The Game with Alex Hormozi - Margin Madness | Ep 218

Episode Date: July 3, 2020

Protect your profit! Today, Alex (@AlexHormozi) talks about a mistake that business owners constantly make when it comes to the pricing of their products or services, why it’s more important to learn the skill in sales, and how to strategically negotiate for discounts.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:(1:00) - Alex shares story about co-worker's costly discount mistake(4:04) - Improve sales skills, avoid fixed mindset and price changes(6:16) - Know business costs, don't negotiate with "terrorists", protect margins(7:38) - Learn to sell better, provide payment plan, protect margins(11:20) - Alex shares secret to negotiating prices and discountsFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

When people have a cost of goods, when they are like, you know, selling smoothies or they're selling products, right? They usually tend to be more aware of their margins. In service, we just exist as though time is free, right? Our time, our employees' time is all free. Welcome to the Jim Secrets podcast where you 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 that we have learned along the way. I hope you enjoy and subscribe. Good morning, everyone.

Happy Saturday. Let me see if I can get some light going on here for those of you who are watching. Yeah, there we go. Nice sun in my eyes. That'll be sweet. Anyways, margin madness. It's one of the things that I want to talk about today

was something that came up last night while I was thinking. I was talking to one of our partners on the Allen agency side. And this is a mistake that gym owners make, that agency owners make, that anybody, you know what I mean? Anyone who's in business makes,

especially when you're starting out, and I made it too. And so I'll tell you, story just to illustrate the example and a couple of principles that you can take away from it. So when I was 15, 16, 17, I was a blender tender. It was my first or second job when I, when I, you know, in high school. And we would make smoothies and all that kind of stuff, right? It was that smoothie king. And the owner, his name was Dave O. Lind, nice guy. One day, understaffed one of our stores. And so I was working at the store. And so it was the manager at the time, Chris. I was new.

this huge like like two buses full of like teachers or students I can't remember it was a horde that walked in the door and after they had all made their order he said hey you know everybody like just because you guys such a big group we're just gonna give you guys you know 20% off just for just to say thank you for all the business and whatever and and you know we made all the smoothies and then you know the rest of the day was normal and then David came by that night and saw the huge order and then saw the discount because you go through the sheets.

And he was like, what's this? What's like, what is this 20% discount? What happened? What did they bring a coupon for everybody? Like, what happened here? And he was like, no, I mean, it was a big group. I figured I would just, you know, give him a reward for bringing so much business. And he was like, you just gave away our margin.

He's like, that's all I was trying to make on these on these drinks. He's like, we don't make, you know, a hundred percent of the money that we bring in, right? He's like, this business runs on 15 percent margins. And he's like, and you just gave the whole margin away. That's it. So all of that work that we did, we didn't make anything from it. And I remember thinking about that and being like, it was the first time I was 15. I mean, I was super, you know, I was young.

I wasn't like, you know, some people were like, I was making alumni stands when I was 10. Like, I wasn't that way. I was like, you know, in school and stuff. But I remember thinking, I was like, huh, revenue is in profit. it, you know, like, you know, it's just like an interesting moment. But what's wild to me is that despite that, especially in the services space, all right? Because when people have a cost of goods, when they're like, you know, it's selling smoothies or they're selling products, right? They usually tend to be more aware of their margins. In service, we just exist as though time is

free, right? Our time, our employees' time is all free, especially when you have grouped together services like fitness or I mean really any most services you have clumped up work. And so I was talking to a h. owner last night and he was saying yeah I've been you know bringing these people on and he was discounting what he should have been charging. And my first my first like biggest ask to you right now is stop. Like it is a it's such an easy sign of a newer green business owner that you negotiate with terrorists, right? If someone comes in and says, well, I can't afford that, they can. They just

don't think it's valuable enough. And so you need to work on the skill of selling. You don't need to change your price. Your price is not negotiable. Your price has been predetermined based on what you want to make per product, XYZ, right? If you know that your, you know, your margin is 20% when you're charging $100 a month for something, whatever it is, right? If you want to double that, then all you have to do is get to $120, right? Go from $100 to $120. And you have to always operate in that mindset. One of the biggest traps that you can do is operate in a fixed cost mindset, which is like, well, I'm already covering all this stuff. All of this extra money that comes in is going to just be on top. It doesn't work that way, right? It might work the way in your

head, but if you can keep the discipline of every one of these $100 month customers that I'm bringing in right now, or $1,000 a month, you can add zeros. It doesn't matter, right? Customers that are coming in right now, I know that I'm only making X on it, right? You know what your margin is at the end of the month. It's 15%, then multiply the top line by 15%. And then all of a sudden, you'll be far more protective of your price point, right? It'll be far more protective of your margin. And so the like my biggest ask to you is that when you're when you're looking at your pricing and someone does have some sort of, you know, pushed back to you like you should be able to push right back and be like, do you think we make a hundred percent margin here? Like I have cost

of doing business here. Right. And like that's that's how this works. This is the price that we already have. Now if we can try and figure out you can figure out a payment plan if you want to do that. Now again with payment plans, you should bake in the fact that you're taking on risk. right if someone's saying uh you know your your thing is four hundred dollars i'll pay you 200 twice if you want and you know that the second payment you have a certain amount of risk that that's not going to happen then it should be two payments to 250 right like you should bake in the fact that you're not going to collect all that money up front which means you're you are taking on risk as a business owner right i'd say raise your hand if you've ever had or not up and down if you're listening

if you've ever had someone who said they would do a payment plan with you and not finish their commitment, right? Obviously. And those are costs of doing business, but part of the cost doing business is knowing those costs so that you can account for them, right? And so, I mean, gosh, I have so many stories about this, but big picture here. One, never negotiate with terrorists. Two, always know and think about your margin when you're talking about price with a customer. If you're at $100 and you know you make 15%, then $15 is all you've got. Right. And so like, hey, I just get, you know, 15% off on this and you're like, so do you want to run a nonprofit? Do you want to run a, do you just want to do work for free?

Because the end of the day, you could have just not done it and made $0 too. Right? Like, just think about it. Like, you could just keep on living your life and not do the work and also have the same amount of profit at the end of the day. And so, like, you have to protect your margin. You have to protect your profit when you're looking at your pricing. Hey, guys, real quick, if you're new to the podcast, I have a book on Amazon called

$100 million offers at over $8,000, $5 star. reviews and it has almost a perfect score. You can get it for 99 cents on Kindle. The reason I bring it up is that I put over a thousand hours into writing that book. And it's my biggest give to our community. So 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. And so the corollary to that or the flip side of that is that if you know what your your margin is right now, this is one of the number one things I do in any business, myself included that I constantly reassess, and I think it's one of the things that we do

very well, is that we look at what our margin is, and then we say, okay, now we're running at X percent. Let's say it's 30. We're like, what could we do to get this top line up by another 10%, 10% in aggregate, so from like 30 to 40, not, you know, you know, you know what I'm saying here. So 25% increase. Going from 10, so from 30% margin, just adding an extra 10% percent. on top of the price, what could I do that does not require me to take on more overhead? What could I do? Number one thing is just learn how to sell better, right? Number two, provide a payment plan that actually covers your loss that happened on the back end, right?

Three, you could add a fee or an activation or an enrollment. Like all of these things are things that you can tack into your business to boost margin, right? If you look at, and I'd highly encourage you to study some of the super established businesses out there. Go to budget rental car, right? See how many fees and enrollments and things like that that they've done. You can get upset about it or you can study it as a business owner and think like, that's pretty slick. I wonder if there's something like that I can apply in my own business, right? You know, at the same degree, look at telephone companies, right? How many different things they do? Okay, so they charge us for this. They do a financing thing for this. They have

these add-ons. They have these separate accounts. Like all these different things that they bolt on because they know what their fixed costs are and then they just start bolting on top. And so the reason that I think small business owners many times do not make money and work all the time is because they do not protect their margin. And they think, well, it's just me doing X extra, right? No, you make 20% that's your take home or whatever it is, right? That is all that exists for you in this deal. Make sure you protect it and never to negotiate with terrorists. So there was a study done. done by, I think it was Wadify, and they were looking at the gyms that were the best and had the highest prices and highest margins and highest growth. And the ones that had that did not have any

price discounts. Everyone paid the same price. There was no backdoor deals. And I can tell you, whenever I look at a new business that's coming in, it's always like, oh yeah, well, we've got these guys who are at this price. And oh, yeah, I've got a special deal for that guy. Oh, yeah, I know his mom. Like, they're telling me, they're telling me all the reasons that they have discounted. And every time we'd get on the phone when I was doing sales back in the day and I'd be like hey give me your numbers what are your prices and they would say oh you know we're 189 a month and I'd be like oh that's great that's awesome so how many customers do you have they're like oh I've got 150 I'm like oh that's great I'll say 100 for that fake so you got 100 customers awesome so uh you're

doing 18,900 a month and they're like no I'm we're probably closer to like 10 or 11 and I'm like okay then how's your price 189 they're like oh oh well that's you know that's that's what it's you know that's that's what it is now wasn't always like that and um you know this guy you know i've got the first in of 80 or at 60 dollars a month so i was like so you have like 10 people at 189 and the rest of your business is at 100 on average like uh yeah more or less right and so if you want to make the money you have to be you have to want it more than the person that is trying to take it from you by negotiating it away all right uh on the flip side this is the evil side of me that comes out, if you're dealing with a small business owner, you can always negotiate the price

because they do not protect their margins. And so I'll give you one trick that I learned from an old mentor of mine that you can use and take to the bank. If you have any type of work that is ever supposed to happen at your business, you've got carpenters, you've got cleaners, you've got whatever, right? If for some, especially with building stuff, if for some reason they miss something. They mess something up, right? A corner gets nixed. You know, a door hint is a little bit off its hinder. It's a little, you know, a little bit crooked or something minor, right? You find that thing, and right when they're done, he would say, hey, that looks a little bit off. And they're like, ah, you know, I mean, it's about, you know, as close as we can get it. It's like, well,

well, what it cost to, you know, redo that and make it right? And at that point, they're done the work, right? And so they're going to be like, oh, it's, I mean, this is going to be, that'll be, we'd have to redo the whole thing. We'd have to dismount. They'd come up with a whole bunch of terms, and you're like, got it. So it would cost us at least, you know, at least 500 bucks, you know, in time and labor just to, just to fix that, right? You're like, huh, well, that sounds like a good place to start for a discount. And I saw him use that move so many times of the people. And they just like would eat their own words because they're talking, they're trying to inflate how much it's going to cost them to make this fix. And he's like, well, if I've got to live with it, that sounds

like a good place to start for a discount. And he would get it almost every time. And so all that to say, you can also ask for additional things. So if you say, okay, well, I'll do that. Well, what else can you give me? I'll pay that price, but I need a little bit, a little something extra sweeten this deal, right? And a lot of small business owners were all for you to do more for the same price. And so I say all this to say, be strong, understand how the game, works on both sides, offense and defense, and use them both to your advantage. And so I, most business owners just don't make money because they don't understand profit, right? That's it.

They still, to themselves, think that revenue of profit, even though they tell other people, oh, everything I make isn't profit. And they just do. And I just don't know how to, I don't know how to drill this in. If you know what you gross every month and you know what you take home every month, that is what in your mind should be your profit margin. And so when you sign up a customer for $1,000 or $100 a month and you know it's 15%, then you should know that you're only making $15 a month in this person,

and you should act accordingly. And you should also think to yourself, man, if I just added an extra 15 bucks a month to this client, I'd make twice as much money. The answer is yes, you would. So how can I do that? And how can I do that without taking on more work? So I'll leave you with that for margin madness. I hope you guys have an amazing Saturday.

Please drop a like or comment if you found this valuable at all. Do not negotiate with terrorists. Do not lower your prices when people ask you. you for discounts. You need to stick and commit to your prices and I feel like it's a matter of integrity of like you look at yourself in the morning like this is what I'm worth, period, that's it, right? Period. That is what I'm worth. That is what the service is worth. And until death do your part or you make a strategic decision that for the next 90 days you're going to change the price and hold it strong unless you make that, then you do not negotiate with terrorists.

All right. So your price is your price, period, and your margin is your margin and everything else is madness. So lots of love, having amazing Saturday, and I'll catch you guys on the flip side. Again, tag somebody who needs to hear this. All right, bye.