Chapter 1: What are the four main types of businesses?
There are only four main types of businesses. So your business is one of these four. And understanding what shape my business was has allowed me to develop a portfolio of companies that generate over $250 million a year at acquisition.com. And so if you have a business, you need to know what shape your business really is to maximize the opportunity you're in.
And if you don't have a business, you should know what you're getting into so you can pick the right one for you.
Chapter 2: How does knowing your business shape impact growth?
So let's get started with the first shape. So what type of business is this business? I love it if you actually think about it right now, like if there's different types of businesses, what do you think this one really is? All right, now that you've thought about it, this is the shape of an e-commerce business.
So in the very beginning, you'll typically have to get some inventory, especially if you wanna have a bigger business, no gigantic businesses or drop shipping. So if you want a bigger business like a brand, you're going to have to do some sort of inventory. You'll have to front a little bit of cash, right?
But as soon as you start selling, because it doesn't require a lot of operational infrastructure, you can grow really quickly. But then you'll hit these breaking points that stop your growth flat. And so either of these will be cash constraints in the business, as in like you don't have enough money to buy more inventory. It could be...
It could be traffic constraints, like all of a sudden your ads just stop, and then the ads don't perform past a certain point. It could be that you've maxed out your distribution. Let's say if your retail distribution is like, okay, we got 7,000 more 7-Elevens. It's like, okay, and then we continue to stay at that level until we get CVSs, and then we stay at that next level.
And so each of these kind of unlocks typically occur when you have a supply chain unlock, or you have distribution that unlocks. So distribution can be literally physical retail distribution or it can be ad-based and or affiliate-based distribution. All of these different ways are promoting it so it gets it in more hands. So this is why the shape of this business looks this way.
And you also can get stopped by all of a sudden you run out of stuff. Your supply chain dries up because your manufacturer can only do 1,000 units a day, and you need 10,000 units a day. And so while you find the next manufacturer, you're flat again. And this is the nature of the business that you're really in. And if you're curious, what experience do I have with e-commerce?
Well, I'll give you two. So first off, Prestige Labs was a physical products business. We sold through a brick and mortar distribution base. We also sold through an online store. So we had both of those angles.
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Chapter 3: What challenges do e-commerce businesses face?
I had distributors, obviously our gyms, and then also any consumers could buy directly from the store. So we had ads that were running as well. And so both those elements were e-commerce. In addition to that, the launches that we had for my last book, the world record-breaking, Guinness world record-breaking book, This is literally e-commerce.
It's a physical product that gets bought through a store and then shipped out, like very straightforward. And so the reason that this video is so important before I dive into all the other four is that most people think that there is something inherently wrong with their business when it is in reality, a feature of this business, not a bug.
And so the more you can zero in on, okay, if these are the big hairy problems that exist within the shape of my business, how do I put disproportionate effort on solving these key foundational issues or problems to this model that will allow me to out-compete all the other people in my space that don't know this. And I'm telling you, like, this is the sauce.
And also sometimes you'll have to switch three PLs as you scale too. So even if you have the inventory, somebody might not be able to ship out 10,000 orders a day. Like when we did the book launch for me, I had to find three PLs who could ship out millions in 72 hours.
That's absolutely absurd, which is why we had to have multiple across different states in order to make sure that every single person got their book within days, not weeks or even months. I talked a little bit about the cons, but let's talk about the pros of this. So e-commerce, it can scale relatively fast compared to some of the other business models.
And the reason for that is once you have the stuff, I mean, it's really just like how fast can you hand it to somebody in exchange for money? And if you have a Shopify store or a WooCommerce store, any kind of online store, they can just click and buy, and then you have somebody else who's shipping it straight to them. As long as they can ship it and they can buy it, You can sell a lot of them.
The issues is when you run out of stuff, the guys can't produce it, you can't get raw materials, they can't ship enough of them. These become the constraints. But fundamentally, if you're operating within all of those, as in they can ship more than you have, you've got enough inventory, as long as people keep buying, the number just goes straight up.
And so what's interesting about this particular business is that it also typically isn't going to be nearly as kind of key man risk from the founder. Of course, there can always be key man risk for key skills. But if you have a product that people love and people keep going to your store and buying it, it's a very sellable business. Okay, and so that's maybe the upside.
Let's talk about the dirty. So what sucks about having e-commerce? One of the first things that sucks about this business is that in general, most people who own e-commerce stores, they can do significantly more revenue than some of the other business models really quickly. It's one of the fastest ones you can grow revenue on.
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Chapter 4: How does cash flow management affect business scaling?
How long is it, you know, if it's a 12 week lead time for you to buy stuff, you have to predict how much you're gonna be selling in 12 weeks. That can be difficult, especially if it's your first time. Number one. Number two, your distribution. You're gonna live and die by your distribution.
So ad accounts, brick and mortar distribution partners that you can have, affiliates or influencers who have kind of, I would call it synthetic distribution through their audiences. All three of those are partners of yours, right?
product like great product will always find a great distribution great distribution will always find great product right but the problem the big problem that you'll have to manage is going to be supply chain how can you have enough stuff to sell right logistics isn't that hard because there's a lot of there's some decent um you know pick pack ship that are out there everybody always has complaints because it's not their business they would do differently blah blah blah blah you wish they they can charge you as much etc etc but like by and large that i would say that problem has been has been solved relatively well um
The next issue is going to be making sure that the product you have has a brand behind it. And this is the real nasty one. Because if you just have a pure, I call them smash and grab businesses, which is just, you're a media arbitrage business. You know you can buy eyeballs at $10 and you can sell them something where you make $11 in gross profit. That's just a smash and grab business.
And if somebody else sees you smashing and grabbing, guess what they do? The downside of physical products is that because anybody can own it, anybody can also sell it. And so if you've got a widget, somebody else can go to China and make the same widget as you. And that's where patents come important.
That's where if you actually do own your manufacturing, have some special sauce in terms of how you make your stuff, these become the competitive moats for the business. But the largest of all of them by far is brand. Nike shirts are inherently the same shirts that other shirt companies make.
They literally buy the same raw materials, but why are you willing to pay so much more for a Nike shirt versus an unnamed shirt? Because of the brand. And so even if someone can copy every single thing down to the thread count of your business, they still can't copy the brand. And so some of the best brands are in e-commerce because you have to be in order to get big.
And so we think if we translate what brand does, and this applies to all of them, it's super important with e-commerce because it's so easy to commoditize, is that the value that brand delivers is that you have higher click-through rates, as in more people show interest because they have a history of good experiences with you or good word of mouth.
Number two is that you'll have higher repurchase rates. People will buy once and they'll continue to buy again. And number three, you'll be able to charge higher premiums for the same thing. So that means lower cost of acquisition, higher LTV because they're buying more and higher gross profits because they're buying at premium prices.
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Chapter 5: What are the pros and cons of service-based businesses?
What's interesting is that nowadays the model has reversed. It used to be, build a huge brick and mortar presence across many, many states, and then start an online store. The last kind of version of that was like Lululemon. that I would say that was more popular and that I can think of at least. And more recently, it's kind of the reverse of that. You look at like the Gymsharks, right?
They're almost all e-commerce and then they choose to open up these flagship stores in key locations that are brand additive. Now, on a long enough time horizon, once brand awareness has been completely saturated for an e-commerce brand, then you actually open up stores all over the place because you remove the cost of shipping,
each of those markets because people actually go straight to the store and it increases their average order when they're in person. And so the actual cost of acquiring the customer becomes rent divided by sales per month. kind of cool. And so that's what happens at the ultimate scale level that many brands don't get to.
And some of them just choose not to do that because it's super capital intensive. But at some point when everybody already knows who you are, you just want to make it even easier for them to buy. And so that is the ultimate version of an e-commerce brand and how you do it right. And It takes years to build that level of brand, but you can scale revenue incredibly quickly.
And I'll add one last caveat, which is that you have to be an absolute savage email marketer. And so the amount of backend, the iceberg underneath of here, that exists in terms of messaging, different process flows, the campaigns that you're running, attribution, so that you can see your true metrics. I think some of the best marketers in the world are here.
And it's because, to be fair, once you have a killer product, It's, you know, back end dweebs that we're gonna, you know, they're gonna be working on making sure that we have enough product. You can hire the people who can make sure the cashflow is there, all that kind of stuff. But like the best, I think some of the best marketers in the world are e-commerce marketers.
Oh, last thing, the product's gotta be exceptional because no matter what you do, you're gonna have all the best marketing in the entire world. If you get someone to buy it and then it sucks, Doesn't matter. And as you scale these businesses, the cost of acquiring customers continues to rise.
And so the only thing that you have that's a compounding vehicle that can scale proportionally to increasing cost of acquisition is a referral word of mouth chain that does two things. One is repeat visitors. Like how many, what percentage of your sales are customers that are coming back because they really like the product?
And then number two, what percentage of those customers are bringing more customers? And if you're like, well, what percentage is right? It depends on the growth rate of the business. So if you're growing by 1,000%, you're always going to have more new customers in the beginning.
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Chapter 6: How can education businesses create value?
So that's e-commerce. What's this puppy? So this is the puppy that 78% of businesses in the United States are based on, which is big, bad service. So this is a service business. My credibility with this is that I had six brick and mortar gyms that I scaled. Then I had a turnaround business that we flew around the country and did turnarounds.
I did 30 something turnarounds over almost two years where we turned other gyms around, which are service businesses. Then, so that was my B2C service experience. Then I went online and basically built a gym consulting firm that sold services like marketing services, ad creation services, things like that to gym owners across the US and basically the English speaking world.
And so I built both B2C and B2B businesses to, you know, I think mid $30 million a year. And then now at acquisition.com, we advisory practice, which is a nine figure plus business. All right. And so, yeah, so we're very familiar with building out high quality service businesses. And so I feel confident in saying I can help you grow yours.
All right, and service businesses look like this because they are slow and steady. So if I wanted to make it a little bit more accurate, I would have drawn it more like a straight line because this one's taller, but I only had this much space. All right, but it's a slow and steady growth curve. So why does it look like that? It looks like this because it's very people heavy.
And typically a service business has people at, All three, two out of three, or all three components of the business. So what do I mean by that? If we break a business into three chunks, attraction, a conversion point, and then delivery, right? Those are the three components of the business. From an attraction perspective, that's the only one where you could have a very scalable front end.
You could just be running ads, you have content on the front end, super scalable.
now typically if you're selling services it's going to have a higher ticket if it has a higher ticket usually a person is involved so you might have a person who's taking phone calls or meeting with customers at their homes or meeting in person in order to convert or transact all right close the sale once the customer is you know has transacted now we have to deliver and it's a service business which means that you have people who are involved in the delivery you do some sort of services to them all right now
What becomes challenging about this is that as you scale, it is easier to go find more product to sell than it is to find exceptional people. Significantly harder. And if the thing you sell is people with a premium, which is what a service business is, then you have to find very good people. And very good people are even harder to find, right? And they also cost even more money.
And so service businesses in general... you want to run significantly higher gross margins than the other three They typically don't run high gross margins and you want to design them in a way that do run higher gross margins because you need the padding for the inevitable volatility that exists within the business.
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Chapter 7: What strategies can software companies use to retain customers?
They're passionate about fitness. Where it's more difficult in that business is it's very hard to Number one, sell. And number two, retain customers because people don't like working out. Now on the flip side, I would say many or the vast majority of businesses are actually not like the fitness coaching business.
The vast majority of service businesses are people doing work that other people don't want to do. And so this is, the fitness coaching business is unique in that it is coaching. The vast majority of service businesses, there is no coaching. You just do the work, right? You fix the roof, you put in the garage, you do the accounting for them, you do the legal work.
You build the website for them, right? So for any of those businesses, it's actually very easy to do the sale because you say, I'm gonna give you the outcome and you don't have to do anything, right? And so if you're actually good, almost all service businesses, when they are done for you service businesses, almost never, if they're any good, have a problem getting customers.
The difficulty they have is hiring good talent because customers will stick because you're doing the service and they don't wanna learn it and they don't wanna do it. And the difficulty you have is you gotta teach other people to do it and do it well. And so you almost always be supply constrained in this business model. So what are the good things about this?
Service businesses are the least risky business because you can always keep a service business profitable.
So what I mean by that, so outside of rent, which should be a lower cost relative to, you know, whatever your business is almost always for service with the exception of maybe like a gym or like a med spa or something like that, where you have like some capital intensive stuff, but that's less of a service business, more medical, I won't get into it.
but for the vast majority of the true humans are the labor, right? If revenue goes down, you can always cut headcount. I'm not saying it's pretty, but you can always stay profitable and you can always cut it all the way back down to just you doing work for money, right? And so you can always make sure, as long as you are priced appropriately, that you can make money in a service business.
If you do a decent job for people, they will tend to stick around. And so it can be very stable, it's very predictable. The difficulty is like, how do you triple a service business year over year over year? Incredibly hard to do, especially as you get bigger and bigger. Now, some of the other benefits of service businesses is they do have the potential for high margins.
It's rarer, but the way that you... I'll tell you in a second how you can create high margins in a service business. But they do have the potential for high margins, but almost always they have high cash flow. Because there's not a tremendous amount of capital intensive reinvestment that must occur in a service business. We don't have to buy inventory. We don't have developers we have to buy.
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Chapter 8: How can entrepreneurs decide which business model is right for them?
If more people want your services and your supply constraint, what happens? Well, if we're supply constrained and we have more demand than we have supply, what should we do? We should raise our prices. And as we raise our prices, we should increase our gross margins. And as long as we have good training and we can maintain a reputation, what happens? More customers come in,
more demand, and then we can continue to raise our prices. And so it should be a process of consistently being able to raise price over time and go after better and better avatars, better and better ICPs, if you want to use that language, ideal customer profile, I think that stands for. Basically the type of customer that you're going after, right? The prospects.
You want better and better people who can write stroke bigger and bigger checks. And the only way to do that is to typically have the track record having done this for years and continuing to level up. And you can only do that if you're good because you have more demand than you have supply. And that's the game that you ultimately want to be in.
Now, is there a world for a low-cost service provider? Yes, with one very important caveat. You have to decide day one when you build this business that you're building it as the low-cost provider. And that doesn't mean, oh, people didn't want to buy this price, I'm going to go cheaper.
It means that day one, every decision you've made, you've made with that North Star, which is that we want to be as operationally efficient as humanly possible. So we're going to offshore all of our talent. We're going to have as much automation built into our business as humanly possible. And our primary USP or selling proposition is going to be that we are the cheapest.
It is absolutely a game where you can make a lot of money. but you have to decide to be in that game day one. I have spent the vast majority of my life on the premium side, which is where I would recommend most of you go because service businesses are inherently more difficult to scale because you have to scale headcount.
And so if you're going to have 20 people that work for you, I'd rather be making a million dollars per person than making less than that. I'll just say that. I'd rather make a million dollars per person because then it'll be worth the headache that comes with the headcount. So, That's shape number two. Drum roll, please. That brings us to shape number three.
So quick guess, what do you think this is? This... is an education consulting info media business. My credibility around information businesses is that I happen to own a software platform that allows people to start information businesses called school. And so I have access to quite literally millions of data points in terms of what makes this business work and what doesn't.
I've also been somebody who's consumed a lot from the alternative education world. And done a lot of studying on what makes these businesses work, because as somebody who is a continuous student of all games, especially the business game, I always want to see what separates the best from the rest. Nice little rhymey.
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