Podcast Summary: The Game with Alex Hormozi – "What To Do When Your Pricing Model Doesn't Match Your Avatar | Ep 865"

Release Date: April 7, 2025

Introduction

In Episode 865 of "The Game with Alex Hormozi," host Alex Hormozi delves into a critical issue that plagues many small businesses: the misalignment between pricing models and customer avatars. Drawing from his extensive experience as an entrepreneur and investor, Alex offers actionable insights on how businesses can recalibrate their strategies to achieve sustainable growth and profitability.

Identifying the Core Problem

Alex begins the episode by highlighting a common frustration among business owners: high customer churn leading to team burnout. He states,

"It becomes very dissatisfying because your team gets burnt out, because they're like, I feel like all we're doing is onboarding new customers all the time and they're just walking out the back door between three and four months later." ([00:01])

He explains that this churn often stems from a fundamental mismatch between the services offered, their pricing, and the target customer avatar. When businesses attempt to serve a broad audience without a clear focus, they land in a "no man's land," offering customized services without the scalability needed to sustain them.

Understanding Customer Avatars and Pricing Models

Alex emphasizes the importance of aligning your business model with the right customer avatar. He categorizes customers into segments such as VSMBs (Very Small Business Owners) and discusses their inherent volatility:

"VSMBs have inherent volatility, meaning because they are small, they will go up and down on a regular basis. They have good months and bad months, and on bad months they will take a real hard look at their expenses, sometimes including your business, and decide to cut." ([02:30])

He presents a clear fork in the road for businesses:

1. Templatized, High-Volume, Scalable Products/Services: Lower pricing that appeals to a broader audience but requires high scalability and automation.
2. Customized, Higher-Priced Solutions: Tailored services for a niche market, ensuring higher retention but necessitating increased resource allocation.

Case Studies: Successes and Pitfalls

To illustrate his points, Alex references successful models and common missteps:

• Shopify as a Gold Standard:

  "One of the best prosumer businesses out there is Shopify... they lose half of their new customers every year, but they're able to build an entire business around this because it doesn't really cost them that much to add another customer." ([04:15])

  Shopify’s ability to maintain profitability despite high churn is attributed to their scalable model and efficient cost structure.

• A Friend’s Large Agency:

  Alex discusses an acquaintance’s agency that thrived by offering low-priced services tailored to small businesses:

  "He built his entire business around cost so that he could charge a very small amount of money to these businesses... his average stick was like 38 months." ([08:10])

  This example underscores the effectiveness of low pricing paired with high scalability and a clear ROI for customers.

Strategies for Alignment and Growth

Alex provides strategic advice for businesses struggling with customer retention:

1. Decide Your Path:

   • Go Upmarket: Offer customized solutions at higher prices, targeting customers who can sustain these expenses.
   • Downmarket with Scalability: Provide templatized services at lower prices, ensuring high gross margins and operational efficiency.

2. Optimize Gross Margins:

   "Alex's rule of thumb for services is it must be at least 80% gross margins for me to be interested in it." ([11:50])

   Higher gross margins enhance operating leverage, making the business more resilient and scalable.

3. Focus on Operating Leverage:

   Alex explains the importance of minimizing operational costs to maximize scalability:

   "Think of it differently, my cost basis is 20% versus 10%, so it's half, which means double the leverage." ([12:30])

   Efficient operations allow businesses to manage more customers without a proportional increase in costs.

Avoiding the Churn Trap

A recurring theme in the episode is the detrimental impact of high churn rates. Alex warns against the “hamster wheel” of constantly acquiring new customers to replace those who leave:

"You end up just creating this churn factory. It becomes very dissatisfying because your team gets burnt out..." ([10:45])

He advises businesses to prioritize sustainable growth by aligning their services and pricing with the right customer avatar, thereby reducing churn and fostering long-term customer relationships.

Conclusion and Actionable Steps

Wrapping up, Alex reassures listeners that the problem is fixable:

"This is one of the big growth issues. It is fixable, though... you just have to decide, am I going to change my services and price or am I going to change my avatar and maybe also your price and go up." ([13:00])

He encourages business owners to make strategic decisions that align their offerings with their target market, ensuring both scalability and profitability.

Key Takeaways

• Alignment is Crucial: Ensure your pricing model and service offerings match your customer avatar to minimize churn.
• Choose Your Path Wisely: Decide between high-volume scalability or high-margin customization based on your target market.
• Optimize Margins for Leverage: Higher gross margins provide greater operational leverage, enhancing your ability to scale.
• Focus on Sustainable Growth: Avoid the churn trap by building a business model that fosters long-term customer retention.

By addressing the critical mismatch between pricing models and customer avatars, Alex Hormozi provides invaluable guidance for businesses aiming to scale efficiently and sustainably. Implementing these strategies can transform a volatile customer base into a stable, profitable foundation for growth.