Scaling Ads Is Killing Your Profit (Here’s the Fix That Works)

Summary

Perpetual Traffic Episode Summary

Podcast: Perpetual Traffic

Episode Title: Scaling Ads Is Killing Your Profit (Here’s the Fix That Works)
Date: April 28, 2026
Host: Ralph Burns (Tier 11)
Guests: Alex Hormozi, Lauren, Yvonne

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Overview

This episode tackles one of the biggest challenges facing marketers and business owners: how scaling paid ads often erodes profitability, and the mindset and strategies needed to overcome this trap. With incisive insights from Alex Hormozi—serial entrepreneur, former Google Ads agency owner, and marketing thought leader—the team explores why today’s ad-driven business models can backfire, the “law of inverse profitability,” and what truly matters for sustainable business growth in the age of automation and AI.

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Key Discussion Points & Insights

1. The Cost of Scaling: Why Ad Spend Eats Profits

• Alex Hormozi shares his firsthand experience managing over $100M in ad spend, underlining a critical problem: businesses, especially in e-commerce, often spend more acquiring customers than they do on producing or delivering their products.
  • "Traffic cost more than cost of goods, cost of service, fulfillment, opex, sometimes combined." (01:01)
  • The reality: Many brands are essentially working for Meta, Google, or Amazon rather than themselves because their ad costs surpass profits.

2. Don’t Chase the Shiny Object—Double Down on What Works

• Ralph and Lauren emphasize focusing on proven channels and tactics rather than constantly seeking the "next big thing."
  • "If you have a business where somebody is actually buying your stuff, right, that’s proof of concept that what you actually have, the world wants... What are you doing right now? Just do more of that." – Ralph (03:45)
  • Many business owners neglect their best-performing channels in pursuit of trends (AI, TikTok, etc.), rather than maximizing channels that are already effective.

3. Understanding the “Bell Curve” of Ad Returns and the Fear of Diminishing Returns

• Hormozi illustrates how scaling campaigns hits a point of diminishing returns, but abandoning campaigns at the apex leaves significant gains untapped.
  • "The apex of the bell curve is... that's the most, the highest, the perfect that that ad campaign is going to perform. And then as I spend more... 10 drops to 9 drops to 8. What they do is they back up..." (05:12)
  • "Diminishing returns are still returns... you’re going to spend money and make more money—do that... Do it all the way until you’re no longer making, and then go figure out the new thing." (06:02)

4. The Law of Inverse Profitability

• Ralph and Alex break down the classic scenario:
  • As revenue grows and ad spend increases, net profit percentage drops—but net dollar profit can multiply.
    • "A million dollar business at 40% net and a $10 million business at 20% net... That’s practically quadrupling your net profitability and you’re still at a much lower margin." – Ralph (10:24)
  • Many entrepreneurs cling to old margins instead of embracing higher overall profits at scale.

5. Beware of Highlight Reels and “Fake Gurus”

• Yvonne cautions against taking marketing success claims at face value, as many internet “case studies” show gross, not net, figures.
  • "Someone who could make a million dollars on a launch could have spent 1.2 million behind the scenes... but that doesn’t show up." (11:36)
• Hormozi debunks his own myth:
  • "All these idiots running around saying, Hormozi made $105 million in a day. No, he did not. He made $105 million in seven years." (11:52)

6. Incalculable Value: What the Spreadsheet Can’t Show

• Hormozi highlights the importance of “incalculable” business drivers:
  • Market share, brand authority, customer loyalty, goodwill—none of these appear in ROAS or margin calculations but are critical for long-term resilience.
    • "They're incalculable in their value, meaning you actually cannot calculate the value of those things. And you know that when the shit hits the fan..." (12:23)
  • Example: His lifelong loyalty to USAA insurance, despite higher costs, due to their exceptional service and trust.

7. The Death of the “Quick Flip” & Rise of the Unscalable

• The easy automation of landing pages, ads, emails, and funnels has killed the low-value, easily repeatable “flip” business model.
• "All the things that we used to do to build a business and flip it just got automated... everything that can be automated is dead." – Alex (16:29)
• Success now depends on doing what doesn’t scale—direct customer connection, brand-building, reputation, and creative execution.
  • "Do what doesn't scale... Find the unpaved roads, like do the things. Talk to people, answer your phones... That’s how you build a business of, quote, incalculable value." (17:21-17:23)

8. The Human Edge in the AI Era

• As tech and AI become universally accessible, true differentiation comes from personal touch, education, creativity, and doing the “unscalable” work.
  • "The future of all business, all entrepreneurial endeavors isn't going to be tech based... the only thing left are the things machine can't do." (18:17)
• Example: Tier 11’s longevity is tied to investing in people and human relationships, not just systems.
  • "You do the things that are incalculably valuable... People always have a human being to talk to... Those things, that’s incalculable, the value, but it’s important, it’s critical." – Alex to Ralph (18:49)

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Notable Quotes & Memorable Moments

• Alex Hormozi:
  • "The word scalable should be a curse word." (00:18, 17:21)
  • "I will not start a business if I don’t know where the traffic’s coming from first." (01:25)
  • "Diminishing returns are still returns." (06:00)
  • "They're incalculable in their value, meaning you actually cannot calculate the value of those things." (12:23)
• Ralph Burns:
  • "What are you doing right now? Just do more of that." (03:45)
  • "A million dollar business at 40% net and a $10 million business at 20% net... That’s practically quadrupling your net profitability and you’re still at a much lower margin." (10:24)
• Yvonne:
  • "Someone... could have spent 1.2 million behind the scenes and netted negative money. But that doesn’t show up." (11:36)

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Timestamps for Key Segments

• 01:01 – 02:31: Hormozi on why ad costs kill profit and his business-building thesis
• 03:30 – 04:19: The case for “do more of what works”—don’t chase every trend
• 05:03 – 07:09: How the bell curve of campaign returns plays out in real life; treating each platform/mechanism as unique
• 08:40 – 10:24: Practical example: the law of inverse profitability
• 11:03 – 12:23: The danger of highlight-reel case studies and the power of “incalculable value”
• 13:27 – 17:29: The flip business model is dead; automation kills arbitrage; survival depends on hard, unscalable, human work
• 18:17 – 19:29: Why Tier 11 survives: human value, education, infrastructure, relationships

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Final Takeaways

• Scaling ads can erode margins, but focusing on profitability means knowing your numbers, accepting lower ROAS at scale, and valuing incalculable business drivers.
• Automation and AI have commoditized marketing tactics; real competitive advantage now lies in what can’t easily be automated: trust, relationships, and creative brand-building.
• Don’t get distracted by the latest “hacks.” Double down on channels and methods that are already delivering real business results.
• In today’s market, building a business of true, enduring value means embracing unscalable work.

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For more resources and actionable concepts from this episode, visit perpetualtraffic.com.

Transcript

[Ralph]

Hey, real quick, before we dive in,

[Lauren]

if you've got a brand or marketing tool that marketers need to know about, sponsor the show here at Perpetual Traffic. Perpetual Traffic puts you in front of thousands of seasoned marketers, CMOs and agency owners. So head on over to perpetualtraffic.com to apply to be a sponsor of this show.

[Alex Hormozi]

The word scalable should be a curse word.

[Ralph]

Do what doesn't scale. You're listening to Perpetual Traffic.

[Lauren]

Hey, quick heads up. If you're marketing to marketers, this is

[Ralph]

where you want to be.

[Lauren]

Sponsor Perpetual Traffic and get seen and heard by thousands of seasoned marketers, CMOs and agency owners. We get hundreds of thousands in downloads every single month, all to marketers. So go to perpetual traffic.com to apply for a spot on the show in Q1 or Q2 of 2026.

[Alex Hormozi]

I'm lobbing a grenade, but I actually think it's a good one. Here's the experience I had for for anybody who's listening that doesn't know me, I built the number one ranked Google Ads agency in the world. When I sold, I had a hundred million dollars in ad spend under management. I got to see three thousands of business models, thousands of business models. And what I found was as often as not, traffic cost more than cost of goods, cost of service, fulfillment, opex, sometimes combined. Which means e commerce is easy to pick on because it's the most, it's the most visible of all business models I think in terms of the numbers. And so for E commerce businesses I would watch as an E comm business would spend more money on traffic than they would spend on the cost of the materials they were selling, the cost of fulfillment, those materials, the cost of the customer service, their operating expenses combined traffic would cost more than all that. Traffic would almost always be more than their net profit. So you're paying Metta $20 for the thing you're making $19 on or less. Which means you work for Meta or you work for Google or you work for Amazon, you work for the traffic store. So my thesis in building these businesses, and I'm not telling you this is a good thesis for everybody, by the way, I'm in the luxury position of starting fresh from how am I going to capture the opportunity? But my thesis is I will not start a business if I don't know where the traffic's coming from first. And so I look for pre existing pools of traffic that are being underserved or not served at all. So I don't care about the idea. Everybody, everybody in business Wants the next big idea. They're like, oh, we've got the next big mousetrap, the next big thing. We crack this code, I don't care. That means you have to go create a new market. You're not an entrepreneur, you're an inventor. I want a pool of people being massively underserved.

[Ralph]

Yeah.

[Alex Hormozi]

And now I can show up and just look like an absolute total rock star. So that's my business building thesis. And so far it's, you know, it's working out pretty well.

[Ralph]

That makes a lot of sense to me, actually. And we talked about this a couple of shows back, Lauren, actually about, like, what we would do if we had to start all over. And I always start with the question whether it's a business. And we used an example of a business who were sort of assisting myself in my social media marketing and email. Person on staff here at your 11 is taking a business from literally like maybe five figures a month in sales. I'm not exactly sure exactly where they stand. Set that aside. But it's like the operative question is, what's working right now? And there's usually something that's working. If you have a business where somebody is actually buying your stuff, right. That's proof of concept that what you actually have, the world wants. Maybe not the entire world, but a subset of people want it. And I find the most logical and quite honestly simple and simplistic question is, what are you doing right right now? And if we can figure that out, there's usually something and it's like, just

[Lauren]

do more of that.

[Ralph]

And most business owners don't do that. And I don't know why, why? And we've used lots of examples of how we've been able to do that here on the show. But your thesis is very much in alignment with like, path of least resistance. Hey, if YouTube ads are working for you right now, hey, you know, you have an influencer who was doing something for you and you made 15 sales. You're like, why are you not doing that anymore? Like, no, I'm over on my social media now because that's important. Somebody said that TikTok was important and now I have to figure out meta ads. I'm like, wait a second, you've got this thing over here that actually worked.

[Lauren]

Why don't you just go do more of that?

[Ralph]

Double down on that thing. People don't want that because they want the shiny object. They want the new thing. They want.

[Lauren]

Oh, my God. I heard on perpetual traffic AI is

[Ralph]

now the thing I need to bring

[Lauren]

in ChatGPT, I need to build a chatbot.

[Ralph]

But no, you have this one thing that's working, that's driving a modicum of business, that if you leverage it, you can then turn it into a larger business, which means increased influence and hopefully scale.

[Lauren]

Same general theory or different. What are your.

[Alex Hormozi]

So it's. Here's what I think people just to, first of all, double click on everything you just said. I absolutely agree. This is the way I visualize it is if you think of any bell

[Ralph]

curve, I miss your old expressions, by the way, period, full stop. Because of you. Double click, double click.

[Alex Hormozi]

I'm bringing them all back, man. This is nostalgia episode.

[Ralph]

I know. By the way, if you say that on Siri, it actually puts the period, period, then full stop after. So it's like. It doesn't really work on Siri.

[Alex Hormozi]

But anyway, no, that's. That's why I can't be replaced by AI. If you think about any bell curve, here's what people do. And again, because I spent so much of other people's money, I saw this happen. The bell curve. The apex of the bell curve is in the center. And so what people will do is they'll build advertising mechanisms until they reach the apex of return. So I'm building an advertising mechanism, and I put a dollar in and I get $3 out, then I get $5 out, then I get $10 out. And let's say that's the apex, right? So, like, that's the most, the highest, the perfect that that ad campaign is going to perform. And then as I spend more and more and more and more, 10 drops to nine drops to eight. And what they do is they back up because they're like, oh, we're losing efficiency.

[Ralph]

I want the days of 10.

[Alex Hormozi]

Yeah. So, but I. Alex Hermosi say something yesterday that was absolutely, absolutely brilliant. He goes, diminishing returns are still returns. So here's what they're doing is if you picture a bell curve in your mind, they're. They're building the first half, and then they're stopping at the apex when there's a whole second half, which is literally, by definition, by mathematical definition, double. You've identified the ability to double your business just doing more of what you're doing, but you're not willing to do it because it's a diminished return. Still a return, but a diminished return. And those diminished returns are the things that interestingly buy you the Runway and the additional cash flow in order to pad the coffers, have more money, invest Grow iterate. So we get really romantic about things like margin and they're like, oh, I'm in 40% margin. If I spend this way, I'm going to drop to 30% margin. And it's like, wait a minute, you mean you're going to spend money and make more money do that. You know what I mean? And like you're saying, ralph, do it all the way until you're no longer make and then go figure out the new thing. The other thing that people do is they realize like, oh, in Meta I'm getting a 1 to 10 return. So then they go to Google and they try to get their 1 to 10 return and it's like, dude, they're two different things.

[Ralph]

Completely different things.

[Alex Hormozi]

They're two entirely different mechanisms. So meta may have a better return, but maybe Google has more longevity or more predictability or you know, easier off on lever, who knows what, right? So every mechanism one needs to be seen all the way through to the end of the bell curve.

[Ralph]

Hey, real quick, if you're looking to

[Lauren]

get your brand in front of growth minded marketers, CMOs, directors of marketing and agency owners, we're opening up our sponsorship spots for Q1 and Q2 of next year. Get in front of a quarter of a million marketers every single month at Perpetual Traffic.

[Ralph]

All you have to do is head

[Lauren]

on over to perpetualtraffic.com for the details or check out the link in the show notes. To Apply two needs to be treated

[Alex Hormozi]

as though it's unique because massive surprise, it is. And it's not just unique to the mechanism, it's unique to the business. So I, you know, I have a professional services business that does really, really, really, really well with paid partnerships, with influencers. But then I have a call it a pseudo SaaS business that looks the same from the outside looking in, but fails miserably with that same mechanism. And so just because you're, you know, something works with one offer, doesn't mean it's going to work with the other. Like you have to kind of go back to the drawing board each individual time. And it's so funny to see entrepreneurs turn into automatons, dude. Yeah. And it happens with success, not failure. It's the successful entrepreneurs that hit these ceilings because they have these weird commitments to things like arbitrary margins or the way that things have been done.

[Ralph]

Right. I completely agree. There's an example we've used here before and it's probably apocryphal, but the point is, is that we had a customer that was making a 40% net on a million revenue. Like they're making. All right, I'm getting a 40% margin. Like I'm getting a 10x ROAS. This is an old example, let's say, because we were using roas, not mer, which we'll talk about here on today's show. It's like, all right, so let's do the math. You're making 400k, you know, after everything net, net off a million, it's like, yeah, that's great. 40%. Like, well, let's start to scale. And so all of a sudden 40% started going down to 39, 38, 37, 36, 35. And he's like, wait a second, hold on. When I got to 35, it's like we're at 1.5 now. He's like, I'm at 35, it's not 40%. I'm like, well, we could scale you to 5 million at a 20% net. Have your net. And what do we have left over? We have a million dollars we've doubled, if not 120 million.

[Alex Hormozi]

More than 400,000 is more than $400,000.

[Yvonne]

That's going to have a stronger exit that you've built into equity.

[Alex Hormozi]

That's such a powerful point. That's such a powerful point.

[Ralph]

So I refer to this as the law of inverse profitability. And we see it everywhere. We've got a whole video series. I'll leave links in the show, notes on it. Because this is really, really important and this is, this is part of the reason, like maybe a prelude to what we'll really be talking about here. Today is like just mindset of businesses. Double down on the stuff that's working first off and take a step back. That's why going to conferences and hanging out with other people, talking to other entrepreneurs is so important. Secondly, do the math in your head because you can't expect like I remember the days when we were making 40% net at tier 11.

[Lauren]

Those days are gone. Sorry.

[Ralph]

They're never coming back. Like my CFO thinks they will at some point, but they probably won't in our industry and the way that things are today, I'm okay with that, but I do want to be profitable. But a million dollar business at 40% net and a $10 million business at 20% net, I've, you know, let's do that math. That's practically quadrupling your net profitability and you're still at a much lower margin. But business owners always went along for those days of two Years ago I was getting X amount of return on my Facebook ads, and now I'm not. Well, that's what we live in today. Get over it.

[Yvonne]

The thing is, you said something about meeting people. Sorry, guys, I'm cutting up. But like, when Ralph was talking about meeting people in person at conferences and talking to the people, like the people that go to the conferences are the doers, I think what are the traps that people are falling into where they're like. What you're talking about is that apex and then when you hit the curve is they're listening to TikTok or seeing something on YouTube of someone who's making more money from the video than from actually doing the things. And I hear all the time, well, I should switch and go to Google because this TikToker said it worked or because this video did and they have 60 seconds to determine if the numbers that they provided are legit while they're seeing just the tip of the iceberg of the real story. Because someone who could make a million dollars on a launch could have spent 1.2 million dol behind the scenes and they netted negative money. But that doesn't show up.

[Ralph]

Yeah, it's.

[Alex Hormozi]

Well, it's all these idiots running around saying, Hormozi made $105 million in a day. No, he did not. He made $105 million in seven years.

[Ralph]

Yeah, it was.

[Alex Hormozi]

He cashed in on the most potent repository of brand equity I've ever seen built by any human in the digital sphere. He gave and he gave and he gave and he gave, and he did it 50 times a day for seven years. And then seven years, in seven years, he said, hey, I have this thing. And then. And then people gave back. And that was the point that you were making earlier, Lauren, that I don't think Ralph and I paid enough credence to. Which is, as you're scaling up and you're losing, let's say, net profitability, you're also gaining market share, customers diversification of client base, brand authority, visibility. And these are things that are. And I'm going to use a word that is often dismissed, but I'd like people to kind of just pay attention to it. They're incalculable in their value. They're incalculable in their value, meaning you actually cannot calculate the value of those things. And you know that when the shit hits the fan. But you still have a really strong reputation or you still have clients that are standing behind you and beside you in ways that aren't Necessarily even logical or you still have referral partners sending things your way. Like there are things that you can't put on a spreadsheet that you can't factor into your funnel that you can't optimize. They're incalculable in their value and business owners don't do enough to really lean into those incalculable things because they're incalculable. So we almost treat them like they don't exist. We treat goodwill like it doesn't exist.

[Ralph]

Right.

[Alex Hormozi]

It's maybe one of the most important economic drivers, but not on the stretch. But it's not. How can you, how can you calculate goodwill? But man, when somebody. There are a couple of brands where it just does not matter to me what it costs, how long it takes if they're on an interface, if they make a mistake. USA is a really good example. I've been a USAA customer since I was my mom's whole family's military. So we got to, we got to. I didn't serve, but I got to be in this umbrella because USA is only for people that have been in the military. And it's, it's the most amazing company I've ever been exposed to. They're more expensive by far incidentally. But I have, all my insurance is under USA and I would kill and die to continue to stay there regardless of costs. That's an incalculable value to usa, but they've earned that from me.

[Ralph]

Hey, real quick, before we dive in,

[Lauren]

if you've got a brand or marketing tool that marketers need to know about, sponsor the show here at Perpetual Traffic. Perpetual Traffic puts you in front of thousands of seasoned marketers, CMOs and agency owners. So head on over to perpetual traffic.com to apply to be a sponsor of this show.

[Alex Hormozi]

And I just don't feel like we're. I don't know why that conversation isn't had. More like there's ways to build businesses and brands that just aren't as sterile, you know, like, and that really creates something impossible to fight against.

[Yvonne]

I think it's possible that people, because we have like these legacy brands. So USA has been around for decades and we think of like the JP Morgan banks and like all of these like generational companies where I feel like in the last 20 years it's how might we build a company, flip it and sell it like in this like flip model. It's just such a low commitment to the long term value of a company. And at least in the US we don't have this whole bid to pass on our companies to our children. Both of you have kids. Do either of you expect your companies to be inherited and run by the next generation of your family?

[Alex Hormozi]

I don't expect my children to work. I don't think my children are 8 and 10. I think when my children are of working age, which let's say is 25ish, I think the productive endeavor will have been commoditized to a degree that makes, makes that type of vocational emphasis and focus superfluous to the human endeavor. Naval Rabican said something to the effect I'm going to paraphrase poorly, but I think I'll get it. He said, if you want to be happy, find something worth doing for the sake of itself. And I think that's what we're all going to have to do in 20 years, let's say. But you also another really good point. This flip mentality we've gotten into, which I'm guilty of and maybe a proponent of and maybe in a small way helped to proliferate all the things that we used to be able to do to build a business and flip it just got automated. All of this surface level bullshit, all of the oh, I'm going to spin up a landing page, automated. I'm going to spin up some ads automated. I'm going to spin up a funnel, I'm going to spin up automation, I'm going to spin up email, nurture. All of that is automated. So everything that we used to do that could provide, that could eke out a little bit of money and a little bit of EBITDA just got automated. I did it. That's dead. That's the autopsy. It's dead. Dead. All of the crap, all of the garbage, all of the worthless. I'm, I won't drop a name, but I'm one of those influencers going to sell you a weekend course and teach you how to make billions of dollars as I shoot you a video at my San Diego beach house in front of my Ferrari. That's all dead. And it's not dead because it's worthless. It's dead because it's ubiquitous. It's still a value to have a landing page, to have automation to have follow up. But I can just prompt it now. My son, my 10 year old son, I bought my boy's Chromebooks and I told him you can only use these for two reasons. One, to learn AI, two, to build your brand. And I, I come back to my 10 year old son asked chat GPT, how do I code a video game and within about two hours he'd use chat, GPT and Bolt in order to create the old Oregon Trail first shooter game. It blew my mind. My son, I swear to God, my, my 10 year old can do that. You want to tell me he can't build an automation, build a funnel, build a follow up. All that's gone. Which means the quick flip business is gone. The only thing left are the things machine can't do. If you want to, the word scalable should be a curse word.

[Ralph]

Do what doesn't scale.

[Alex Hormozi]

Do the thing that doesn't allow AI to just take it and run with it. Find the unpaved roads, like do the things. Talk to people, answer your phones, reach out to customers, have customer success representatives like do the things that don't scale. And that's how you build a business of quote, incalculable value. The future of not just marketing, the future of all business, all entrepreneurial endeavors isn't going to be tech based. Tech became ubiquitous, not worthless, ubiquitous. AI. ChatGPT is free. It's free. Claude is free. Like all these things are free. I can build whole business. I can and I have. If you've studied vibe coding at all. I watched my business partner Yvonne create things that I swear to God would be about $200,000 for an MVP. He does it in a couple of hours. He created a matching tool for our EA agency. He's created these amazing lead magnets. He created a business valuation tool and he does it in a couple of hours. It's the death of SaaS. All things that can be automated are dead. That doesn't mean that the productive endeavor is dead. It means that you have to find the things that aren't automatable, but it's the incalculable value, right? It's like building brand loyalty and loving on people and trying to find a way to come to customers and let them know like, hey, I'm honestly. And Ralph, I'll pander here a little bit. Dude. I think that's why you've weathered every freaking storm. Every storm I've ever seen in the marketing space. Tier 11 has always found its way to kind of just stay above water because you do the things that are incalculably valuable. People always have a human being to talk to. You're not going to like try to put them behind a dashboard. You're always actually investing in the education necessary. You invest in the infrastructure, you train your people. I know how much money you spend on continuing education. Like those things that's incalculable, the value, but it's important, it's critical. And so for everybody listening, that has the Tim Ferriss four hour work, work, dream. It's gone, it's gone. You know, maybe there's a couple of years of arbitrage, but stop that. Everything from here on out, I'll tell you what it's going to look and smell like. It's going to look and smell a lot like really hard work.

[Yvonne]

You've been listening to perpetual traffic.