The Game with Alex Hormozi - The Simple Exercise You Can Do TODAY, to Find Your Biggest Opportunity for Growth | Ep 276

Episode Date: February 11, 2021

Two words: Lifetime Value. Today, Alex (@AlexHormozi) breaks down a simple exercise that will help you find where you should be placing your energy on in order for you to open more opportunities for growth in your business.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:(1:03) - 2 ways to grow a business: Acquisition & sub-factors(3:45) - Business growth through customer LTV increase(6:54) - 5 ways to increase backend: price, cost, resells, cross-sells, upsells(11:08) - Exercise goal: clarity, not overwhelm, for business growthFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

What are the simplest ways? What are the simplest of these levers, the highest likelihood levers that I have, and then doing this on a consistent basis and expanding the time horizon so that the likelihood that you actually achieve the result approaches 100%. 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? Got a very special presentation for you today.

What I want to talk to you about is something that I've been working on a lot more recently, is helping businesses go from a million dollars a year to $2 million a month. And I've now been having, you know, these conversations regularly with the entrepreneurs who are doing, you know, between one and five-ish, and they're trying to get to, you know, one and then two, three million dollars a month and beyond. And I wanted to give you kind of an expansion on the framework that I think I've talked about before where people come out, they pay about $50,000 for a day of consulting and I walk them through kind of the ways to grow a business, right?

And so we basically spot check and figure out where we feel like the biggest lever or opportunity is and we go all in on that all right and so fundamentally the ways to grow a business there are only two and then within those two there are subsets obviously right so one is you can increase acquisition which is getting more customers right selling more units and I've talked about in other videos how to do this but there are six ways to do this one is through paid advertising which everyone automatically defaults is the only way, right? The next is through earned media, which is like right now, as you're listening to this, this is earned, right?

Third is owned, right, which is going to lists that you have. Fourth is through partners or affiliates. That's like if you have another company that serves your types of clients, but in a different way, you might partner together and refer clients. Number five is client referrals, as in your own client, sending other business to you, which if we feel like that's an opportunity, that maybe we create a really, you know, aggressive referral program. And then finally, manual outbound.

Okay. So those are the six ways, right? And then obviously within those, there's, you know, endless amounts of subcategories, right? Within, you know, manual inbound, you could have cold, colon, cold email, cold messaging, and things of that nature. And you could do that across different platforms called Messenger or on Instagram, called Messenger. Facebook call message or on LinkedIn, right? All of those are tactics, but this is the strategy,

right? Referrals would be referral systems like Dropbox had, you know, refer a friend. You could pay them, you could give them percentage off, you can give them bonuses or give them swag or give the extra services that they would normally be able to have. Partners, how can we create an incentive program where we can pay you for continuity, we can pay you per deal, or, you know, how can we integrate ourselves into your business so that we're just the second step or third step of your client journey? Owned, this is the lists that you have absolute access to that no one can touch or remove from you, right? Like if I own an email list or I own a phone number, then that is something that I own that I can always use to get more customers with.

Earned is the platforms that choose to distribute our content information because we provide value to the users, right? So like if you're getting value from this, then the platform says we're going to display this to more people. And then maybe at some point in the future, you'd be like, hey, Alex, you know, I'd love to have you help me go from a million a year to a million a month, et cetera, right? And then finally, there's paid, right? And then within paid, there's obviously a million subcategories, you could go GDN, you could go Tabula, you could go, you could go Facebook ads, Instagram ads, and YouTube ads, and pre-roll and, you know, like search and the million other ways that you can use those.

But fundamentally, these are the categories. All right. Now, the backside of the business is increase customer LTV, right? Now, I'm going to define this really quickly because everyone kind of understands increasing the number of units. That seems straightforward, right? Like if you get more customers, it's just like, what's the customer? somebody who starts pay you, right? Increasing acquisition people seem to understand.

Increasing LTV seems to be significantly more amorphous, right? It's something that's less understood. And one of the difficulties is that the term itself is usually poorly defined. All right, and I'll give you an example. So if I had a meal prep business, for example, and let's say it cost me $9 to create and deliver a meal to a customer that's shipped, all right, to the door. And let's say I charge $10 for that meal, right? And let's say the average person buys 10 meals a week, that's $100 a week, and, you know, per month that's $400 a month. Just using rough math here, right?

And let's say the average person stays with me for, I'll just use 10 weeks because it's 10 times 100, so 1,000. All right. So someone on my marketing department might be like, hey, dude, we're spending $200 to get a $1,000 customer. This is awesome. Let's crank up the ad spend, right? Because the $1,000 LTV, when in reality, the LTV,

of that customer is not $1,000. What is it? Think about it for yourself for a second. It's $100. Why? Because my gross margin, what I'm actually making on the sale minus cost of goods is a dollar on a $10 purchase, right? It cost me nine, all in, and I make a buck, right? And so I'm making $100 over the span of the lifetime store because $100 a week times 10 weeks is $1,000. So I'm making $100 bucks in total gross margin per customer. So if it costs me $200 to make $100, I'm literally just losing $100 in every customer I require. That's not a good play. And so the delineation, the thing that needs to be peeled off here is what is the gross margin over the lifespan of the customer?

That is what true lifetime value is. The problem is that some of the writings on this, a lot of the writings are on this topic, talk about software companies. And typically the gross margins on software are close to 100%, which is why there's some of the biggest companies out there. And so they just kind of assume that the revenue that someone's going to create is going to be close to or basically interchangeable with the gross margin over life span. So they use this interchangeably. But it's not true for most of us who don't sell software, right? Who don't sell air. And so if you have hard costs of goods, then it has to be the gross margin over the lifespan of the customer.

That is what lifetime value is. I might even redefine it as LTGP, which is lifetime gross profit. All right? Real quick, guys. if you can think about how you found this podcast, somebody probably tweeted it, told you about it, shared it on Instagram or something like that. The only way this grows is through word of mouth. And so I don't run ads. I don't do sponsorships. I don't sell anything. My only ask is that you continue to pay it forward to whoever showed you or however you found out about this podcast

that you do the exact same thing. So if it was a review, if it was a post, if you do that, it would mean the world to me and you'll throw some good karma out there for another entrepreneur. Now, I have talked about this in the past that there are three ways, sorry, two ways that you can increase the backend, right? You can get them to buy more times. You can get them to cross-ups. But after doing kind of a more deep dive on this, tactically, here are the five ways,

and each one of these ways, just like the acquisition, you can increase on a business. Number one is you can increase the price. Very simply. You do the same exact thing, but you charge more. That increases the lifetime gross profit on a customer. The second is you can decrease the cost. So this is one that a lot of people overlook.

If I can figure out a way either through technology to decrease my cost of goods, so let's say with that meal example, let's say I figure out a new way to ship it and I can decrease the weight or I don't have to put as much ice in the box, then my cost goes down so my gross margin goes up. That does grow the business. I make more money and it allows me to spend more money in acquisition, et cetera. So decreasing cost or figuring out a way to fulfill the same thing with a lower cost would be an improvement in the business. The next three are related. They're cousins of one another. Number three would be reselling. So that's within the context of like a recurring business.

Like if someone buys monthly membership, they're basically getting resold over and over and over again. So that gets into churn, increasing activation, all that kind of stuff. And so that's where you get the increasing LTV based on resale slash retention. All right. The fourth is through cross-sells. All right, this is where you're selling someone something else that they also need. All right.

So this can be done in two ways. One is you can have another business. Like an example of that within one of our companies is that we have gym lords, right, which is our gym company, right, gym launch, and our community's gym lords. And then Prestige Labs is the supplement company that's specifically made for gyms because a lot of gyms, like there's a lot of things that normal supplement companies don't do that we specifically designed it for gyms to solve a problem. And so as a result of that, if they choose to sell our supplement line, that is a kind of a soft cross-sell. We're not actually selling them, but they're

choosing to sell our products. So it's another revenue stream for the business. That's a, that's an example of me owning another way to increase lifetime value. A different way would be, let's say, ClickFunnels, right? That's a software that a lot of our gyms use. And so we're an affiliate of ClickFunnels. And so in that, we get a certain percentage back from ClickFunnels for referring customers to them. So the flip side is that we are partners of another business, and so we have integrated them into our business, and then we get paid for that. I don't want to create a landing page software. This is not within my core. And so as a result of that, I will find the best one, and then I can recommend it and get commission as a result of that.

So that, again, increases lifetime value. And then finally, you've got upsells. All right. And I like to delineate this because you think differently about each of these things, right? This is someone's buying the same thing more times. This one's buying with an upsell, someone's buying a better version of the thing. So this is, think about this as more premium or upgrading, and this is buying again. All right? And so each of these five ways increases the lifetime value of the customer. And obviously there's a meal, I can write a whole book on pricing. you know, there's a hundred ways to decrease cost for a product or cost of delivering service. Entire books on churn and activation and onboarding and all that kind of stuff to decrease

the likelihood someone's going to leave, increase likelihood they continue to stay with you again and again. Cross sales looking at all of the different things that a customer who's going to work with you may eventually buy as a result of doing business with you and seeing which of these things would I potentially want to create, which of these things would I would potentially want to buy, and then which one of these things would I potentially want to just partner with? And if you're earlier on, I would definitely recommend doing more partnering and less building because then you probably have too many companies and it's a nightmare. All right. So, and then finally, okay, how can I identify customers who are more likely to want to have a higher level of service

and then ascend them into that? And so when I'm looking at a business that we're trying to take from a million dollars a year to a million dollars a month or multiple million dollars a month, this is my framework. This is what I'm looking at to answer the, questions and then figure out where do I feel like where they're at if I'm rating these, where do I see the biggest opportunity, the lowest hanging fruit that has the highest likelihood of success for that business so that we can achieve it. And typically when we go through this entire process, I might just say, all right, we're just going to do this. That's it. Because at

the end of the day, if you're trying to grow your business, the point of doing an exercise like this is not to feel overwhelmed, but to feel clarity. You should feel calmer after doing this exercise and focused on exactly what needs to happen in your business in order to grow it. And so fundamentally, two ways to grow, get more customers, make them worth more. And then within getting more customers, there's six different sources of getting customers. And then within each of those sources, zillions of tactics around that. And then within lifetime value, you can increase the price. You can decrease the cost for you, so you increase your margin. You can resell these people over and over again or retain them longer.

You can cross sell them or have some affiliations with businesses that they're going to do business with as a result of working with you. And then finally, figuring out ways that you can ascend them into higher levels of service. All right. And so looking at the entire business to think, what are the simplest ways, what are the simplest of these levers, the highest likelihood levers that I have, and then doing this on a consistent basis and expanding the time price and so that the likelihood that you actually achieve the result approaches 100%.

And that is the process. that I am now doing with the companies that we're working with that are doing, you know, a million, two million, three million, sometimes five million a year, that are trying to get to a million a month, two million a month, four million a month, et cetera. So anyways, hope that was valid before. I hope that made sense. And yeah, keep being awesome. Lots of love. Subscribe, like, all that stuff. All right. Bye.