In this episode, Alex (@AlexHormozi) explains why most education businesses struggle with churn and sellability, not because their content is bad, but because they confuse one-time value with ongoing value, and price them wrong.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast,t 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.Wanna scale your business? Click here.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition Mentioned in this episode:Get access to the free $100M Scaling Roadmap at www.acquisition.com/roadmap
Chapter 1: What problem are we solving in education businesses?
We have to answer, what problem are we solving? If people are churning and you have an education business, well, unless you're doing continued education, that is the nature of the business and you probably miss price on the back and probably miss price on the front end.
This is where service businesses start to sprout off of education because they're not coming for the education, they're coming for the service. They come for the service, they'll keep paying for the service if it's good. Back streets, back, all right. Or is it let's go? I don't know. I actually don't know the words to the song.
Don't know the words to any song, believe it or not, except for one that I did for poetry class in seventh grade because I actually had to like write it down. So I'm a very visual learner. Literally can't remember any of the song lyrics. Anyways, that's not why you're here. I am on a little bit of a roll this morning because I've had a lot of things that have been percolating.
I haven't done one of these in a minute. I've just had a lot of backlog of like consistent questions that I get around the same themes. And I wanted to make stuff to like... just put a nail, you know, drive a nail into the coffin, like not have to, basically it's like, I want you to not like this, like this is solved. Like you don't have to think about this one again.
Chapter 2: Why do education businesses struggle with churn?
Like this is, this is the, this is, I won't say the answer, but I'll do my very best. So here's the issue. Many people have education businesses. And so that means books, courses, you know, media, speaking, coaching, all of that stuff. Right. And they want to make sellable businesses and And they also want their customers to never leave.
And so they have these problems, which is that customers are leaving and their business isn't sellable. And they think there's something wrong with their business. And the answer is maybe. So let's dive into this. Number one, what makes Harvard Harvard? Like, why is Harvard different from whatever one, two, three, you know, coaching education business?
OK, well, number one is that Harvard has standards. So they have many people apply and only a few get in. If you accept everybody who has a credit card, that's not a very high standard. And so if you want to create a brand around education, you can't let everybody in. Thing number one. Thing number two, Harvard makes no promises.
Chapter 3: What differentiates Harvard from other education businesses?
They don't say, hey, you're going to make this much money and you're making this many days. So they've completely gone away from that. Instead, it's just it costs this much money to get in and you might not get a result. Now, here's the here's the craziest part. Number three, not everyone passes. So not only does not everyone get in and everyone pays with no promise, not everyone passes.
And so if you just look at those three criteria, there's more. But if you just look at those three criteria, you'd be like, oh, that's why they're different from 99% of other education businesses in general. They also do education. Now, what else is different about their thing?
Well, it's in person versus remote, which is probably, again, another big differentiation for the vast majority of these businesses. On top of that, the network of the quality of the people is probably the most valuable thing that they give on top of the brand. And so they just curate an experience for very smart people and they slap their brand on top of them.
And fundamentally, that's actually what they sell. Now, what's the next issue that comes up for most people of like, why is my business not a Harvard brand? They will then get into, well, my customers leave. So do Harvard's. They leave after four years. Now, they also have an extended time horizon in terms of the promise of when someone might get to the end of this thing, right?
Yours is six weeks. Theirs might be six years. Now, what is continuity in the form of education? Well, every quarter... or every trimester, semester, or whatever they work on, right? You have new courses and you have a curriculum. And so a lot of people who are in the education space are like, I want to teach this one thing and I want people to pay me for it forever.
And the reason for that is because people in the education space mistake a payment plan for continuity. So if you sell something that costs $12,000 and you give them access to it for a year and people pay $1,000 a month, you don't have churn. People have graduated. You have a payment plan, not continuity. If you're trying to solve for continuity or solve for sellability, let's go into those.
Why not? We're partying, right? A business that has enterprise value has reliability of future cash flow, meaning there's a high likelihood that this business will continue to make money in the future. And so typically like a Harvard has a brand. And so because of that brand, they're not worried about demand, right?
They can demonstrate the fact that they have a certain number of people who are applying every year and a certain number of slots available. And so because of that supply demand discrepancy, because of the brand that they built, they were able to likely, if it were a private enterprise, what is private, but it's not a nonprofit or sorry, it is a, it's not a for-profit institution.
It's a nonprofit technically. Let's not get into that. But point is, is that For your business to have value, you're going to have to build a brand around it that guarantees demand in the future. Because, and this is the big one, because education does not lead to continuity except under one circumstance. So let me explain.
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Chapter 4: How can education businesses create continuity?
Now you're like, wait a second, then how did gym launch sell for a lot of money if there was enterprise value? Ah, because most people mistakenly think gym launch was an education business. And that's because the people who profit from education businesses try to sell you on that.
As the owner of gym launch, I can tell you the vast majority of the enterprise value in that business was not from education. Because there's other things. So I said column A is one-time value. Column B is consumables. Things that continue to provide value again and again and again. Now, if you look at your service, which I like to think about it from that perspective.
What are the other things that you have in the business that someone must use again and again and again? Examples. Forgemont, one of the primary things that we do there is that we go and test ads in representative markets. We spend our own money. to get ads that we know work. And then once we have that ad, we then sell it at a margin, basically, to everyone else.
And it's 100% gross margins for us after we've incurred the initial cost of, one, filming the ads, editing the ads, and then displaying the ads, actually running them, putting the money behind it to see which ones are the winners.
But once we scoop up the four or five winners, we can just hand them to 1,000 or 10,000 locations, and they are valuable to each of those locations because within those local markets, they are new ads. But what do you need next month? More new ads. And so it is a consumable that has 100% gross margins that can be sold again and again and again.
What else do you think someone could have that is consumable? There's a great school community, for example, where they do 3D printing. So the guy teaches 3D printing. How do you do it? How do you set it up? Whatever. One time value. And then after that, every month, he scours the internet for new products that are hot and trending right now so that you could set up with your 3D printing business.
And so people stay every month because they can get this list, the hot list, and then they grab the things off that list and they stay in there. And for him, he just had to do the one-time work of creating the list and then he can sell it over and over and over again. But people stay because they don't want to lose it. I'll give you a different business. There's a real estate business.
that has a school community. And they have super low churn. And one of the reasons they have low churn is because every month he has bird dogs, so basically people who go out and scout for properties, and he puts a list out of properties that meet his criteria for his way of doing wholesaling. And so then people pay to be in his community in order to have access to this list of fresh properties.
So he does the one-time work, and then he basically licenses that or fractionalizes the sale of that to many people. These are the consumable consumables. What other ones are common? Let's think through them, all right? So one of them is you've got community. Community in and of itself is actually a consumable thing. You use it this month, you use it next month, right?
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Chapter 5: What are the two types of value in education deliverables?
In this context, how do we get customers to stick? One is, with the pricing, we want to price the one-time value as high as we possibly can relative to what people are willing to pay. On the consumable part, we price it where people are also willing to pay if the other piece didn't exist. So think about this. This is the big mistake, right?
This is the big mistake, is that people will price their consumable at a payment plan price of their one-time upfront value. And so, for example, if something's worth $30,000, then they say, cool, you can pay $2,500 a month for 12 months, and you're going to get this one-time value and this consumable value.
But then once people have kind of drained that one-time value, and sometimes it takes less time than a year, then people exit because the consumable value is not worth the $2,500. This is why I'm a big advocate of the big head, long tail model, which is maybe the upfront thing is worth really $10,000. And your consumable thing might be worth $100. It might be worth $200. It might be worth $500.
I don't know what that is. But if you only sold that, so this is a good mental frame, is if you only sold this thing, What do you think would be a price that people would not want to leave? That's the price you have for your continuity because that is the price that people are willing to stay at.
And typically, it's significantly lower than a spread out version of the upfront value of whatever the educational skill is. And so you have to differentiate those things. Now, beyond that, you might be like, well, shoot, my consumables aren't worth that much. Fine. Then structure your pricing so that you always have a value discrepancy in what you charge and what you deliver.
Now, the other piece of this is, okay, well, I want to have enterprise value in the business, which means that I should have a reliability of future revenue. So, sure, we have a little bit of our consumables. That will stack up over time. Great.
We have our upfront, which typically serves to liquidate the acquisition cost, at least how I like to structure things, for the high margin continuity that goes on the back end. But what else can we do? Well, what does Harvard do? They sell you more courses. They sell you more degrees. You want to have a bachelor's? Guess what you have now? You want to get a master's? Get a master's.
After a master's, what do you get? You get a PhD. Well, after a PhD, what do you get? You get a double PhD. You get a super duper PhD, right? They'll keep selling you, but the thing is that's the continuity. That's the ladder is just with the higher level version, but they also know that it's a fraction of that, right? If 100 kids go to get a bachelor's, it might only be
10% or 20%, I don't know what the numbers are, 20% that they get a master's. Of the masters, maybe it's only 10% of them that get a PhD. And so also the pricing also reflects that. Interesting, right? Real quick, guys, I have a special, special gift for you for being loyal listeners of the podcast. Layla and I spent probably an entire quarter putting together our scaling roadmap.
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Chapter 6: How do pricing strategies affect customer retention?
Delaying gratification in general tends to, especially at the beginning, increase your reward. But at some point there is a diminishing return, in my opinion, beyond which you should just get your reward, right? And also there's this misconception, I think, that by taking the reward,
unlike the experiment, that it prevents you or precludes you from getting another marshmallow again later, which oftentimes it doesn't. And so I think there's a sweet spot, and that's like most things, is that the magic is in the middle, is being able to balance both extremes.
And what many people will do, strivers especially, will just suffer for extended periods of time, and then sometimes they don't even get the second marshmallow and the first marshmallow is stale. So I don't see an issue with the fact that the business that you have might just generate more cash flow and not really be that sellable. That's okay. It's a trade you make.
And I think it's a reasonable trade. But if you want to have your cake and eat it too, then there is one specific type of education that does have continuity. And so that's what I'll dive into. So obviously all the components that I talked about that are consumable, those will drive continuity. But there is one specific type of education that drives continuity, which is continued education.
So there are professions where you have to stay up to date with technology. You have to stay up to date with new practices.
Where if you can build a business where you recertify people on new skills or new technologies that come out on a consistent basis, then that membership, which is really what the business is, that membership business can over time continue to compound and you can demonstrate that people will stay with you for an entire career.
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Chapter 7: What common mistakes do education businesses make?
If you can demonstrate that, then you have a business that is very valuable and is in education and can sell at almost a tech multiple. Fundamentally, inherently, technology businesses don't get these multiples because it's not like, oh, I have a software, therefore I get a software exit. No one gets this.
The thing is that people will preach this because they want to sell you on that idea, but that's not how an investor sees it. The things that make a software valuable are the things that make a business valuable. which is that there is revenue retention, there's high gross margin, there's high incremental margin, there's less operational drag at scale.
These are all the things that make software companies at scale more valuable. It's not that the fact that they use code that makes them valuable. If you sell people into a software and they churn out every six months, that's not valuable. It's basically the same as a service. And you're going to be valued based on the fact that you have customers that come in and out all the time.
And the thing that you'd have to establish as a brand that would then prove out the fact that you're going to continue to have demand like Harvard for years to come. And so if you're not doing this... then you're basically just building something that generates cashflow, which to be fair, I'm not saying there's nothing wrong with that.
But the big misconception is the idea that number one, there's something wrong with it. Number two, that I have to add software or something to make my company valuable, which it won't make it valuable. It'll likely make it a distraction and decrease the size of the business. Number three, We're cranking. You're charging too much for the consumption and too little for the education.
You probably need to do this. Charge more for the upfront thing because it is life-transforming value, and then charge less for the thing that's ongoing because it probably is less valuable than the other one. And if you're like, I'm not sure if mine is less valuable, well, just look at your churn. People are telling you if it's less valuable.
And if you don't have something that is consumption-based, think about what components of whatever it is that you sell, someone must consume on a monthly basis. They use and reuse so that you can get them to buy again and again. So these are my qualms. With education done right, this is how I think about it. And hopefully that should put to rest. One, how do I sell my education business?
Well, it's not about an education business. It's about keeping a business that keeps customers for a long time and having high gross margins. I gave you one model that does work. The other model is having a stack of consumables. Continued education is also a method that works there. But again, that's the new thing. That's the PhD. That's the master's.
It's certification level one, two, three, four, five, six, right? It's the extra thing that you're doing. And you have to understand that there's gonna be a trade-off or drop-off at each level. Now, if you sell only continued education on the front end, then you have people already have a prerequisite.
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Chapter 8: What makes a business truly sellable?
Which, of course, every business has to keep selling people. The percentage is going to matter based on the industry and who you serve by a wide margin. If you're serving high-end enterprise, then you should be 80% annual renewal or higher. If you're serving beginners, then it's going to be high. And that's also a feature, not a bug. It's just part of selling to that customer.
For me, what I care about fundamentally... is the cost and the return of a permanent customer. So let me break this down. This is probably the most important concept. All we care about in any business is how many permanent customers do we have.
Let's say that you have, for every 10 people who buy your education, three of them transfer over to your service, and of the three that transfer to your service, one of them never leaves. Then we just have to know, okay, it cost me 10 times my current cost to acquire a customer to get one Person who never leaves. So what's that LTV to crack ratio? What's that LTV to crack ratio, right?
If you're having just your LTV to crack ratio for front-end business, that's different than LTV to permanent, right? What's my permanent crack to a permanent LTV? They just never leave. And if you're like, well, I don't really have that yet. Well, yeah. And that's because that's the hard part of business.
Once you figure out the product market fit of what's my feature stack, what type of customers that feature stack better, you know, better serve for so that 12 months from now, these people never want to leave. Once you solve that part, that is the hard part of business. That is the hardest question to solve.
Once you solve that, then everything else is basically just math of how do I find more of those people? And if I have to go through five to get to one, then my cost, but this is one permanent customer. And then it should be able to cashflow question. which is why people raise money and then they get really aggressive.
But then you want to see like, okay, is there a way that I can either select better on the front end or is there a way that I can increase activation so it becomes one out of four instead of one out of five? But we have to get to that one point you have a permanent customer and then build backwards from there. Okay, so when do you upsell other feature stacks?
Well, it's going to be based on their need. So if someone comes in and has all of these needs, then you'd sell it naturally at that point. If someone has one problem solved, but then just creates another problem, a simple example would be like, Hey, I teach people how to do, you know, DM setting or whatever. So you teach people how to, you know, reach out to people and create appointments. Okay.
Uh, Well, once they learn how to do it themselves, what's the next thing they're going to want? They're going to want other people to do it for them. And so if you want to sell a service of placement for those people or sell some sort of like a fractionalized service where you have a pool of people that works for many people, or you say, Hey, I'll employ them myself.
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