attention to the lifetime value of your customers? Today, Alex (@AlexHormozi) talks about the potential impact of leveraged buyouts (LBOs) on the economy and the business landscape, as well as how businesses can effectively acquire and retain customers by focusing on the lifetime value of customers and lowering the barriers to entry.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:(0:26) - Lifetime value and its impact on acquisition strategies(1:50) - Lower barriers to entry with future LBOs(5:10) - Benefits of lowering barriers to entry(6:51) - Maximizing lifetime value to increase volume and lower barriersFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

What's going on, everyone, happy Thursday. Hope you guys have an amazing week so far. I wanted to start this one with something that was a little bit more of an incendiary title. LBOs are the future. And I am saying that because most people who have been a part of our community, been a part of our world, know that I don't talk much about LBOs. Rather, I guess I do talk about them, but I'm always kind of bashing against them. And part of that is just for marketing, just to be a little bit more polar.

But the other side is just kind of realizing that where you are in the context of your business and what the lifetime value of your customer looks like at any given point, what's up, Kate, is going to dictate how you acquire. So when Jim launch started, we like Jim Launch, Jim Launch, we actually had people pay half and half or paid and full up front. And I had to work with a financing company at the time, which I really didn't like. It was kind of like one of those higher risk financing companies. So people ended up having to pay like 25% more by using this financing company. But it was the only way that we'd be able to get paid up front. And the thing is, is that over time, what should happen is that the lifetime value of the customer should start stacking. It should start kicking in over time.

And so over time, we had gyms who started with gym launch and then they started staying on the back end and they'd stay with us. And so the revenue that came in from those people from recurring continued to grow. At a certain point, we didn't need to ask for half and half or paid and full up front. We were able to do longer, more extended payment plans, which means that we're basically lowering the barrier to entry, right? And the lower the barrier to entry, the more people who can enter, right? And so I use the title LBOs of the future because, like right now where gym launch is, we have like $1,000 to start, and then people get two weeks, I think, of grace period to make

sure that they're making money so that they can afford the second real payment that they have, right? And so it's actually like we super have spread it out over time so that basically anyone can do it. And so we have client finance acquisition, which is what we preach with most of the gyms that come in with us because most of them don't have the recurring stacked up in order to allow them to basically lower that varied entry. And so the big problem that happens is that when small gyms market like big gyms, that's where they get into trouble. Because when you lower the barrier to entry, you're lowering your cash up front,

your immediate cash per customer. And then what that does is it puts more stress on the business, right? If you have the cash reserves or you have stacked up the retention and the recurring that's come in from these customers, then you can have LBOs that actually work. And so I do kind of poo-poo, and I did poo for a very long time, the whole LBO model, and it's mostly from a marketing standpoint because it doesn't really match the reality of 99% of the gyms that are struggling, or even just not wrong where they want to be, right? And it's because if you're losing money in the acquisition, then it's really hard to market unless you have a lot of cash.

And most people aren't in that space, right? But, hey guys, love that you're listening to the podcast. If you ever want to have the video version of this, which usually has more effects, more visuals, more graphs, you know, drawn out stuff. Sometimes it can help hit the brain centers in different ways. You can check on my YouTube channel. It's absolutely free.

Go check that out if that's what you are into. And if not, keep enjoying the show. If your recurring starts kicking up, if your lifetime value of a customer starts really stacking, then you can continually lower and lower and lower the bar to the point where you're cash flow and negative for two weeks. four weeks, six weeks. So like gym launch, for example, when we acquire a gym,

we're cash flow negative for the first six weeks. So six weeks from the time somebody opts in to that point, you know, what are the sixth week? We're a negative in the acquisition. And then we start making our first dollar of profit. And what that's allowed us to do is basically take over the entire market because we don't need to ask for all this money up front.

We don't need to do all these things because we know that our average customer is going to stay for a very, very, very long time. And so right now, like if we had no money that came in from Jim Launch, the recurring that we just have from the base of customers that we have already served would still provide us a 60, 70% plus margin for operating our business, which is crazy, right? But it didn't happen overnight. It took time to get there, and we took steps from going half and half in paid fools to, you know, three pays to. Okay, everything's more upfront. Let's see, like, let's do, you know, three or four thousand down and then a thousand, whatever. And so like, we've continually lowered what we ask for on the front end from a cash standpoint to continually lower the bar so we can get more volume. But you have to do that with an eye on how much cash those coming in from your recurring.

If you never solve your retention problem, you'll never be able to scale at a massive level, right? you'll never be able to do that. And so that's why some of the plays that we have in Legacy, for those of you who are on here, lower the varied entry like the Green Play, so that we can get more people on recurring faster. We get less cash up front, but we should, if your retention is strong, be stacking $5,000 to $10,000 a month in recurring revenue. And when that happens, that's when the game really, really, really gets funky. And that's really the goal that everyone should be shooting towards.

But ironically, how you do the very back, back, back end affects how you do the very, very, very front of front. And so it really does kind of come full circle in terms of how you look at acquisition and how nothing happens in a vacuum, right? And so I say LBOs are the future because in a lot of ways, they are one of the most effective ways of growing a business. But 99% of people don't have a business as strong enough that they can actually use LLBO. without going under. And that's the fundamental problem. And so we have to do client finance acquisition on the front end, get more per customer,

so that we can outspend everyone in the beginning and be cash flow positive in the acquisition so that we have the cash flow to then take and then reinvest in building up the services, customer service, systems, et cetera, so that we can get the left time value high enough that we can actually lower the front end. So I hope that makes sense.

I hope that was neato for you. And that should give you an idea of what the goal is. The goal over time should be absolute volume and maximizing lifetime value. So if you maximize the lifetime value, then you want to lower the barrier as much as you can. So you can get as many people into that lifetime value as you possibly can. But you have to keep an eye on the cash realities of the business. And so that's where the seesaw, the balance point between how much cash you ask for up front, and then how many people you get seesaws.

And that's really the whole game. So anyways, I thought that would be needo for you. Thanks, Chris. Appreciate that. Lots of love to everybody. Hope you guys have an amazing Thursday. And if you wouldn't mind, drop a like and a comment. And I'll be sure to like and comment on your comment back.

All right. Have an amazing day, guys. And I'll get you guys soon. Bye.