The Game with Alex Hormozi
5 Things I Just Learned After 14 Years of Business | Ep 873
Mon, 21 Apr 2025
Wanna scale your business? Click here.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 and will learn on his path from $100M to $1B in net worth.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition
Chapter 1: What are the five business lessons learned?
Five business lessons that I just learned, crossing 250 million in 2024. So the first one was the cost of change. It was the first time that I've actually quantified how much does changing something in the business actually cost? So if you would imagine a straight line, right? It's saying, okay, this is normal business activity, right? Straight line is going across.
Chapter 2: What is the cost of change in business?
Now, let's imagine we want to change something, right? So that's like our normal revenue, but then we decide, you know what? I'm going to change something in the business. So what ends up happening is this little line kind of dips down. And I've estimated just for my kind of like this, again, there's no science behind this, just my estimate.
that I get about a 20% decrease in effectiveness across any function that I'm going to change, especially if it's manual.
Now, if you split test a headline, that's different, but if you're like, hey, we're changing our onboarding process, or we're changing our sales process, or we're changing our outbound process, or we're changing our something that people are involved with, we tend to get a decrease immediately of 20% in a performance, which is pretty significant.
And so as soon as I realized that we had almost this guaranteed cost of change, which is about 20%, I was able to quantify what things were worth doing. Because if you're anything like me, I have this big list of stuff where I'm like, man, we need to improve this, we need to improve this, we need to improve this, and I have all these ideas of things that I think that'll improve it.
But when I actually am honest with myself and I think, huh, how much is number one gonna actually improve the business? If I say, well, I think I'd maybe get us a 5% improvement, Well, if I have a guaranteed 20% decrease or decrement in performance, and I have a 5% incremental increase in performance, do I want to take a 20% guaranteed loss to have a potential for a 5% gain? Probably not.
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Chapter 3: Why is perfection detrimental to business performance?
And so what's ended up happening is that there's all these little 5%, 5% little improvements that I think could happen, but there's only like one or two, 20, 30, 50% plus improvements I think we can do in the business. And so what happens is some of these things I just choose to never do. And I'll try not to stay explicit here, but some stays...
You just have to accept that the business will not be perfect, but your chase of perfection will actually make your current business worse because you're constantly changing things. But let me spell this out one more level. So let's say you have your 20% loss, right? Now, let's say you do something that is good, right? You start going up, right? 20% loss, it starts going back up.
But what happens if you at the same time say, oh, well, now I'm going to start changing something else, right? And so basically you incur this permanent 20% decrease because you're always changing something. So you're always 20% below where you should be in the business. 20% is a lot. Oftentimes in the business, my business has done exceptionally well when I just let them breathe.
Because here's the other part that no one tells you. If you change nothing, you get about a 5% guaranteed improvement. Think how crazy that is. If you change nothing, you just 5%, you can book it. Think about GDP. Partially, some people are like, oh, that must be, you know, that could be in relation to education, which in the U.S. it certainly isn't.
It could be in relation to technology in terms of GDP improvement, or it could be an increase because of population, which in the U.S. there's no population increase, or not really. For me, I just kind of see that across all businesses that if you just let people do stuff, they just get better at it, right? People get more efficient at it.
I'll leave you one tactical framework that you can kind of use to think through this, which is, this is actually from the investing world that I've borrowed as an entrepreneur, which is called ICE, all right? And so it's an acronym, I stands for impact, which is like how big, that's that 20%, that's that 50%. How big of an impact do I think this is gonna make on the business, right?
If I had to make, like if this works, it's gonna do this. The second is, well, how confident am I that it's going to work? That's the C, which is what's my confidence level? So I got this big thing with low confidence or this medium thing with high confidence. I'll probably take medium with high confidence, right?
And then the third is ease, which is going to come into a combination of how many resources are we going to have to deploy to do this? And also what's the timeline that we're going to have to do this on? Impact, confidence, ease. And so we actually do this. Like I have this massive sheet that it's called growth and I have it in all caps. And this is how I like it.
how i get my add out is i put it all on this list which would probably be the second big tactic is that i have every big idea that i want to try and i have to like get it out and spell it out and say all the things that i want to do and i just put it somewhere because the team can't handle the amount of ideas that i have and probably your team can't either you have to just like scratch that itch in some way i do it by documenting so i don't forget it and then whenever the team has more bandwidth i go back to that list and i'm like all right
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Chapter 4: How to evaluate the impact of business changes?
You gotta learn how to sell. Cool. That's zero to a million. No questions asked. That's what it is. Now, to expand beyond that, I was like, okay, we kind of pendulum swing back to like, we gotta make it super viral, right? Word of mouth is the best way to grow a business. But I've thought more and more about this, and I think that it's an it depends answer. Now, there are some products
that you want for sure to have people who buy and then buy again. You want them to reoccur with you, as in like if I buy a Coca-Cola product, I might buy a can today, and I might buy a can at a restaurant later this week. And so it's like, am I on a subscription? No, but I buy again and again and again. Or you have your internet, which you just never cancel out of.
Either of those are things that are recurring, they have high revenue retention. But that is different than virality, right? That's very different. So on one level you have, does it stick? On the other level you have, do people share it with other people? This is the nuance of understanding that's kind of shifted for me this year, which is that some companies, like especially B2B,
There's sometimes disincentives for a customer to bring in a competitor of theirs, right, if you service two types of similar businesses. They have literally a disincentive to tell people about it, like they don't want anyone to know how you're helping them in whatever way, right? So that's kind of like thing number one. you have like a negative pressure on word of mouth.
The second issue is that not, even if you didn't have negative pressure on word of mouth, there has to be some sort of density in terms of the frequency of communication that your customers have with other potential customers.
So if I've got a guy who runs a metal shop that specializes in aerotech, for that guy to have very frequent communication with other aerotech companies that might use my software, my internal tech, or whatever it is that I help them with, Why is he going to be talking to competitors? And if he is talking to competitors, why would he want to share all my stuff?
You can understand why sometimes it's not about word of mouth. And this is just a nuance of understanding that I would think is kind of my belief set is broken. Because I was very hardcore on everything can grow on word of mouth, period. But that's just not always the case. The gold standard should absolutely be revenue retention. Bar none, full stop.
And I can say that with absolute confidence no matter what business you're in. If you're B2B, you're B2C, you want to be able to get recurring or reoccurring revenue. But the virality typically is gonna be more on the consumer side. So if you have a really good soda, you as a customer is not like, oh, I don't wanna tell my friend that this soda's really good.
You know, I've got this shirt, it finally fits me, cool. Well, do I know other guys who are Biltmore like me? Yes. Do I have high frequency of communication with them, at least digitally? Yes, okay, cool. So I'm gonna have, there's some viral kind of coefficient there that goes in. And that applies to also consumer brands that are not tech. I wanna be really clear about that.
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Chapter 5: What defines revenue retention versus virality?
a plumbing company? What is it for an e-commerce business? The other extreme ends, I'm gonna just paint the extremes and you can kind of understand the middle. If I had, instead of paid ads, I had manual outbound, so outreach or whatever you want to call it, outreach, reaching out to people one-on-one with a team. And then from a conversion process, I've got one-on-one sales.
And then from a delivery process, I've got, call it concierge, one-on-one, or even many-to-one services. then I'm gonna want an LTV to CAC ratio that's gonna reflect that. For me, if I had a business like this, and this is gonna shock some of you, but just bear with me, I'm gonna want this thing to be like 20 to one or more. Now some of you guys are like, there's no way, it's impossible.
Chapter 6: How to measure customer retention effectively?
I would say I've made the material, the vast majority of the material wealth in my life at 30 to one, or a higher, and I've done it multiple times. And during those periods of time is when a lot of the, basically the wealth that I've accumulated has come in. But in the times in between, instead of trying to scale something that's at five to one or eight to one, I'm just gonna continue to tinker.
I'm gonna stick with my one location. I'm gonna keep working on the model and just keep tinkering with it until eventually we get the economics that we need in order to scale. What if I'm doing paid ads, but we do one-on-one sales and we sell media or information or something like that? Then it's like, then you're gonna be somewhere in between.
But I have this as my rule of thumb is that the three to one only matters at the companies that have 100% scale, 100% leverage across all three components here. If you have manual across all three, you're going to be at, I would at least want to be at 20 to one. I shoot for 30 plus. A lot of people can't even believe that. Fine. So, fit it to whatever your goals are.
I really do believe that you can just keep tinkering with the business, keep tinkering with the offer, and find a way to get it so that you can have a huge discrepancy between these two numbers, because that's what allows you to scale.
If you want to scale a business that's more manual, which some of you guys who are listening, 78% of businesses in America are service-based businesses, so this applies to you. As you go into colder and colder markets, you will convert a smaller percentage of customers.
These are customers who are less likely to purchase from you, but you have a bigger pool of people, so that's kind of the trade-off. But when you go to those colder and colder markets, smaller percentage convert, meaning it costs you more to get those customers. Basically, you sell more people, you're going to have more infrastructure that has to get built into the business.
So you have layers of management that will start costing you and not necessarily always be alpha. There can be value additive. With these two things that are working against you, you have to have this very large discrepancy between what it costs you to get a customer and what you're going to make from that customer in order to weather that storm and allow you to kind of grow into that.
You can almost grow into your LWD CAC, which is kind of how I think about it. So if you're thinking about this for you, number one, know what your true LTV to CAC is and make sure you're doing it off gross profit, not off of revenue.
And then number two, if you want to scale, make sure that your LTV to CAC ratio is appropriate for the level of leverage that you have within your existing business across all three functions. So you might be wondering, why doesn't the ratio still cover it for a super manual business versus a business that's entirely automated? The main reason is lumpiness.
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Chapter 7: What is the ideal LTV to CAC ratio for businesses?
And secondarily, we wanna make sure that if we are highly leveraged, then we can be at three to one. But if we're low leverage, we wanna be at 20 plus, 21 or higher. And again, this sounds crazy and unrealistic for a lot of people. I get it. Fine, at the very least, be at 15 to one. Please, for the love of God, I promise you it's possible. You just have to work on it longer than you expect.
Which brings us to number four, let's dive into it. Number four, I've said a lot about this, which is that the one to three million area is a huge swamp, right? We call it the swamp, at least at acquisitions.com. And why is one to three million so hard? Now, we've noticed that it's hard, but we're like, why is that range hard?
Now, for those of you who are like, this is not real for me, I'm just trying to make my first $10,000 a month, just keep listening. Because believe it or not, some of these things will apply to you. So if you're at one to three million dollars, why is this one of the hardest periods? Because usually from zero to a million, you can usually do it with like you and two, three people.
It's not that hard for you to keep track of the team. You can usually run very high margins, especially if you're a sole proprietor. You're basically just selling your time, which is fine, right? You don't need to obsess about your passive income before you max out your active income. Good idea. By the way, a lot of billionaires, very high active income, FYI.
Anyways, as you're scaling up, that first 500, 800, sometimes million dollars a year is actually in some ways somewhere more profitable than the next two, three, four million, because you have to install this level of infrastructure, because you're like, I just can't do it anymore. Now, you can always just keep jacking prices, and that's fine, and I'm a big advocate of that.
But if you're like, no, I think this is the price that I wanna service at, and I wanna do more volume, then you're gonna have to put in more infrastructure. But this is the math that I just realized is why it's so hard. So let's say you've got a $2 million business. You're right in the middle of the swamp, okay?
And you probably noticed, anecdotally, for those of you who are kind of like in this business world, there's a lot of people in the $1 to $3 million range. Like a ton, a ton of businesses. To be fair, does that mean they're making $1 to $3 million in profit? Which means they're doing $1 to $3 million in revenue. Big difference. All right, but let's say we've got a $2 million business, okay?
And let's say that they're doing... 20% margins, all right? So they're doing $400,000 per year in EBITDA, or profit, okay? So we have $400,000 here. Now, here's the shtick. At this point, for the business to evolve, for the business to level up, the entrepreneur typically has what I would consider an impossible choice.
You have to choose one of two things, and sometimes the option is both, which is path one, instead of getting more help, I'm just gonna work even more. I'm gonna go from 12 hours a day to working 16 hours a day. I'm gonna stop taking weekends off, and I'm gonna basically get through this hump so I can push my way to $10 million a year, which you can do. It is hard.
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Chapter 8: How to scale a manual service-based business?
But I also want to start investing in, and I'm like, dude, what's the rush? And so the counteraction, like how do you counter the rush? How do you counter the rush? And I think the way that I have countered the rush is to look at the people who have the ultimate version of my business. Who are the people who are 20 years ahead of me? What do their businesses look like?
And what's interesting about this is that the vast majority of them have one massive business. And in seeing that, I was like, huh, almost none of them have multiple massive businesses they started. Elon is, of course, the one exception that everybody wants to bring up. And if you're Elon, you already know how to speak alien, so don't worry about this video.
But for everyone who doesn't know how to speak alien, for people who haven't just generated $100 billion in a year, if you haven't done that yet, then maybe consider every other person on the Forbes list that just did one thing for the entirety of their career. And it's like, Bezos has Blue Origin.
Yeah, after 35 years of Amazon, you've got Mr. Panda, still doing, he's like, but wait, he owns the Cosmo. Yeah, but he also did that after 45 years of Panda Express, and Panda Express is still his cash cow. Okay, I've got this restaurant, it's working well, so I'm thinking about starting this agency, right, to help restaurants. It's like, dude, What does the ultimate version of this look like?
The ultimate version of this looks like either you go all in and you build an enterprise agency that only works with very large restaurant chains and those tend to be sticky and those tend to be valuable businesses. But if you're like, well, I'm only dealing with small SMB restaurant owners for my agency, show me one.
One, agency that service SMBs in that $1,000, $1,500, maybe $2,000 a month mark, who has a $100 million plus business, even just like revenue. Just show me one. Why doesn't it happen? Because it's a bad model. Every single agency goes upmarket and they serve enterprise and it's become really big. Look at Ogilvy, look at Vayner, look at NP Digital.
All of these are massive, massive companies that only serve as really the Fortune 500. Why? Because they're sticky. Because if you have volatile customers, you have a volatile business. If you have a volatile business, you're not gonna be able to weather the storms. If you can't weather the storms, you're not gonna last long. If you don't last long, you're not gonna get big.
How do you counteract the idea of rushing? You have to look at the end state of the business. What is the ultimate version of my restaurant look like? It might be 2000 locations nationwide. What is the ultimate version of my agency look like? It might be Ogilvy and Mathers, right? It might be we're doing $5 billion a year. And let's look at the number one person in space.
What is the ultimate version of my lawn care business look like? Maybe it's a franchise. Maybe it's you privately hold it. But no matter what it is, it's probably not three different businesses that you're trying to start all at the same time because you're in a rush. Because the thing is, is that rush is what guarantees you're never going to get big.
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