I have talked about Alex Hormozi before in this newsletter and if you haven’t checked out his stuff yet, I highly recommend you do so. He is one of very few people with a large following that I think offers consistent, legitimate value for free.
His latest book is called Money Models and while it goes into a lot of detail, it’s also actually pretty simple. So simple in fact, I think most business owners overlook these basics and miss what they could be doing if they just boiled down their operations to these fundamental principles and then applied them over and over and over without getting bored or distracted.
Here is the basic idea: if you know what a customer will spend with you, and what it costs you to service that customer and the difference is greater than the cost to acquire that customer, then you can basically scale forever by investing in new customer acquisition.
Sounds obvious, right? But many, many business owners fall short in executing on this. Either they don’t know how much it costs or even how to go about consistently getting new customers or they don’t make enough per customer to support growth and leave any profit, or even have a profit to begin with!
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Let’s make this a little clearer with some actual numbers. Suppose you sell a product for $20 and it costs you, all in other than advertising, $15 to sell that product and get it into the customer’s hands. If you can acquire a customer for $5 or less, then you can scale up to a basically infinite number of customers.
Now, if it costs you $6 or more to get a customer, you can only scale into bankruptcy. If it costs you exactly $5, then you have a huge business but the effort won’t be worth it because you’ll only breakeven, no matter how big you get.
So you have to make sure that after all your costs, and the cost to acquire a customer, there is something left over and of course the more the better.
If your formula doesn’t quite work in your business, what can you do? Adjust the price, generate repeat sales from the same customer, cut costs, improve your marketing and sales process to get customers for a lower cost each or probably, all of these things.
If with all that you still find you can’t profitably sell your product when you include the cost of getting the customer then it’s time to consider the fact your business can’t be saved.
This usually isn’t the issue, however, outside of ecommerce. In ecom, because you are often competing with low cost providers, it can be that the margin simply isn’t there for most commodity products to support the business if you’re acting as the middleman. If that’s you, then you need to consider how you can reach your customers directly or differentiate your product in a way that gives you some pricing power, otherwise it’s a very tough road.
Outside of ecom though, the issue I see most often is business owners with no clear idea of how to get new customers consistently and what those customers cost. I can’t answer all that here! But I can tell you the value of solving that question is huge.
Not just because you can scale easily and to as large as you want but the real benefit as you grow your business is that you can build out a team and ultimately have a business that can grow and run without you. That is next level success, well beyond just being able to be a top earner, you now have both financial AND time freedom. This is what Alex is always going on about and he’s not wrong!
My advice is to know your own numbers, solve for how much you can afford to spend to acquire a new customer and make sure that still leaves you with a reasonable profit and then plan to grow month over month, year over year until you hit the size you want. The math works, you just need to put the theory into practice!