The Game with Alex Hormozi - The Perfect Business | Ep 281

Episode Date: March 2, 2021

Do you have what it takes to own a “perfect” business? Today, Alex (@AlexHormozi) talks about what the perfect business looks like to him, the factors that contribute to this vision, and shares some characteristics we need in order to get ourselves on the road to this ultimate goal.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:(2:25) - Factors: unique, expensive, and sticky air(6:02) - Markets built on information advantages and inefficiencies(9:45) - Characteristics: risk-averse, long-term thinking, unteachable character(14:58) - Building value, not getting rich quicklyFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Unique, expensive, sticky, air. Welcome to the game where we 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 we have learned along the way. I hope you enjoy and subscribe. What's going on everyone? Happy Tuesday. I hope you guys are pumped for today's podcast slash video. I've been looking forward to this one for a little bit. And if I sound a little bit stuffed up, it's because I have two massive tubes that are like four inches long at each of my nostrils. But that was no reason to not give you guys some sick stuff for business stuff.

And this is mostly just for me too. So anyways, buckle up. Hope you enjoy it. So today what I want to talk about is the perfect business. And so believe it or not, this is actually something I talk a lot about. Not as much publicly, but if we were ever talking person and talk shop about business, I love talking about business models. I love talking about just monetization structures in general, writing a book specific of

monetization structures. So I'm really excited about it. But I just recently finished Berkshire Hathaway University, which is basically the consolidated 30 years of shareholder. Warren Buffett and Charlie Bunger, the co-founders, co-sharvins, etc., of Berkshire Hathaway, they do these yearly shareholder events. And these guys are both billionaires. Now they're both in their high 90s, which is crazy. They've been investing for 50 plus years, investing for 50 plus years. And they've built a, you know, a gilion dollar empire.

I think as of today, it's worth half a trillion, which is just nuts. Their return on capital was 2 million percent. So when they started, where they acquired Berkshire Hathaway, which was a publicly traded company at the time, was a textile company. They, uh, the stock was $19, I believe. Actually, no, they offered to buy Warren Buffett out at $11 to $30. Or $11.50. Anyway, it doesn't mind. Point is, is that it was, it was between $11 and $20.

right? And at this point, that same stock is worth $377,000. All right. So that's a, that's a $20,000 X return. So if you, so his aunt put $10,000 in, it's not worth $200 million. All right. That's how crazy this is. And over, you know, 30 years of shareholder things, there's many times where he gives little nuggets of wisdom of what he's looking at, what he's buying a business or what he what he believes to be valuable businesses. And I was really, it was cool for me because I have always had three main things that I look for in businesses. And in reading his book, or the book that was about his shareholder meetings, I added two to that list.

And so I wanted to share those with you today. All right. And the moniker that I have had for this is, I'm going to share it with you, is unique, expensive, sticky air. And I said there's five or there's four words here. That's okay, because I'm going to show the last one in a second. But unique, expensive sticky air. So what I'm looking for, like, in my mind of what a perfect business is,

it's unique expensive sticky air. And I've explained to each one of these. So unique is something, and I'll even tell you one of the things that he said in his shareholder meeting that I found really just, it was just so short and so like packed that I loved it. he said in response to what is an ideal business in one of the meetings he said something that cost a penny sells for a buck and is habit for me and it was so succinct it's so great and reading some of the other stuff he's got other other things but that

one was three of the five in three sentences right some of that cost a petty sells for a dollar and it's habit for me and I just like it's it's just so great all right so let's let's break this down so something that costs a penny so that would be like air something that cost you almost nothing to make all right uh it's expensive meaning you could sell it for a dollar so it cost you a petty could sell it for a dollar and it's sticky it's habit for me people come back and keep buying it again and again and again right which means very long lifetime values all right that's that's what he's looking at initially now the the unique part is something that if you if you listen to some of his other stuff is he likes to have big competitive moats.

All right. So what's something that's, how can I find air for a petty, sell it for a dollar, that people come back and want to keep breathing and no one else can sell it? So it's unique air, right? It's not air that anyone can sell. It's specific to the, to, it has a brand behind it that no one could copy. It has share of mind. He talks about that a lot, like GEICO.

Every word here probably knows, like you can say 50% or more by switching to GEICO. You've heard that. because he 10xed their advertising budget as soon as he bought the whole thing and just had them go on a massive rampage so that they could take over my chair and GEICO has grown proportionally. And so this is four of those features, right? Unique, expensive, sticky air, something you could make for a penny, sells for a dollar, is habit-forming that no one else can replicate.

And for me, this is just so cool. And I'll talk about a couple of the features of this in a second. You know what, I'll talk about it now. So one thing that you'll notice, and this is for all the newer entrepreneurs, or you don't really, fuck it, any entrepreneur who's interested in this kind of thing, notice the gross margins he's talking about, right? A lot of people, quote, feel bad for charging for things that don't cost them much, which is a terrible mindset to have. You charge what the market will give you, right? So if, for example, you know, you find these widgets like these pens and you know that you get,

them from some place in China that cost you a dollar. If someone's willing to give you $100 for it, do you feel bad? Taking it. You're like, well, if only they do. Markets are built on information advantages, information inefficiencies, meaning one person, the seller knows more than the buyer. That's how these things work a lot, right? And so I notice this because, you know, you're listening to one of the best investors of all time, if not the best investor of all time. And he looks for, were like a hundred to one right cost of penny sells for a dollar a hundred to one it costs one penny one percent cost of goods compared to what it's being sold for so ninety nine percent gross margins that for me was actually very very interesting

is that he he doesn't go for like an eighty percent or a ninety percent he goes for ninety nine percent and for perspective the difference between selling something for a dollar that cost you ten cents versus selling something for a dollar that cost you penny is not that you know it's it's just nine percent more profitable to sell some you know sell a dollar that cost a penny versus a dollar that costs a dime it's actually 10 times more profitable and here's here's why I'm going to explain this is that for one unit of cost the penny one could sell 10 times the amount for that one cost so does that make sense so if I were to sell 10 pennies worth of my cost it means I make $10 whereas

10 pennies worth of the other example of a dive is only $1. And that's one of the things of people don't understand about margins, right? The gross margin of the product that you have, like every increment, when you go from, when you go from 90 to 95% gross margins in a business, you doubled the profitability of the business. That's what's crazy. Hey guys, real quick, if you're new to the podcast, I have a book on Amazon called 100 million dollars that over 8,000 5-star reviews and it has almost a perfect sport.

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 gift to our community. So it's my very shameless way of trying to get you to like me more. And ultimately make more dollars to 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. Right. And so that's why this is so important. And right now, if you try, for example, look at your prices right now. And say, I would have to get to, if you're at 90 and you say, I would. to get to 95% gross margins. Now let's say it costs you, right? Let's say it costs you $10, right, for your thing, right? And you sell for 100. That's 90% gross margins. So $90 is margin for you, $10 is cost, you sell for $100. All right. So if you wanted to get to 95% gross margins,

what do you think you do? Would you add $5 to be 105? No, that's not math. To get to 95% gross margins, you'd have to sell the same $10 thing for $200. That's what people don't get about margins, right? And so when we would turn gyms around and whatnot, I would have guys who are at 66% margins. That's usually where most people are, and that's horrible, by the way. And I would say, we need to get you to 80.

And they would see 66 to 80. Ah, only 14%. Only 14%. You just saw me double the price from 100 to 200 to get 5. Right? And so that's how important these margins are. And so to hear this man say, I want something that I can create for a penny, sell for a dollar, that's habit form. We get people keep buying over and over again for the rest of their lives.

And that no one else can buy because it's unique, right? That was pretty cool. And so these are the four head of components of the business itself. But the last thing that Buffett talks about, and he talks about this a lot. So I'm going to draw a little dotted line here. Is the person who is running it. All right. And he has three characteristics that I saw him repeat over and over again.

for the management or the operators, all right? And they have such a brilliant model of managing, right? Because Berkshire only has like 19 employees or something like that. So like stupid. They have a gazillion. They did 88 billion in profits last year. Think about that. 88 billion.

The second most profit in the entire world with like a 20-person company because they're so good at abdicating responsibility, just basically delegating out responsibility to the businesses that they bought. Now, he turns out a lot of deals. But what he looks for in operators, and this is why I think this is, cool is that what he looks for in operators, we can look for it ourselves. We can create that ourselves as entrepreneurs, right? We could think, how can I embody these characteristics? All right? And so

the first of these characteristics is he says, I want somebody who's risk averse, right? Because he said many times anything's time zero is zero. He's like, you can have 30 years of a great track record and make one bet that goes to zero and lose it all. And that is why he's so risk averse. And I had a mentor who told me something once that I just loved. He said, Alex, you should only have to get rich once. And for some reason, that just like, that hit different, you should only have to get rich once. And so, and the smartest best of the world feels that way too.

You should be risk-averse. He's like, I give up bigger opportunities all day long to cover my downside. And the richest people in the world, I'm telling you this right now. If you don't have access to people who are worth $100 billion, a billion, I do, and I will tell you how they think. right it's all about downside risk mitigation they will give up they will give up huge returns to not risk losing money and the funny thing is that poor people think the exact opposite they go for the lottery they have basically 100% guaranteed downside right one and 300 million of winning and

they do it all the time right and one of the things that buff says is like if you if you if you if you bet poorly small you'll bet poorly big which I love that too right So anyways, number one management is risk averse. If we think about ourselves, how can I be more risk-averse? How can I make sure that I can't lose? It's much more important to not lose than it is to win. And what's interesting is that if you don't lose long enough, you kind of win by default, which is kind of interesting.

Which brings me to the second point, which is long-term thinking. So the reason that they like family-owned business specifically is that families think about generations. They think about passing it down between, you know, father and son, parents, and kids, right? And they like those businesses because they don't cut quarters. They think about quality. They think about long-term investment, long-term competitive strategy. They're not thinking about quarterly earnings and, you know, and basically short-term gratification, which is what most of the stock market companies are forced to do because they have to pander to stockholders, right? And so if you can't, I've talked about this to my other podcasts, shifting from CEO to investor,

But one of the most beneficial things that I have done for my mental health and for the success of my business is thinking in a long-term time horizon. And I can't tell you that, I'll tell you that of the people that I encounter, the longer their time horizon that they talk in, the wealthier, more successful they are, invariably. So when I talk to somebody and all they're thinking about is this week and the next two weeks payroll and what they're going to make this month and last month, I already know that they don't make a ton. And it's because that's only thinking, right? And then they can get from there, you get the slightly higher level entrepreneurs. They're thinking in quarters. Okay, this quarter. This quarter, we can't focus anything.

This quarter is all we got. This is all we can do, right? And that's fine, because the smaller you are, the less stable you are. It's more volatile, right? But over time, as you expand those horizons, right? You'll be able to make better and better decisions because you'll start thinking, well, if I did this for five straight years, would it be reasonable that I would win? Probably, right?

If I do this consistently for five years, do I think that it would be unreasonable that I won't be able to be far past by my goal, probably, right? But most people still think in these tiny chunks of time and can never get ahead. And they spend month after month after month for 30 years trying to become millionaires rather than just set a goal of like, well, let me just see if I could increase by income by $20,000 in the next year, right? And then next year after that, I'll try and increase it by another $20,000. And they do that by, you know, and in five years, you have the top 1% income. But only 99% of people don't think that way, which is why only 1% do. anyways number one for the management is that they're a risk averse they will take they will take the

loss they will not take the opportunity to avoid the loss number two they think of long-term horizons right and number three they have unimpeachable character which i just really like that as a word unimpeachable character and if you uh if you listen to war talk about uh about about about losing money He said, if you lose money, that will be forgiven. He said, but if you lose me a shred of reputation, I will be ruthless. And he's so big on this. And I think that's, you know, these kind of three things come together. People who have unimpeachable character are not trying to get rich quick, right?

They're trying to build something of value. They're trying to build something that's enduring, something that's long term. And they're honest. And so what happens, though, is that when you have an unimpeachable character, it's actually intangible that has compounding returns. And I'll explain what I mean about that. But he talks about it for his own business. He's like, the fact that our check's always clear that we do what we say we're going to do allow us to get access to more deals because more people want to work with us, right? And we close deals faster. And so the thing is, is that your reputation over time becomes a

competitive advantage. And that's what a, what's a unique. That's a sustainable and compounding competitive advantage because someone who's stuck with their word for 10 years compared to somebody stuck with their word for 30 years whose word is worth more the 30 year guy someone who's stuck with you know who's done everything and but unapenable character for 30 years compared to a guy's done it for 60 years who has the stronger word the 60 year guy it's something that if you can develop it literally compounds with time and it's and it's in his opinion priceless and I think he's a very good valuer of things and so anyways the perfect business model I'll give you a quick recap it's expensive sticky year that's managed by somebody who's risk averse long-term

thinking and has unapenchable character all right so something that you can create for a penny sell for a buck that's habit-forming that no one else can do and you do it in such a way that you don't take short-term risks you think long-term in terms of how you're gonna invest in the business and the legacy and building something of value and not not obsessed with short-term volatility but for a long-term earning and finally that you do it it in such a way that people will think everything that this man has done has been fairly earned and wisely used. And so with that, I will leave you with the perfect business. I hope you enjoyed

this. So we felt as valuable. This is one of my favorite things to talk about and keep being awesome. And if you're in the arena, keep getting up. I promise you will be better over time. Lots of love. I'll kiss you guys soon. Bye.