The Game with Alex Hormozi - The Biggest Mistake That Stopped Me From Getting Past $30M | Ep 411

Episode Date: July 21, 2022

Some mistakes can be right under your nose! Today, Alex (@AlexHormozi) breaks down the mistakes that businesses make that cause them to plateau, how to deal with negative word of mouth, setting modest expectations, and more! Note: don't trade the short-term sale at the expense of the long-term brand.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) - Outline business and 3 eventualities that impact margins.(4:44) - Combat 3 eventualities, understand importance of sequences.(7:56) - Create CX/Customer Success team to track time to value.(10:23) - Increase expectation discrepancy, reduce negative word of mouth.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

What happens is they say, hey, I did this thing. So if I do more of that thing, that is how I will grow this business. And the answer is yes and also no. And here's why. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion dollar thing with Acquisition.com. I always wish Bezos, Musk, and Buffett had documented their journey. So I'm doing it for the rest of us.

Please share and enjoy. I'm going to break down why all of these mass market bizav businesses and consumer product businesses plateau. And so if this is you, then listen up. And so this actually stemmed from a conversation that I had with a big business opportunity, business owner who's doing 50, 60 million a year. And, you know, they were reaching a plateau where their margins were paper thin. And so I wanted to break down the reasons why the way, a mistake that you can avoid that took me a very long time to figure out in a lot of pain. And so if right now you are in one of these businesses that sells to A, consumer products. All right. So mass market or B,

business opportunity or C even services to mass market, then this is for you. you, all right? And I'm going to show you how you can avoid a mistake that you won't know that you made until it's too late. All right. And if you don't know, my name is Alex Tremozian, I own acquisition.com. It's a portfolio of companies that are different $100 a year. Make these because I want you to get to $3 million a year so I can partner with you. That's why. All right. But if you're not there, then I make this just because I want you to be rich A. A. F. All right. So let's walk through a logical outline of what happens in a business. All right. So zero to six figures. All right. So zero to $100K. You sell something to someone.

That's what you have to do in order to get to 100K. And usually it is unreliable. All right. So you have unreliable acquisition and usually from different channels because you don't know what you're doing. All right. And that's usually what it is. All right. So it's unreliable acquisition, but you are selling something to someone. Now, 100K to one million, you create a reliable and usually a single reliable acquisition channel, which means you pick one channel, one product, one avatar, all right? And you sell that thing. That's all you do. And if you do it reliably, you can get to seven figures. That is what happens here. Now, what I'm about to show you is the mistake that most people make. All right? At this point, we have what I would call PMF or product market fit. It means that people actually want

the thing that you're selling, which, believe it or not, a lot of people sell stuff that people do not want. Crazy. I know. All right? So we have product, market fit. Now, this is the point where people mess stuff up because what happens is they say, hey, I did this thing. So if I do more of that thing, that is how I will grow this business. And the answer is yes and also no. And here's why. If you do more of what you do, there are three variables that are logical eventualities that will occur in the business that will eventually rob you of your margins. And so if this actually work, then you usually are profitable, right? And so you are most profitable in the beginning of business. Why? Because you usually had to figure something out and you usually have very low overhead,

less infrastructure costs, et cetera, in the beginning, right? Now, in a physical products business specifically, you do have some economies of scale that happens when you buy more stuff, but those are diminishing, meaning, you know, the first two increases in orders of magnitude of purchase is where you get the vast majority of your savings. And then after that, it's, it's razor thin in in terms of how much savings you're going to be able to have from scale, all right, from increasing the quantity that you purchase. All right? So you're usually profitable in the beginning and you're growing. Cool. Makes sense. Now, here's the thing. These are the three eventualities that happen in every business that's mass market. All right? Number one is that CPMs go up over time,

all right? They go up over time. That should make sense. Advertising today is more expensive than it was yesterday and more expensive than it was 10 years ago, right? Costs per impressions go up. That is an eventuality. That is a lot. It will happen over time. Number two is that you will have to go to colder and colder audiences, which means as you scale, the conversion rate that you have on these audiences will go down, right? If you had that one channel that you were doing, If you go deeper on that channel, you go to lesser and lesser likelihood audiences of people who are going to purchase. This is a function of scale. And so you think about it, like conversion goes down as you scale.

That makes sense. Now, the reason that a business can scale is because they make so much money on the smaller audience that when they go to a larger audience, they still make enough money to justify doing it. But it is a logical eventuality that at some point you will reach a enough audience that they will not buy. All right. And then the third piece is that a use scale of business, cost of infrastructure go up, all right? Which means that you have higher fixed costs in the business, which means your margins in a real way can compress. All right. So these three things are eventualities. These are logical outcomes that happen as you scale as the business progresses and does more volume. All right. And so if we have these three things, then what happens is let's say this is our line of top line. And let's say this is our margin is our line is that this starts to compress. And we start to get razor thin. Why? Because of these three eventualities. These always happen in every business. So then you're like, okay, Alex, that sounds like doom and gloom. Then how do you're like, okay, Alex, that sounds like doom and gloom. Then how do you're

do I combat that? Well, it's understanding sequence. All right. And so if up to this point, you said, okay, I made a million dollars or making $2 million a year or whatever selling mass market services, mass market products, you're selling to everybody. You're selling to a big, big, big demo. All right? So this is where beauty. This is where business opportunity. This is where investment opportunity. This is where weight loss, relationship coaching, big mass market things. Right. These are huge industries. Okay. And so how do we combat it? We have to have an equally strong thing that is going in the other direction that is decreasing our cost of acquisition. and increasing our gross profits.

All right. How do we do that? Do that through getting the invisible hand to work for us, which is warm, word of mouth. All right. Now, before you look away, because this is important, this is important,

is that as you scale, right, if we're in this little, you know, example over here and we go, you know, one million to 10 million, right? And the margin goes from, you know, 40% to 30%. And then we go 10 to 30 million. We go from 20% to 10% margins, right?

And this margin keeps compressing. The thing is, is that we need a acquisition channel that doesn't behave in these three ways. How? Word of mouth is quadratic in nature, meaning one person tells two, two people tell four, four people tell eight. And so we have far more leverage on the acquisition of one customer. And this process right here is what will drive down your cost of acquisition over time at scale,

even if you're reaching more people less efficiently than you were in the beginning, which makes sense. Of course, you'd be less efficient at scales you are in the beginning. Now you might say, well, our media department's better, our buying is better, our advertising is better. And sure, all those things happen. but these three things are absolutes. Cost impressions will go up.

You will market a colder audiences who are less likely to buy your thing. And the cost of infrastructure will increase. Those are eventualities. All right. And so we have to, and this is the piece that everyone misses, you have to pause when you're in that one, three, maybe $5 million per year range.

You have to pause to do something entirely different. And you have to stop doing the thing that got you there because continuing down that path will eventually lead to a point where you have lots of revenue and basically no margin. And then you will have a hiccup. It will have a mistake or you'll have something that happens and it will blow your business off its course

and all of a sudden, you'll go from feeling like you're on the top of the world, driving all this cash flow, driving all this revenue to be like, holy shit, we're negative. And we're paper thin. And I don't know what to do. And you feel like you have to keep selling

just to pay payroll, but there's basically no margin left. And then you basically have created a massive nonprofit that you're liable for, right? And if I'm talking to somebody, you know who you are, you're listening and you know exactly what I'm talking about right now.

And this is the eventuality that happens unless you stop and you fix this, which makes it feel like you're doing something out of sequence where you're actually doing it in the right way to do it, which is why you have to go slow to go fast sometimes. Hey guys, real quick for those of you guys who are $100 million offers fans, I love you. I added in a lost chapter that has never been released. I'm releasing it now.

Transparently, I'm doing that to build hype for $100 million leads. But you will have the unreleased chapter. It talks about your first avatar and how-to segment customers to make more money. You can get it by going to acquisition.com forward slash leads. It's both free in exchange for your email so that I can email you when we launch $100 million leads and so that you cannot miss out on it because last time I sold out for like eight straight. weeks really fast. So that is my way of making sure that y'all get first dips. So what we have to look at is how can we improve the customer experience, right? The customer experience. How can we create a

customer success team or director who can start tracking things like time to value? Like how quickly can someone, you know, achieve this value? What are our NPS scores? What are our customer health scores? What are the things that are going to drive the one thing that matters most, which is referrals? Because what happens is that most people either have neutral or negative word of mouth, all right? And so here's a way that you know if you have negative word of mouth. Negative word of mouth is when your cost of acquisition increases at a faster rate than the cost per impression increases. Okay, so if the cost per impression is up 10% and you're up 40%. It means that you have that quadratic, that beast that I was showing earlier that does this, whatever, you have that beast,

but that invisible hand is now compressing your business. People who would otherwise would have purchased, see your ads, see your marketing and say, oh, I actually heard something bad about that. And then boom, they don't buy. And not only that, the negative ones tell 10 times more people than the positive experience one, which is why it's so hard to build a wonderful business, because it's so hard to have to be so good that you counteract the 10 times word of mouth that happens with a negative experience. I know. It's crazy. It makes it feel, makes business feel hopeless. But there is hope because if we do this in the right sequence and we say, we're going to pay attention to the things that matter most because we're thinking about 10 years, not 10 days from now,

we know that these three things are going to be the inevitable things that eat our business and eat our margins. And so we have to combat that by pausing, increasing our integrity about the products that we're selling, right, so that we can drive the thing that will be our, our guard, our shield against this. It will be the invisible hand fighting the negative invisible hand and increasing it because all of a sudden people heard something and then they see your ad and say, oh, I wouldn't normally have bought it, but I did hear something about this and then they purchased. And all of a sudden, what happens is, colder markets become warmer markets as a result of the word of mouth, all right? And so that is how you can use this thing to give you the positive

invisible hand that can combat you. Now, some businesses at scale, what they've figured out is, okay, they're not shitty, but they're just neutral, right? And the thing is that these three eventualities will still happen no matter what. And so you need to turn this negative into a positive. Otherwise, at scale, the eventuality of this business is it will do tons of revenue. And you will reach a point of equilibrium where your costs and your cash flow are the same. And you have run a massive nonprofit that you are 100% liable for. And that is very, very, very stressful.

And so the only way to build the enduring brand that can continue to scale is to have this invisible hand in your team on your side, which means you might have to slow down for a period to figure out what do clients really want? What is the job that they hired our products or services to truly solve? And how can we figure out a way to truly surprise and delight them in a way that they did not expect? Which means we want to increase the discrepancy between expectations and delivery. All right? We want deliver to be up here and we want expectations to be on here. And the problem is that most people who are short term, short term minded, what they do is they say,

they raise expectations in order to make the short sale. But then what happens is they can never live up to that. And so we have a negative expectation to delivery gap. And then that is what drives the negative word of mouth in the. business, which eventually dooms them. And so the idea is how can we have modest expectations that we can set and then create such an amazing experience, decrease the time to value so that people say, wow, this thing was so much better than I expected. You should try this out. And the easy way to show this is, have you ever had somebody pump up a movie to you and be like, hey, you got to see

this thing? It's so good. It's so good. And you're like, oh, man, I can't wait to see this thing. And then you're like, okay, that met expectations, even though the movie was amazing. Movie met expectations because you had amazingly high expectations. On the flip side, Have you ever had an experience where someone's like, oh, this is a shit movie. It's terrible. Blah, blah, blah. And you go in with super long expectations and then you're pleasantly surprised, right? Even though the product is the same, the expectation dramatically changed our experience

of the product, service, et cetera, right? And so when we're dealing with consumer products, right, we want to set modest expectations and then create room for us to over deliver so that we can get this word of mouth. And so what we do is we don't trade the short term sale at the expense of the long term brand. And the brand in a nutshell does two things. A brand is simply what people say about your product behind your bag. That's what a brand is. It's a reputation. Right. And the easiest way to build your reputation is improve the quality of your products is to keep the promises or more than keep the promises that you make. That is how you build the brand that will endure. And that is the thing that can achieve scale. Because once you achieve scale, you also have the hidden power pricing behind you. Because once people love your products and services, if you do a 10% or a 20% bump in price. And for those of you who sell mass market B2C products, these things, if you don't have a change in demand, all of a sudden, double, triple, quadruple the profit of your business. Right. And you

you can only do this and have premium pricing power if you have a brand. Otherwise, you're just media arbitraging and you will eventually run into this, these three evils right here, check, check, check, these three evils right here that will eventually eat away your margins and destroy your business. All right. So this is a cautionary tale of what not to do. And sometimes you have to go slow to go fast to build the thing that's worth building. All right.

So, Moes Nation, I love you guys. Keep being awesome. Bye.