The Game with Alex Hormozi - You Need to Understand this if You Want Your Business to Scale | Ep 716

Episode Date: July 10, 2024

"If you want to build an asset that makes you generationally wealthy, this is for you." In this episode, Alex (@AlexHormozi) shares that for most businesses that he's started and worked with, there's a core value driver that must be understood in order to truly scale. And if the entrepreneur does NOT work on this and instead gets distracted on other problems, they won't grow as quickly.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:(5:30) - What Business?(7:50) - Supplement Example(9:30) - Paired Incentives(15:00) - What is solving the problem worth?(16:00) - The Woman in the Red Dress(20:00) - Every Business Has Shit(26:30) - Marry Your BusinessFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

I started and sold a software company, started and sold a gym licensing business, started and sold a supplement company and six other businesses over the last 13 years. The vast majority of businesses that I talk to, the entrepreneurs think they're in one business, but they're actually in another. By only being able to solve one set of problems, they continue to jump from business to business to business rather than realize that there's one big problem, the business they're actually in that unlocks all the enterprise value that gets it to the next level. But if you want to make a big business, you want to build an asset,

things to make you generationally wealthy, this is for you. I have made the mistake in almost every business that I've been in, in thinking I was getting into one business when in reality I was getting into a very different business. And discovering the real business that you're actually in is what will unlock the amount of growth and moneymaking that you really want to get into. It's usually the second and third level of entrepreneurship within whatever opportunity of you you're pursuing. So let me give you example to kind of make this real.

When I got into the gym business, I liked fitness. And so I thought that the business was going to be about like, macros and results and workouts and all of that. That's what I thought the business was going to be about. But once I got into the business, I realized it was actually just about marketing and sales. That specific business is about marketing and sales overall. Now, when I make these generalizations, all businesses are like cars. Like if you don't have wheels, the car's not going to move. If you don't gas, the car's not going to move. If you don't have an engine, the car's not going to move. But the question is, what is the biggest limiter? What's the biggest thing that gives you the most return

in that specific vehicle or that specific business. And so I'm going to walk you through four or five different businesses that I've been what I thought it was versus what it really was. And then I'll turn it back to you and thinking about how you can apply that same methodology. And I'll bet you many of you. And I get this because I have a lot of conversations with business owners today. They don't know what business they're really in. All right.

So I thought it was about fitness, but it was actually about sales and marketing. If you look at the biggest fitness companies in the world, like especially in the gym space, their acquisition machines. That's what they are very, very good at. The actual fitness component of it is actually pretty minor, right? And I mean, I'll tell you this from talking to the franchisors who own many, many locations or privately owned ones, have thousand plus locations, that the fitness stuff is almost an afterthought. They're like, yeah, yeah, yeah, get people to sweat, move around, whatever. Because the reality is that within fitness, for example, the biggest problem is that people don't show up because of other reasons. And so you have to always go get more customers.

The good news is that everyone's trying to lose weight three times a year. And so there are plenty of people. So that was the first business that I misunderstood what business I was really in. Now, thankfully, quickly, I learned that and then that became the skill set that I, you know, doubled down on. Now, with that, I then was like, okay, well, I'm going to start a supplement company, which was prestigious labs. Now, again, I thought that business was going to be all about the product. I thought it was all going to be about the stuff that's inside of it. And so I got Dr. Cashy, my good friend, who's bio he's a PhD biochemist, one of the smartest human beings on Earth. And I said, hey, man, can you make the best products? I said, make a sandwich you would actually eat because he made all these things for Olympians.

And he would put together these trash bags full of like specific ingredients and specific compounds. And he's like, dude, these are going to be way too expensive. Like, it's not going to be commercially viable based on the quality of the ingredients. And I was like, dude, just make the best product. I'll figure out how to sell it. And so that's, that was the focus that I had in prestige lives. But guess what? Once I got into that business, I realized that it actually had very little to do with what was in the bottle.

Because basically anything, anything that's in a bottle that you don't taste, the vast majority of products that are out there benefit off of placebo and nocebo effect. Basically, people taking something and then they feel better because it takes something. And I want to be clear, placebo effects are real effect. So like, I'm about the effect. Whatever works for you, works for you. And that's not really the point of this talk, but more so that I got into the business thinking that what was inside the bottle. was the thing that mattered, but the reality was what was on the outside of the thing the bottle and the thing that the bottle was next to. Meaning it became what I realized almost too late

was that it's it's a business that's based on brand. It's based on branding and it's based on media in terms of having tons and tons of traffic. And so I thought I was building a product based on what's inside the bottle when everything that was limiting the business what was on the outside of the bottle. And I saw the guys who were the biggest in the space. And this is the little telltale sign, by the way, if you want to hack this is you look at the people who are the biggest in your space. So take your model, take it to a national extreme, and look. And I think there's a lot of wisdom that can be found from that and trying to reverse engineer. Like, what are the things that make this different? Now, you might be like, and here's, this is what I used to do. All right. So like, don't make

this mistake. When I was in the gym industry, I would look like when I started, I was like, oh my God, I can make way better workouts than those guys. That's because those guys don't give a shit about their workouts because that's not the main thing in the business. I got into the suburb business. Like, these guys are making hundreds of millions of dollars on this product that's just mediocre. The thing is, is that most of the customers that are buying it don't even know the difference anyways, which means that your differentiator isn't actually making you different. You're the only one who knows your differentiator, which is not good. Your customer has to realize what the differentiator is. The thing is, for most supplements, the differentiator is LeBron takes it,

or so-and-so takes it, or I think this is cool, or my friend Sally likes it, right? Or, and I'll be clear, on a consumables perspective, if it has a flavor, then the flavor becomes very important. in the long run in terms of how good it tastes because most people take AG1 because they think it tastes good and because they feel good about it, not because what's inside of it. All right. So just to be clear, I got into the gym business and I thought it was about fitness, but it was really about marketing and sales. I got into prestige labs and something business and I thought it was about the stuff inside

the bottle and really about brand and building a big media traffic machine. And then I was like, okay, I think I'm getting the hang of this of just making mistakes over and over again. So then I got into the software business. And I was like, okay, I get it. Everything is about marketing and sales. I'll be able to sell the shit out of this. And guess what?

we sure as hell good because I knew how to market and sell. And so then I got into the software business and I realized, by the way, side note, software tends to sell itself. You know why? Because if you can have technology and say, hey, there's that thing that you're doing that this will do automatically, not a very hard pitch. But the problem with software is actually delivering on the promise. And so it actually is a very product-driven business because anyone can sell it.

The constraint, like software is not that difficult to sell. At least this is my experience with this. All right. So take that with my big Himalayan size grain and salt. For me, that's when I realized that product was the main thing. And guess what I don't want to start it out? I outsource the product. I had an outsource dev team make the product for me, which I then realized was the core

part of the business. It's like starting a supplement company, then trying to have an agency build your supplement company for you. If you're in the supplement business or you're in the consumer product goods business, outsourcing acquisition, outsourcing brand, outsourcing media is like, it's, that's the business you're in. It's not the stuff inside the bottle. All right.

So I'll give you another one. So I had a gym owner from mine from many, many years ago. He was in using, he became a landlord. He was a licensee, awesome guy. And he started, he had a couple locations and his wife started a cleaning business because they got into Airbnb's because he started making money in the gym. So he started investing and he realized he actually liked real estate better than he liked the gym, which is awesome.

Great. And so they started a cleaning company to clean houses for the Airbnb. B and Bs, but then they realized they got in the Airbnb community and they also got in just like that area. And they were like, you know what? We could probably just sell cleaning to other people. And so this was interesting. I had dinner with him. And he was saying, I was like, so what's your LTV to Kack? He's like, oh, dude, Kack's like $25. And I was like, oh, getting customers in cleaning, not a problem. And this is, and he was like, this is so different from the gym business because the gym business is getting the customers, getting, he has to arm Russell Suzy for an hour to get her to say, yeah,

she's going to stop eating crap and start coming to the gym three times a week. But if you just say, hey, I'm going to clean your stuff and you don't have to do anything. Not a very hard sale. And so you said, the real problem that I'm having right now is actually getting people to do the cleaning, right? He's actually getting, you know, people who speak English, who don't steal, who show up on time and do all that and like do a good job consistently. He said the problem, that's actually the problem in the business. And so I had this, it was this great moment for me because I love finding finding out, what is the real business behind the business? And so if you're in the cleaning business, you're not in the cleaning business. You're in the recruiting and training business.

You have to learn how to get low-skill labor in high volume to show up for you consistently, which is a cultural thing. It's a training thing. And part of that has to do with Brandt, but a lot of it is just having the incentive system structured such that that type of person can still succeed. And he had a cool little thing that he did. He did it. He had a setup where they got paid not by hour, but by clean. And so, So they were actually incentivized. And so basically, and this, by the way, big pro tip on business is you want to have paired incentives. So it's like having quality and speed. And so it's like if you have a customer support team, you want to measure them not just on like percentage of tickets that are absolutely resolved. You also want to have speed of completion. If you only have one, then you have lots of people responding as quickly as possible, but not getting it done. And on the flip side, if you just do on whether the ticket is completely resolved, people won't move fast enough. And so it's having paired metrics. Andy Grove talk. about this in high output management. Really good book if you ever want to learn more about ops. Pretty high level, though, just to be really honestly, but it's a great book. Anyhow.

And so the paired metric for him was you get, you can clean as many houses as you can in a day and I pay you per clean. And so that drove up as productivity per employee. And so the paired metric was that if you don't do a good job, you have to go back and do it again at no cost. And so that was the deal. And that was also part of his offer for the cleaning thing and it worked really great. And so like, if you don't think we do a good job, we'll come back and clean your whole house again, and so that was the paired metric. Again, so he thought he was getting the acquisition business. He's like, dude, I can get customers all day long in this business. And it's because he came from the general and expected it to be the same. And so I've noticed this is this continued thing is that what I think

I'm getting into is actually not the real constraint of the business. And I'm going to, I don't want to leap frog ahead here, but like this is a little bit of foreshadowing for the woman in the red dress. All right. So I'll just, I'll just leave that there. All right. So I'll give you one for the, anybody who's in like the consulting space or professional services space. If you sell to businesses, you sell how to market, how to, I mean, even accounting, you sell lawyer stuff, you do consulting in general, any of that stuff, you think that you're in the marketing and sales business, because that's what people will tell you, right? But if you really want to play this game at a high level, now, again, it's a car. If you have no marketing and sales, you're not going to have a business,

right? Duh. But which is the things is the thing that unlocks the biggest level of growth? It's actually, again, look at the biggest companies in the space. You look at EY, Ernst and You look at KPMG, you look at McKinsey, you look at Bain, you look at BCG, some of these big public, massive firms, multi-billion dollar, 100 billion dollar companies. What is the thing, what is the business they're really in? They're in the recruiting business as well. And specifically the talent management business, because different than the cleaning business, now structurally, it's recruiting for sure.

But it's at a completely different level. They're trying to skim the cream of the crop because how do you scale expertise? their intelligence on demand. If you go to the bet, you go to Pulsinale, you go to some big, big law firm, right, in Manhattan, right? Some big law firm with a Manhattan address. They have to attract the absolute best and brightest people.

Otherwise, the brand will degrade over time. But how do you attract the best and brightest people? Well, that's why a lot of these professional services businesses are based on partnerships. They're limited partnerships. They're LLP's. All right. And so that's because anybody,

they have a track for eventually becoming an owner in the business. And most service-based businesses that rely on expertise, have tracks for people to have small slices of ownership. And they're willing to have a small slice of a $200 billion pie rather than start out on their own. And they also have subspecialties underneath of that. You're a IP lawyer. You're a defense lawyer, whatever. They've all these different subtracks underneath of that.

And so, again, you get into the consulting business and people say, hey, it's about marketing and sales. But really, if you want to scale, and again, this is the thing. If you want to scale, if you just want to make money, then sure, just market and sell and you can make a buck. Right. That's not the problem. But if you want to get big, you want to build an asset, the business you get in there is on talent. And how do you retain talent and how do you improve the value of that talent and make them look? Because otherwise, what do you do? What happens if you do a great job with talent in that business, but you don't retain them. They take up. They take your customers and they leave. They start their own shop. They hang in their own shindle up. That's that's the game there. Right. So the gap, what you have to figure out. This is the big billion dollar problem is what you have to do. All right. Now, um, I'll, I'll, I'll, I'll leave it at that because I think I made the point. Now, here's why this is important, is that if you know the business that you're really in, you actually can get paid to solve the right problem. All right?

Now, the way that I like to think about this is that, like, as entrepreneurs, we get paid to solve problems. And the bigger the problem, the bigger the payoff. And so I like to imagine, like I've got this big, massive wall in front of me. And the thing is, is I see the wall, but I don't know how thick it is. But I have an idea that it's pretty thick, right? Because I'm like, shoot, I don't know how I'm going to get through this wall. But I like to mentally envision myself that there's this big pile of money on the other side. And I remember having this conversation with the portfolio company.

We're like, hey, we think that we need to build software into this business and actually transform this business from a media company into a software company. And it's like, this is a big strategic bet. Like a lot of resources, a lot of time, basically a lot of like lost growth. Like instead of us gassing it on this side, we're actually going to basically maintain here and then deploy a lot of resources into growing software. And so I was talking to the founder and he was like, this is really. really hard. This is going to be really, really hard for us to do. And I was like, yeah, yeah,

it's going to be really hard. And I said, but if we solve it, we get an extra $250 million. So does that feel worth it? And he was like, well, when you say it like that, and I was like, right. So for $250 million, would I solve it? Yeah, it feels a lot more approachable, or at least it feels worth it. And so I'd encourage you to think like, what is the ultimate price tag of me solving this problem worth. And then all of a sudden, you're like, okay, then you can actually appropriately allocate your personal resources to solving the problem because it really will make you a lot of money. Now, a lot of times we need to frame the problem for what we get by solving it. Otherwise, we avoid solving it. And so knowing the business that you're really in isn't really what you think

it is. It's often the second or third order effect. And that's the big wall. And so you come in, Like my friend did. He starts acquiring customers. He's like, I'm going to make so much money here. And he's like, oh, shoot, I got to hire and staff people. Boom. He sees this big wall. And he's like, oh, I'm not equipped to solve this problem.

And this, here it is. This is the meat. This is the part that I've been waiting to get you and hammer you guys on. Is, hey, and if you'd like to get personalized advice on how to scale your business and unlock the enterprise value, kind of like the stuff that we're talking about here today, acquisition. com just started its new workshop division where we host one or two days a month at our headquarters here in Vegas for businesses that were not necessarily invested in, nor do you have to become a portfolio company. But it's a way for us to meet more companies, for you to meet us, for us to help you

solve some problems, unlock some big value. If that sounds a little interesting, go to Acquisition.com, hit the scaling button, and our team will see if you qualify. Hope to see you soon. The woman in the red dress appears now. As soon as you realize the business you're really in, And you also realize that you're not equipped to solve it because you don't know what the hell you're doing. And you don't know what you got into to begin with. That is when the woman in the red dress appears. Now, if you don't know, if you're not familiar with my stuff, the woman in the red dress is any shiny object. It's the distraction.

And the interesting thing about the woman the red dress is that the better you get to the business, the hotter she is. And so like you think you can, you learn to say no to a two out of 10. Yeah, because you've got some crackhead lady on the side of the street. It's like, okay, she's like, hey, let's go. I'm good. I'd rather just not get chlamydia slash whatever you've got. And so all businesses have shit. They all have shit. They all have a big brick wall that you have to come in contact with. And guess what? That's why you get paid to solve the fucking problem. That's why you make outsized returns is because you have to be willing to confront with the sledgehammer in hand, not knowing how thick the wall is going to be and start hammering away at it with the hope that when you get to the other side, it will have been worth it. And often it is. Now, I want to drive this point home. So, if you have a roofing business, if you have a restaurant business, if you have a dry cleaning

business, all you have to do is look at the world and see, is there any version of this business that is a billion dollar company or even a hundred million dollar company, whatever your goals are? And most times you'll find that there is that. But you'll also find that it just takes time to get there. Because the only times I have, let's say small business, it's actually happens a lot, right? Is, hey, I've got a, I've got a roofing contracting business. Okay, cool. And they say, hey, should I jump into a different opportunity? I'm like, well, okay, well, what are you doing. They're like, I'm doing four million top line. I'm doing a million bucks and bottom line. I'm okay. Okay. Well, why don't you just 10x the size of your company? Ah, and then they say,

well, I've got this big concrete wall in front of me. What they described next is the real problem of that business, the business that they're really in that they didn't know they were getting into. And I want to be clear, this only happens at scale. All right. So once like all businesses, like if you're, if you're, if you're new to entrepreneurship, you got to figure out the basics of everything. You got to figure out that a wheel is round. You got to make sure that gasoline is combustible. You got to make sure that there's some sort of engine. It might be a sewing machine in the beginning that's powering your car.

It might be a remote control car that can only go 10 miles an hour. But like there's got to be some engine. Otherwise, you're not going to get any movement. Right. But when you start really one to achieve scale, there's going to be a big hairy problem. There's going to be a big concrete wall in front of you that you don't know how thick it is. And that is the work. That is where the enterprise value is unlocked.

And the vast majority of the time, When we're investing in a company or we take over a company, we are just comfortable with the fact that there's a concrete wall and we're just going to chip away at it. And so a lot of the work that I do is actually expectation management with the team is saying, yeah, this is going to take two years. Yeah, this will take three years. And they're like, wait, three years. I'm like, yeah.

Well, I'm in this for like, I mean, let me put it this way. If in five years we had a hundred million dollars enterprise to this business, is it worth it? They're like, well, yeah. And I'm like, do you think we can solve it in five years? I'm like, well, yeah. But then guess what they don't do? be willing to wait five years. And so the thing is that sometimes it takes somebody from the outside to say, like,

dude, let's zoom all the way out. If you solve this for $100 million is worth it. Yeah. Okay. Well, it's going to take that long. Oh. Huh. And then things start to settle.

And then you get this, you get less frenetic energy. The amount of wasted effort for entrepreneurs that goes into this ideation of what else they could be doing with their time or with their skill sets, honestly, it's, it's like, oh, great analogy. It's like being single versus being married. All right, hear me out. Is that when you're single, at least for me when I was a guy, I would say 30% of my time was being generous, maybe 40% of my time.

Might have been higher. Anyway, I'm not getting into it. Was allocated to like the idea of chasing tail. So it was like, man, what if, what if that worked out? What if that worked out? And I'm spinning multiple plates. I'm doing lead nurture, right? I'm working the pipeline.

I'm planting seeds. I'm making a quippy comment. I'm responding to a story, whatever. And so I'm working leads. And so as I was doing this, right? All my attention was going to possibility, was to potential, was to what if, right? As soon as I got married, the thing, the biggest gift that marriage got me was it got me 30 to 40% of my time back was I didn't have to think about this.

Like this part of my life was not done, but like solved. As in like, I'm going to be with Layla. Cool. Great. Now all the extra tension that used to go to like possibility in terms of what who else could be goes back into the main thing, which for me was business. Now, within the business, it works the same way is that I think most of you guys are dating your business, but you need to get married to your business. You guys are trying to have friends with benefits with your business, trying to go on

dates, maybe date a couple of other business on the side, have some side checks. And then you're wondering why your relationship with your business isn't that healthy. If you go all in on the business, the business will go all in on you. And I promise you, it's just that the guy who's beating you right now, he's just committed. He's just married. He's just married to the business. he's like, I mean, if it takes me five years, it takes me five years, but like, where am I going? Like, I'm in this. I'm in it for the long haul. And he sees what the value of a 30-year marriage would be or a 50-year marriage would be

with his business. And so if you know the business you're really in, which you usually find out a couple years into the business, which is once you solve the basics of business, you realize, oh, this is the big, Harry problem. And then you don't know how long it will last, but I promise you that someone else has solved it. And I promise you that they weren't super geniuses. They just were willing to commit.

They were willing to swing the hammer at the wall for a very long period of time and willing to zoom out and say, I can think in five-year increments. And do I think that if I put everything I have and not get distracted with the woman in the red dress, not have the side chick, not have these other businesses I'm flirting with that I'm keeping warm on the side? These networking lunches for this guy I might do a partnership with, even though it has nothing to do with this business because he says, hey, you're good at this, I'm good at this. We could do this thing together. none of that. And just being like, no, I'm just going to keep slamming at this wall because if

I just get this one thing right, if I just break through this wall, I will unlock all of the wealth that I've ever wanted. But there is a big, thick, massive, gray, boring wall between there and where you want to go. And it's just who's willing to keep swinging the hammer for a long period of time without getting distracted and without thinking they're smarter than they are. Keep being awesome. Fucking sleigh. Love you all. Bye.