← The Game with Alex Hormozi
The Game with Alex Hormozi
The Only Two Numbers That Decide If Your Business Survives | Ep 985
00:13:25
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I've been in business for 14 years. I have a portfolio of companies that last year did over $250 million in aggregate revenue. And if I just start over from scratch today, this is the most important concept to learn, right? And so I want to be clear, this is not a tactic, it's not a funnel, it's actually a ratio. And once you understand it, you'll never really see business the same way again. And the way I like to think about this is that there's a lot of people out in the marketplace who talk about different methods. But what this is is about a better model. And the thing is that methods explain buyer methods are like one trick. Ponies like you figure out a new DM hack, you figure out a new way to, you know, get your content to go viral with a new hashtag, whatever, right? Those are methods, those are tiny tactics, but those change all the time. The things that endure are the models, the economics of the business itself, right? And so that is the engine that fuels everything. And so everyone likes to talk about marketing, content, branding, et cetera, but none of it matters if you run out of money. And so let's think about the number one rule of business is don't go out of business. And so what's the thing that prevents you from going out of business? Cash flow. And so if you can manage your cash flow, then you can basically stay in business forever. You can continue to play the game. So coming back to the number one most important business concept, this is what you need to know. Number one is what, what's a customer worth to you over 30 days? Now, the reason I limit it to 30 days is because that's typically as long as most small businesses can handle from a cash flow perspective. As in, like, you're willing to pay money, wait 30 days to get it back. That's also because that's the, the interest free time period where people will give you money for no interest. Credit cards are interest free for the first 30 days. And so you basically are limited by your ability to get credit if you actually had no money. But if you do have some money, then still you want to recover it back within the first 30 days. That's a rule of thumb. Now the second thing is, okay, we know what a customer is worth to us. We know what gross profit, how much we're going to make from them after we pay the cost of delivering whatever it is that we sell. The next is what's a customer cost me. Now what I'll be clear here is I'm not talking about cost me to deliver. I'm saying what does it cost me to get them? So what do I have to spend in marketing, in advertising, in content, in sales commissions to get a customer in the door? And you have to know these two numbers, number one and number two. And ideally, number one is greater than number two, right? Like we want to make sure we're making more money from customers than it costs us to make it. And the thing is, is if you don't understand your business math, you'll continue to blame other things, right? You'll continue to blame your methods. Oh, Facebook doesn't work for me. Oh, outbound doesn't work for me. Oh, content doesn't work for me. Well, imagine you're in this scenario, right? Is it actually an issue with Facebook ads? Is it the ads that aren't working? Is it the method that's not working? Or is it the model? You have a model issue. If you could make hypothetically a billion dollars from a customer, you could spend 12 cents to reach every single person on earth and just try to get one customer. That would be a business that could probably spend a lot of money. Real quick, I have a gift for you. This is the $100 million scaling roadmap. It's something that my team and I put 200 plus hours into building and breaking the stages of scaling into 10 steps. All right? And so what we did broke down everything that got us, basically got us stuck. And what we did to break free at each level of the business. And if you'd like to know what product, marketing, sales, customer service, IT recruiting, human resources and finance look like at the stage that you're currently at, this is a free gift. So all you have to do is go to acquis.com roadmap, you can plug in your business information. And if you want our help, you want my help to help you break through whatever level of scaling you're at, this is not a promise. I'm just saying I'd love to help. On the thank you page, you can book a call. Every month we have a workshop out here at my headquarters. You actually talk to my real team that does, does our marketing, does our emails, does our ads, does our copy, does our, does our, does our sales, does our finance, does our recruiting? The real people are doing this at a very high level. And what's really cool about that is that they can typically find and spot what the constraints are in a business like that. And so it's one of those valuable things that I could possibly Do. Obviously, you know, space is limited based on our actual headquarters, but if that's interesting on the thank you page, you can book no pressure. This is a gift. Either way, it's absolutely free. Now, I've been hiding the real words for this, but thankfully, business actually has a term for this, which is the lifetime gross profit, which is ltgp. Sometimes people refer to this as LTV or clv. Customer Lifetime value. Lifetime value. All of these more or less mean the same thing. What's the amount of money you make after you spend whatever you gotta spend in delivering for the customer? What's the extra cash on top? If you they pay you 100 bucks, it cost you 20 to deliver a sandwich. 80 bucks is your gross profit. If they do that, 10 times $800 is the lifetime gross profit. All right, now, what's a customer cost? Me. This is cac. This is cost of acquiring a customer. That's what that stands for. All right, so this is our ratio of LTV to cac. Here we go. Now, if you can do this math for yourself, and I'll give you the back of napkin way of looking at this, because you're probably like, I don't track this stuff. And that's okay. Look at what you spent in marketing for all of last year. Okay, so do a whole year. Very simple. You can just look at the line item. Would you spend in advertising, would you spend in labor that's associated with it? So you might have a videographer, your contractor. You might have spent some money on ads. You might have spent some money in commissions. Everything that it takes to cost to get a customer, okay, all of those cost, you add them together, and then you look at how many new customers did I get last year? Maybe you got 100 customers. And let's say it cost you $100,000, okay? So that means it cost you $1,000 per customer. Okay, this should make sense. That gives you how much your CAC is. And the nice thing is that CAC's the easiest one to calculate. You just literally look at your cost divided by customers. That's it. I'll give you the back of napkin. Simplest way to do it, which is revenue divided by number of total customers. Now, I want to be clear. This is going to give us our lifetime revenue. We still have to look at our gross profit here. So we would just multiply that number by gross profits. And if you're not sure what your gross profits are, if it costs you 20 bucks to make a sandwich and you charge 100 bucks, then your gross profit is 80, meaning 80%, all right? So you'd multiply that number by 80%, and that's what your lifetime gross profit is going to be. So I'll also give you the simplest way to do gross profit. So I'm giving you the back of napkin quick and dirty ways. But you know what's interesting that I found is that the back of napkin way, when you do it over an extended period of time, tends to be the most accurate because it takes, you don't have these good months and bad months. It actually gives you a more accurate picture of your business. All right? So the way you do it is you look at total costs of goods, which some people call cogs, all right, or cost of delivery if you have a service. So it's like if you have a bunch of reps and you have some software that you use to deliver, or you've got some contractors that you deliver some stuff, whatever it costs you to deliver for all customers for the whole year, divided by number of customers, that's it. So that'll give you what your cost per customer is. And so if we then take our lifetime revenue, subtract our cost per customer, then we'll get our lifetime value, all right, which is the gross profit per customer. And that's like a very real way of doing that. So we have, you know, two variable simple divisions with some simple subtraction. All right? So this is not intimidating math. And if this intimidates you, I would encourage you to get over it because this is, this is, this is not even, this is third grade math. I don't know when they teach multiplication division, but I think it's around third grade, all right? It's not a lot, okay? Like you can do this. Like literally all you have to do is just add up, just add up the line item at the end of your bookkeeping, because your bookkeeper probably does this. Just look at your advertising total. Look at your sales commission total. Look at your, your payroll total for everything else that's not marketing and sales related. And then you add all that stuff up together and you look at how many customers you have in total that are active. And then you divide it. And so the end result here is that you're going to have an LTV number or a lifetime gross profit number, whatever it is, and you're going to have a CAC number on average for the last year. Now, ideally, you want the ratio between these numbers to be as big as possible. Now, I'm going to give you three kind of considerations for this, many of the people in the software world, the very smart Silicon Valley people, talk about a rule of thumb of three to one, which is you want to make sure that you're making at least $3 in gross profit per customer for every dollar it costs to get them, okay? Now having done business for a while now, that is only true under the conditions where you have all three elements of business that are automated. And you're like, what are the components of business? Basically, lead generation has to be automated, conversion has to be automated. So sales, how are you going to get people to give you money, right? And then you have delivery or fulfillment. These are the three components. They have to be automated. If all three are automated, yes, three to one works. Now if two of the three are automated, right? So let's say this one isn't automated, this one is, and this one is, then I think you change that to about six to one. Now if two of them are not automated and only one of them is, I think you change that to nine to one. That's at minimum. And then finally, if all three are not automated, meaning you have people at every one of these steps in the process, you need to be at over 12 to 1. Now you might be like, wow, that's a lot different than what I have. Right? And that's why we need to improve it, which is what I'm gonna talk about next. Now you might hear this and then wonder like, wait, what degree is does this like the checks and the X's? What does that even mean? Okay, so lead gen, something that's high leverage would be like making content that's one to many, running ads one to many. Those are things that would qualify to me as being high leverage. It's not one person. You don't have manual labor that's really installed there in order. You're not limited by human. Now if you're doing manual outreach in order to get customers, you would be limited there, right? If you have viral coefficient, it's all word of mouth and it's compounding that has high leverage, right? So if you're doing outreach as your primary way of getting customers, well, there's nothing wrong with doing that, to be clear. But if you do a manual process, then you're gonna have an X here. So it's going to mean you're gonna have to increase your LTV to CAC ratio. Now if you're like, why do I have to do this? The reason that this ratio has to increase is because there's a number of costs that the business incurs as you scale. So number one is the cost of getting new customers is actually going to go up as you go to colder and colder markets. Cost of getting customer, believe it or not, always goes up over time. So you might, whatever you have today, believe it or not, is likely going to be the best cost require customer ever going to get. All right, because CPMs go up over time. This is a fact of life. More competitors enter the marketplace. This is a fact of life. And even if neither of those things are true and you just went into colder and colder markets, as in you scaled up your advertising, you're going to reach people that the algorithm thinks are slightly less likely than the first people that they displayed your ads to, which means it's going to cost more because it's going to have to show it to more eyeballs to get the same number of conversions. It's going to cost you more per customer. You're going up the interest graph, right? You're going up kind of the normal curve of people who are less and less interested as you go colder and colder and spend more and more. That's number one. The second reason that this is important is that you're going to put in layers of infrastructure in your business. You're going to have levels of management. And these things, although they suck, still add cost to business as it scales. And so you're going to need some padding terms of your lifetime gross profit to be able to afford this level of scaling. And typically customers that come in later are less sold on the idea and sometimes are worth less, so they actually end up spending less money over time. And so all of these reasons kind of compound together. And the last one, which is so important when it comes to this X mark, is that when you have people in every one of these processes, whenever you hit a point of kind of saturation, you've hit the capacity of, let's say, your sales team. Let's say you've got five guys that are proficient, they do well. Well, at some point you're going to have to scale your sales. And so you're going to bring a sixth person in or seventh person in. But that new sales guy is not going to be as good as the first five. It's going to take time for them to get good, for them to get on ramped. Same thing when it comes to marketing. You have to have a new market. Who's going to come, he's not going to be as good at making content. He's going to have to get reps same thing on delivery. You might have some star account reps on the back end that do some level of service delivery and you're going to bring somebody else up to speed. But the thing is the business has to incur that cost immediately, day one, and doesn't always get the return on that for a few months. And so if you're at three to one and then you have these, all of a sudden, imagine this, you're at 3 to 1, but then you have to bring in a new marketer, you have to bring in new salespeople, and you have to bring in new account reps. Well, all of your metrics are going to suffer, which means all of a sudden you're going to go from barely being profitable to probably not being profitable at all. And so we have to have this, these increases for each level of manual that enters the business in terms of manual labor, so that we have padding and cushion for, for cash flow in order to scale. Because the number one rule of business is you have to can stay in business as long as you got money. That's the rule. And so we have to make sure our economics of the business support the fact that we're going to have inefficiencies as we scale and it's going to be lumpy, right? We have to bring in a whole bunch of new sales guys, our conversion rates are going to tank. But we have to have the business economics, the model to support that. Because if the only way your business works is that you're selling, you're never going to scale. You have to fix the model. Sam.