The Game with Alex Hormozi - The Value Equation - How To Reverse Engineer Pricing | Ep 181

Episode Date: February 18, 2020

"The more I see the big companies (…) all I keep seeing is how they focus on removing barriers, on how they focus on removing friction" Today, Alex (@AlexHormozi) discusses the value equation and how to increase the perceived value of a product or service by decreasing the obstacles and friction that a prospect has to go through to achieve the desired outcome. He emphasizes the importance of focusing on the bottom side of the equation and removing pain and decreasing the bottom line for customers to increase the value of the product or service.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:(1:05) - Value equation has four pieces.(2:23) - Detractors: delay, pull away from value charged. Actual time/effort.(4:52) - Examples: Xanax vs meditation and Netflix.(8:00) - Decrease time and effort to increase value.(11:39) - Real value is removing pain, decreasing bottom side.(15:04) - Differentiate value and squeeze time to win and keep customers.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

All right. So what I want to show you is how to reverse engineer pricing, A, and B, how you can look at how to provide more value outside of the box. 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. Hey, what's going, everyone? I hope you guys are having an awesome, a terrific Tuesday in your week. I wanted to talk about a topic that, honestly, in almost every time I have some sort of consulting day or coaching one-on-one, especially with higher-level business owners, you know, doing five, 10 million a year plus, this just inevitably gets brought up. And so I wanted to dive into this a little bit more for those you don't know what the

value equation is. It's something that I have not seen anywhere else. And so this is just kind of like how I view and how I put it together. and it really works well. All right. So what I want to show you is how to reverse engineer pricing, A, and B, how you can look at how to provide more value outside of the box. Okay.

So the value equation has four pieces to it, all right? Two on the top part of the equation, two on the bottom part of the equation. All right. The top part of the equation is two pieces. One is perceived outcome. All right? So this is the plus side. This is the big part.

So if this were an equation, this is what's going to generate the upside, right? So the perceived outcome that a prospect has of what they think is. they're going to achieve by buying your service, information, product, whatever, right? And so it's like for fitness, or I'll tell you all four and then I'll give you different examples, all right? So that would be the perceived outcome. All right? And fitness would be energy, looks sexy, feel good, great body, right? The second part of the top of the equation is the likelihood of actually achieving that, right? So that's whether the prospect believes that they're going to achieve this outcome. All right. So that's where a lot of times we as marketers, et cetera,

salespeople is we try and add in lots of social proof to increase someone's conviction and therefore charge of higher price get more value right i would say the first half of my career probably more than that the first 70% of my career are focused on the top part of the equation all right which is big perceived outcome lots of increasing likelihood of success of achieving the outcome right that that should be it right but it turns out there's actually two two more pieces of the equation right you have the bottom mouth, this is the detractors. These are the things that pull away from the value or the price that you're able to charge. So the first part of the detractor is the delay. So that's the amount of time between when they give you money and when they're actually going to experience

the perceived outcome when they think they're going to actually achieve it. Right. So let me give you just two different examples. An example there would be like fitness, right? You sell someone on a transformation program, whatever. Realistically, we know and they know that it's going to take them six months, 12 months to really achieve the look that they actually want. And maybe even then, they still haven't achieved it. So massive time delay, right? And so that's number one on the detractor side. Yeah, imagine if they could, they could pay and you snap your fingers and they have the, they have the body they want right in front of you. Do you think you'd be able to charge more? Hell yeah, right? Now, the third, sorry, the fourth piece of the equation, so the second detractor

from the equation is the actual, the effort that they have to put in. And you can put time, and effort in there because time as a function of how much effort they have to put in, not time is a delay. And so in a fitness example, it would be, all right, you can't eat the foods you want, you have to wake up early, you have to be sore, you can't eat with your family anymore, right? These are all the things that they have to, these are the sacrifices that they have to put forth in order to achieve the pursuit outcome, right? Now, so if we're looking at this equation and we're looking at it with a fitness example,

right? I'll go through all four real quick, just as a recap. Perceived outcome, big, sexy, feel good bikini, right? likelihood of success, let's be real, kind of low, right? Do we really think that they're going to achieve the big bikini? We're going to try and get them pumped up, but we also know what percentage of people fall off, right?

And what percentage of people actually make it all the way there? Very, very slim. And they know that too. We're trying to delay their disbelief during a sale, but the reality is that a lot of people don't succeed, right? Now, detractor, it's going to take months and months and months, so that's a negative. And then how much effort?

They have to give up all their time and effort and change their entire lives, right? Which is why for fitness, for example, people don't go onto websites and one-click order a $2,000, $3,000 personal training package. Could you imagine if that were actually how it worked? It doesn't work that way. And that's why we have to spend 60 minutes arm wrestling someone to get them to take the decision to change their life. Because we only have one of the four value pillars in our corner, which is just that we have a really good perceived outcome. We're going to change your life.

We're going to transform how you look, how you feel your energy, you sleep, you know, everything, right? but the rest of the four are not that good right now i want to give you two examples and i'm going to talk about how we can use this to increase value for you and kind of where i've kind of evolved in terms of how my thinking around it so i'm going to give you a different example than fitness right let me give you an example around uh relaxation all right so same perceived dot com is increased subjective well-being increased happiness increased feel good feelings right so that's your perceived outcome let's say we're going to use meditation all right so that would be your that would be the vehicle that we're using here. Perceived outcome is chill, chill, great feelings. The likelihood

of achieving meditation probably pretty low, right? Because let's be real, people are really distracted. You have to learn how to do it. You have to sit cross-late. Like, there's effort and skill that has to go into it, right? Time delay, it might take you 60 days before you actually get good at it. Right. It might take you time to get there. And then the last piece is the effort is sacrifice. Feeling stupid, feeling you can't focus, constantly, you know, failing at doing this. All right. And so in this equation, you have like one big bonus, one good one, and then maybe like a half on the likelihood of achieving it. Time delay might be, you know, 30, 60 days, so it's less than fitness, right? But overall, not huge value, right? And that's why meditation is not like a massive industry. It's not like as big as weight loss. You know what I mean? It's just like it's so, so value. Now, what I want to show you is how if you change three of these other pieces but you keep the perceived outcome the same, how you can massively increase.

the value of the product, right? So same perceived outcome, chill, relaxed feelings, right? Now, let's say we're using Xanax as our product, all right? Likelihood of achievement, right? Second part of the equation, sky high, right? How confident do I feel that I'm going to feel chill and feel good after I take Xanax? Virtually 100%. Right?

What's my time delay? 15, 30 minutes? I mean, maybe 10 minutes if you mainline it. I'm just kidding. But short, right? I don't have to wait a long time for that to happen. And then what is my, what is my, my sacrifice, the effort I have to put forth? Nothing.

I swallow pill, you know, I drink some water. That's it. And so what's the difference, right, between meditation and Xanax. It's the same perceived outcome, right? But one of them is a gazillion dollar, you know, pharmaceutical brand. And the other one is something that there's really no, like, main players in the meditation. You know what I mean? Like, there's no huge economic boom in the meditation space.

Right? There's just not. And it's because of this value equation. So let me, um, let me tell you about what I've been thinking about a lot more recently. So I'd say the first three quarters of the time that I was in business, I focused much more on the top side of the equation. I focused all my attention on how can I increase the perceived value of the service that I'm providing. How can I increase the likelihood that they're perceived likelihood of achieving the outcome, right? That's why we have tons of social proof. We have, you know, big like let's see what gym lunch, right? I'm going to get you to increase your, you know, revenue by 200. $140,000 in your top line. Here's our average revenue per gym. Look at the thousand testimonials we have, right? All of my focuses up here, right? And now when I talk to people who make a lot more money than me and who are a lot smarter than I am, I noticed that a lot of them focus on the bottom side of the equation more. And so let me give you a tiny math example, and then I'll show you how powerful this is. So let's say you have something that's a small perceived outcome, right? A small big top part of the equation. But I make the bottom side virtually zero. So I make the time delay almost instantaneous and I make the effort and sacrifice almost zero.

So here's an example of that. Netflix did not change what we consumed, right? They didn't change movies. They didn't change the TV shows. In fact, they just put the same shows we were already watching. But all they did was they made it instantaneous, right? And we had virtually no effort. We didn't have to get up to the store. We didn't have to go to Blockbuster. We didn't have to get in our car. We didn't have to peruse the whole. Like we didn't have to do any of that, right? We could just click it from our phone even. And instantly see. seamlessly consume the things that we were already consuming. So they didn't change the top side of the equation.

They changed the bottom side, right? And so when I'm thinking about what we're looking at in our business, all of my effort has really been put far more towards on the service side. How can I decrease the time and effort for someone to achieve the outcome? How can I decrease the amount of time it takes them to achieve an outcome? And by doing that, you can increase activation, increase lifetime value, et cetera, But it overall increases the value of the service or the product that you have. And so if you think about like Alan, which is coming out this Friday for our Jimler community,

by the way, because I get asked about this all the time, I'm just an investor in the business. I think it's an amazing product. I've helped in the formulation of it. I'm not the sole owner, all right? But I think it's awesome. And so it's a really big undertaking. It wouldn't just be me. So anyways, what Alan does, it's a software that works leads, all right?

And so let's go through the value equation. Real quick, guys, you guys already know that I don't run any ads on this and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the words so we can out more entrepreneurs, make more money, feed their families, make better products and have better experiences for their employees and customers. And the only way we do that is if you can rate and review and share this podcast. So the single thing that I ask you do is you can just leave a review. It'll take you 10 seconds or one type of the thumb. It would mean the absolute world to me. And more importantly, it may change the world for someone else.

So the value is leads come in the door, right? That's great. I get two or three X my throughput. All right. Awesome. Right? What's my, shoot, what's the second part of the equation? I'm forgetting.

Spot a part of the equation. What's the time to like? It's immediate, right? Like as soon as you hook it up, you don't have to do that anymore. Right? And then the effort and sacrifice. What it does is it removes all of the effort and all of the sacrifice that is typically customary with working leads.

Right? And a lot of that comes from the interruption cost, right? It's not that, like, because on average, it takes about an hour to work lead end-to-end if you worked it fully for 30 to 60 days if you were to do it the right way, right? Right is no one does that. Most people don't do it, okay? But beyond that, the biggest cost is that the moment you get a lead, it becomes a 10 out of 10 priority in your life because you could be writing an invoice, you could be doing a contract,

you'd be writing on meal plans, you could be talking to your customer. Whatever it is, it immediately takes your attention and becomes priority number one, or it should be, right? because you have a hot lead that's right there. And so what it does is it's the cost of switching tasks. And so if you do, and they've done tons of research on this, if you have two tasks that you have to do, task A and task B,

and it takes you 10 units of time to do each, right? If you were asked to do both of them together, it would not take 20 units of time. It takes 70 or 90 units of time, depending on the person, simply by asking them to do both at the same time. And us as business owners, what we end up doing is working all day

and getting nothing done because we're constantly switching between tasks. And so the primary cost of something like an interruption-based issue like working leads, phone calls, etc., is that it destroys the productivity of the person during the day, right? It's also impossible to manage someone else, especially at the pay rate that you usually have to pay someone to do that for them to do a sustainable job. And make sure that for every single week for the rest of the year, you always have sufficient lead flow for them because, God forbid, you have somebody who's supposed to work leads and you're not running your campaign right now. And this person is literally just dragging overhead and providing no value. All right. And so my effort now, and even the same thing on the done for you meal side, has been, how can I make things seamless?

Right. Like, I haven't changed food. Right. Like, you know, I mean, the brisket's great. Don't get me wrong. The food tastes great. It's amazingly well packaged. All of that stuff, right?

It's non-GMO, et cetera. But the real value comes from the pack that it removes pain. It decreases the bottom side of the equation. And if you think big picture about how you can. provide value, there's a lot of opportunity, like most everyone focuses on the top side, myself included of the equation. Let me promise more, promise bigger, tell people how they're like, you know, guarantee, like all this stuff, right, where we're trying to increase their, their perceived likelihood of achieving the outcome, right? Those two top sides of the equation.

But the more I see the big companies, the billion dollar, the $10 billion companies, all I keep seeing is how they focus on removing barriers, on how they focus on, how they focus on, removing friction from the experience of a customer like Amazon like they've just made it so seamless for you to purchase something with one click on a whim that by doing so they've created more value than basically any other company out there right it's not they even didn't even change what we're buying they didn't they literally didn't change what anyone was buying they just changed how easy it was for us to do it and so when I think about Jim launch and I think about how we can provide more value right now all of my focus is how can I get people how to

How can I shrink the timeline that I can get someone a result? And how can I get them to do fewer things, consume fewer videos, obtain fewer skills to achieve the result? And if you can you frame this with any business, if you're doing weight loss, if you're like, okay, how little can I get them to do? How few skills can get them to acquire? Okay, can I take care of their meals for them? All right, that's done. When they show up, how can I get it so they don't have to think about anything when they're here. They don't have to ask the instructor again how to do X, Y, Z.

Like, maybe even not show up to the gym if you're running a hybrid model. Like, how can I remove the obstacles that create friction and create pain for a prospect? When you do that, then you can increase the value and the price, ironically. And so this is where it gets kind of interesting because if you look at a math equation, it doesn't matter what you have on the top side of the equation, but if you divide it by zero, it's infinity, right? Anything divided by zero is infinite. If you guys know that from math class, from eighth grade math.

And so for me, that's been really profound because getting the top side to infinity, is really, really hard, but focusing on decreasing the obstacles and the friction that a prospect has to go through gives you a very tangible way to provide value by removing pain and removing friction. And so it's been one of the things that when I'm talking to, you know, higher level, you know, whatever business owners, it's like right now you have too much friction. Right now it takes too many things for your customers to be successful, right? And so part of the reason that it took so long for us to get Allen out was because we had to streamline the onboarding process for the people we're going to be coming in, right, so that we can standardize

the variables that we've now identified. There's a ton of variables that affect show rates, which are mind-blowing. But how can we standardize that process so that it becomes seamless for this person so that once they're done their onboarding experience, and we know this, that there's only 14 days. If someone sticks with Allen for 14 days, and that's just because it takes 14 days to ramp off, right? If someone passes the 14-day mark, they step. They don't leave, because they never want to work leads again, right? But it's that 14 day period where we have to remove as much friction as we possibly can to increase the value of what they're receiving. All right.

And so anyways, that's where all of my focus has been as CEO. And I just wanted to share that with you guys. So maybe as a different way to potentially consider providing value or even explaining value to a prospect, sometimes everyone promises the same things. You know what I mean? Like if you look at the gym space, right? There's a zillion people who promise the same things. I'll fill your gym.

I'll make you more money. You'll work less. Blah, blah, blah, blah. Right? Same promises. Right. Now, everybody's got testimonials, right? Some of us have more, but everybody's got testimonials, right? So then what other ways can you differentiate value? And I think one of the biggest opportunities, especially in the service space, because most people don't think this way, is looking at the bottom side of the equation because there's a ton of opportunity there. And that's ultimately what, you know what, I'm going to, I'll tell you a fun little side of the head story. So I had a, I had a business owner who actually sells the gym owners. All right. So he, most people would see like, this is a competitor of yours, right? And they do about 300,000 a month. And good guy.

You know what I mean? And so for everyone who's worried about the small ocean or whatever, like, just don't, don't be stupid. You know what I mean? Like, I'm helping this guy who's supposedly soliciting my members, right? And within the first, you know, hour, I was able to get him to basically admit he's like my product isn't as good, right? And I was like, I know that.

But I'm glad that you've said that. Right. And fundamentally, his cost of acquisition was the same. as ours was. All right. So our cost of acquisition, his sales and marketing was fine,

right? It was the same as ours. The difference was the lifetime value of a customer in his business was $8,300. The lifetime value of customer in our business was $42,000. That was the difference.

We made more per customer because we keep people longer and we keep them making money longer. And a lot of that comes from how can we squeeze the time that it gets someone to win? How few things can we get them to do to still have this great result?

Reality is that most people don't do, most people don't even fucking consume the legacy portal. Like 90% of people who buy our stuff don't even consume all the videos. If I'm going to consume 25% of the stuff and actually act on it, they win and they're in for ever. And so that is everything like whenever we make a new like Jim Lach Portal update, we try and make it shorter, not longer. We don't try and add videos. We try to take away videos. How can we increase people's, we decrease the friction and increase their speed to money? Because if we can work on the bottom side of the equation, the promise, which is always the same,

the overall value of the product will go up. And so that is where all our focus as a team on. That's where all of my attention goes as a CEO. And it also gives you an amazing differentiator for you to focus on how you can provide value, but also how you can explain the value that you provide to your prospects and your marketplace differently is by focusing on the friction and the obstacles that you remove rather than yet again making a huge promise like everyone else does because they're not original.