The Game with Alex Hormozi - The Money Printing Machine: Investing in Advertising | Ep 607

Episode Date: October 31, 2023

"Fundamentally, if you're making more money back from customers than it costs you to get them, then you are printing money." Today, Alex (@AlexHormozi) shares his three-step process for scaling ads in portfolio companies, emphasizing the importance of tracking ad spend, preparing to lose money, and optimizing for the lifetime gross profit to customer acquisition cost ratio. He also discusses the benefits of split testing and creating multiple ad creatives to find the winning formula for successful advertising campaigns.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:(0:54) - Phase 1: Track expenses, spend only when traceable.(1:44) - Phase 2: Start with money loss, find winners, extend payback.(6:18) - Phase 3: Reach money printing. Measure LTGP/CAC for growth.(6:40) - Focus on LTGP/CAC ratio, efficient acquisition, quick payback.(9:51) - Businesses grow through client-financed acquisition, overcoming bottlenecks.(11:58) - Scale advertising once foundational aspects are perfected.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

And when you play in the big game of paid ads, expect to lose more times than you win. But when you win, double, triple, quadruple, quintuple, one million fucking percent down on it and scale the hell out of it because that's how you make it back. 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. What I want to walk you through is kind of my three-step process for how I've scaled ads in all of our portfolio companies, companies that I've owned majority of, outright, or minority of. And for a little bit of context here, between our portfolio, we spend over $150,000 a day in paid advertising, and I have a lifetime return in my own personal portfolio of 36 to 1, meaning for every $1 I spend, I get $36 back, all right? So I'm trying to help you do it. This is how I think through it.

Phase one is that you have to track money, all right? And so the idea is that you don't spend a dollar before you know where the dollar was spent and be able to track that it came back from wherever you spent it. As silly as this sounds, this is what the majority of people don't even do. They don't even track their ad spend. So even if they are doing well, they have no idea that they're doing well so that how could you possibly know if your ads are working? It's like going to the casino and making bets without knowing the odds.

It's a great way to get cleaned out, right? So you have to know your odds. You have to track how much you're spending versus what you get back. And if you're curious about how to do that, there are different CRMs and there are different software tools that you install. And if you're like, I don't know how to do that,

that's how you Google how to install tracking pixel name of software. All right? That's why we have this beautiful video world of education. It's wonderful.

All right? Now, the cool thing is is that most advertising platforms want you to track because they know if you track, you'll spend more money. And so they have lots of free trainings that are there.

Because the nice thing is it's not a very hard setup because if you look online, it takes five minutes to set up tracking pixels the right way and you're off to the races. But if you're afraid of computers, A, welcome to the new world.

But B, you should know how to do this stuff, especially if you're going to be in the paid ads world. Phase two is my favorite phase, is the lose money phase. So once you track, you're able to track your ads, what's the next actual thing you do? You spend money, and you're not going to immediately make money back with any advertising. So you literally lose money first. I want to emotionally prepare you to lose money, because that is what advertising is in a short enough time horizon.

You lose money. So the question is just how long it takes you to get it back, aka your payback period, or predicate how good you are to advertising, because the fast you're going to get it back, the more you can advertise. And the more you advertise, the more people know about your stuff. The more people know about your stuff, the more people buy it. And so a different way of thinking about this is thinking about investing in a money printing machine. So imagine you've got this printing press and you have to go buy pieces of the machine. It's like, okay, I've got to get ink, okay, I got to get some wheels. Oh, I got to get that paper. So, and then eventually you

have this money printing machine. You're buying the mistakes until eventually you have the system down. Once you have the machine that prints you $10 for every $1 you put into it, what's your marketing budget? As much money as you possibly can pour into it. And many people have made their money in real estate, made their money in stocks, made their money in crypto, I've made my money advertising. An interesting thing from a human behavior perspective is that when you advertise, you lose more times than you win in terms of quantity. So if I run 10 different ads, I expect to lose nine times out of 10th before I find my winner. And just FYI, the bigger you advertise, the more you're running 99 to just get one mega winner. Because most people think that their

advertising can't scale. What it really is is that mediocre advertising can't scale. But exceptional advertising can. Oftentimes, people only run one ad. They lose and they think that they suck. Facebook or meta, whatever, did a meta analysis, double meta, of top advertisers on the platform. The top 0.1% of advertisers on Facebook split test 11 times more ad creative. Like success leaves clues. These guys just get it. They're like, oh, well, in order for me to spend way more money, I need to make way more creative to get the right people in front of the right message. That is the difference between the pros and the not pros. In the key, The key point is that you will lose more times than you win.

But when you win, you win big and you will be able to win back all that you lost. And so the difference in a casino and advertising is that with enough skill, you can become the house. So we'll walk you through a little money example. So let's say I spend a thousand bucks on 10 ads, so 100 bucks an ad. And after that, I lose on nine of them. So I lost $900. And on one ad, I get $200 back.

So most people would look at that campaign and say, man, I made $200 on $1,000. of spend. This ad campaign blows. And to a degree, they'd be right. But what they would be missing is the diamond in the rough, which is, wait a second. This one I spent 100, made 200 on. Can I take 10 grand and spend it on that ad and then make 20 back? And so then it only cost me 800 to get a machine that now made me 20 on 10. How much more can I spend in that machine? And that's fundamentally the game, is you keep putting them out there until you find the mega winner. And then you juice the living shit out of it for as long as you possibly can. And then what happens is over time, we'll start going down. And this is also the transition that happens between mid-tier advertisers and top-tier advertisers.

So in the beginning, you don't know what the fuck you're doing, you lose most of your money. Phase two, you start finding winners every once in a while, you scale the shit of it, and then what happens? It starts going down because it gets fatigued. It can't reach colder audiences. And so your ROI starts compressing, right? So then you freak out because you're like, oh my God, my business is going to end. I need all this cash flow in order to pay my people. And so then you frantically go and make other ads and then you find another winner and you scale it up. The difference the medium and the advanced advertisers is that they are ahead of that curve. So even if they have a winner right now, they're already making the next generation of ads on a consistent basis so that they have

winners that are cross-peaking. So you have two or three or four or five winners that are peaking at different times. And then that is what evens out the business from a larger perspective. Right now, If you make ads and you don't have an ad testing and creation cadence, meaning you're not doing it every day, every week, start. You'll make more money, I promise you. 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. Which then gets you into phase three, which is the print money phase.

You'd think that the lose money phase wouldn't have been in my favorite phase. Print money would be. But no, I just love suffering. No, but the print money phase is what we're trying to get to, right? That's the Nirvana. We have the fully-fledged print money machine that we invest all the time and effort into creating. And so fundamentally, if you're making more money back from customers, then it costs you to get them, then you are printing money. Now, the question is how much more?

And by when? Those are two factors, which is what is the lifetime gross profit that I'm going to achieve from a customer, and how quickly am I going to pay it back? LTGP, which is lifetime gross profit to KAC ratio. And when I'm looking to invest in any business, it's the first number I want to know because it is the biggest discrepancy of arbitrage. Like fundamentally, all businesses are arbitraged between when it costs you to get a customer

and how much you make on customers. That's what it is. Like, you have a machine that it costs you to get this person in, it costs you this much. It's a money printing machine. Like, that's all businesses are. It's a black box where you spend X and you get Y. It's what it is.

That's the game. So if you know those two numbers really well, it's the most important ratio in the business. And I talk about this at length inside of the book, $100 million leads. So let's say that I make $10 in gross profit because I have a newsletter, right? I don't have a newsletter, but if I did have one. John has a newsletter.

John makes $10 per month on his newsletter. And let's say that the average person stays for 20 months. So that would be $200 is what he makes on a customer, lifetime gross profit. Let's say it costs him $50 to acquire that customer. So he spends $50 and then he makes $200 over a lifetime. But the problem is he spends $50 today and he makes $10 back. And then next month he gets another $10. The next month he gets another tenant. Five months later, he breaks even. At month six, he makes his first

$10 profit. Should he spend that money to do that deal? Every fucking day he should do that. But he will run out of cash. And so it becomes a cash flow constraint rather than a business model constraint. So there's different ways to solve that, right? In terms of like you can change, you can have upfront, you can have people prepay a certain percentage, blah, blah, blah. There's ways to tactically solve that problem. But just in terms of determining whether your advertising is working, if you are making more money over the lifetime gross profit by more than three to one,

then it costs you get them. So for him, that was $4.1. Right? It cost him $50 to make $200. Then that is a good, scalable advertising campaign. Now, for the small business owner, you have to optimize around another metric,

which if you had VC backing and all this money that is pouring at you, which most of us don't have, you wouldn't have to optimize around that because they just want to blitz scale you and take you to the moon. But most of us don't have that. And so what you have to do is figure out a way to get your payback period down to 30 days, ideally.

And the reason I pick 30 days is that 30 days is when most business owners can get interest-free money. Any business can get a credit card for some amount of money. And so that means that you can get the credit card and you can spend that money. And if you can get that money paid back in that first 30 days, then it means that you can always use someone else's money to scale your business. What you have to cover in that first 30 days is two things. One, the cost to get the person, cost to acquire. That's the money you spend in both marketing and sales to acquire the customer. The second thing is the cost to deliver on the thing that you just sold.

Now, if you want to get Super Sayan, which is what I think we're all here to do, if you can do two times that, which means two times the cost to acquire and the cost to deliver of one customer in the first 30 days, then you cover the cost of acquiring and delivering customer one, and then you get free money to go acquire customer two and deliver on customer two. And then that guy brings to more with him. And then that is where you completely deb bottleneck the capital you have from your ability to grow acquisition.

What will happen next, because that's what I have in almost every business I own, is that you have other constraints of the business. You'll have operational constraints. You have talent constraints. You won't have enough people. You want to have enough staff. And then that opens up other doors for problems. But once you crack that piece, I call that client finance acquisition, because it's your clients financing your growth rather than outside investors. And that's Nirvana.

When Jim Launch took the entire gym market by storm, here's how it actually happened. Everybody at the time was running free trials. They were running seven day free, 14 day free, 30 day free, whatever. They can only spend up to X because cash flow, because they had to give 30 days away for free and deliver the service, and then spend the money on marketing and sales to acquire the customers they're negative for the first 30 days, and then get a third of those people to then roll into a membership at 99 bucks a month.

Well, it would take them three months to recoup that initial cost. That's very tough for a small business owner, which in the gym industry, on average, they have 21 days of cash on hand. basically impossible. So we were able to take over that marketplace by simply changing the acquisition model. And what we did was we had a defined end program on the front end that we charged for upfront, $500 or $600, and our cost to acquire customer was $200 or $200. And so we would make back the cost to acquire that customer and the next customer with the $400 left over. And so we were able to fill gyms to full capacity in a month without them having to front the money because they didn't

have the money to front. So even if they had $1,000 to start, we'd make more than $1,000 back in the first few days, and then we'd reinvest that to get even more people, and then reinvest that $5,000 to get another more people. And then over and over again, until the biggest issue that Jim watch, as always had to deal with is gym's getting to full capacity. Because then we got to open up time slots, figure out how we can reconfigure the gym so we can get more people per session, et cetera, et cetera. But because the people who are competing against our gyms could only spend up to $20 a lead, and we could spend up to $100 a lead, we could out-compete them.

And so it was just dollars and cents, even if they had better ads than us, we had a better business. So in my book, and at least my canonical thinking of how to scale advertising, I actually think about scaling paid ads last. And the reason for that is because

you can get your trial and error out of the way in terms of testing your product market fit, getting your offer right, getting your pricing right, getting your sales process right, learning what hooks and messaging works best with the people that you're talking to on the phone hand-to-hand before you run paid ads.

Because when you run paid ads, you're risking real money. Before that, you're just risking time. So I'd rather you risk the thing that you have more of instead of the thing that you have less of when you're starting out. But once you have all that stuff, you will sometimes reach a point where you want to scale faster or maybe required for whatever your business model is. And at that point, you can get into the big game of paid ads where you are risking real money. But you should have enough cash flow from your other advertising methods that you continue to use because you have kept those going so that you can support the losses that you will incur in the beginning of learning paid ads.

And when you play in the big game of paid ads, expect to lose. more times than you win. But when you win, double, triple, quadruple, quintuple, one million fucking percent down on it and scale the hell out of it because that's how you make it back. When you nail the LTGP to Kack ratio, all advertising becomes easy. Because you make so much money per customer. You start building your businesses back to front, which is how we prefer to do it, which is how do we provide more value to our customer than anyone else can so that we can charge more and make more profit than anyone else can. And then put mediocre advertising in front of it, but still out compete everyone else because of our

back end, not our front end. The back end, end informs the front end. It enables the front end. Some of the best advertising in the world are attached to really shitty businesses because they've forced to get really good advertising. But if they got into much better vehicles, which is a common theme I see in Mosy Nation chasing the wrong opportunity, if you got into a much more legit vehicle, you could spend way more and flex those skills you have in a much bigger way. And so if you want to get in the paid ads game, it is the big boys game. It is where you're actually putting real money in. Like if you're doing cold outreach, you're doing more outreach, you're doing affiliates, you're doing referrals,

you're doing any of the other ways you can get customers. You don't really risk a lot of money there. You just risk time and labor from yourself or other people. But when you get in the paid ads game, you're putting real money on the line. You're actually getting into the game in the casino. And so you have to be skilled. But if you know the process, I got to track, I got to expect to lose. And then once I make more money than it costs me to make it, can I enhance it and can I shorten the payback period. If you can do those things, you'll unlock the unlimited money code and very quickly be amazed at how much you can scale.