In this episode, Alex (@AlexHormozi) shares the 5 biggest lessons he learned after passing $250M in revenue, covering everything from why constant changes hurt performance, to how virality is overrated, and why “rush” might be your biggest threat.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.Wanna scale your business? Click here.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition
Chapter 1: What are the biggest lessons learned after crossing $250M in revenue?
i wanted to make a video about five business lessons that i just learned crossing 250 million in 2024 and i wanted to make this because like i think at all levels you're always growing like when i was at one million dollars a year you know i uh i had a certain amount of lessons that i had to learn i think it's a 10 million there's certain lessons i'd learned 100 million there's certain lessons i'd learned this last year there's five lessons that are i would say new but would have applied kind of retroactively to all
stages of business growth for me. So the first one was the cost of change. And so it's like, what does that really mean? So 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 us 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 right which is pretty significant 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 like this big list of stuff where i'm like man we should need to improve this we need to improve this we need to prove this and i have all these ideas of things that i think that'll improve it but
But when I actually am honest with myself and I think, huh, how much is number one going to 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.
And so what's ended up happening is that there's all these little 5% 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. Some of these things I just choose to never do. And I'll try not to stay explicit here, but this is what reminds me of this concept, which is that some shit stays fucked.
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Chapter 3: How does constant change affect business performance?
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. Now, let's say you do something that is good. 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. 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 and 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 about 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 in relation to education, which in the US 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 US, 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 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 going to make on the business, right?
If I had to make, like, if this works, it's going to 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.
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. This is how I like...
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 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 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, let's order this. Which one has the highest impact? Which one do we think is going to work? Which one's going to be the easiest?
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Chapter 4: Why is virality often overrated in business?
Logo retention is of the 100 customers, do I have 50 customers, or did I go from 100 customers to 25 customers, but those 25 customers really like me, and they now spend twice as much? So that's the difference between revenue retention and logo retention. For me, we look at revenue retention because that's what we care about.
It's like, okay, if we just know that these 50, now that they're in, are just going to keep paying and potentially even growing between 50 to 100 next year, this is a monster business. This is what we look at and we obsess over in any business that we invest in.
Number two is making sure that the highest priority for the business is going to be revenue retention, not necessarily virality because not all products are meant to be viral. But if you are in a business that is consumer focused or something that doesn't have one, a disincentive to share,
and a high frequency of interactions between your customers with one another, people who have basically high overlap, so they talk to lots of people who could potentially buy your product. If these two things are, you have a high disincentive and you have low frequency, then you're just not going to have virality in the product and you don't have to worry about it.
But if you do, then obviously you want to have both. Number three, I've been very obsessed with the concept of LTV to CAC. I've talked about it a lot, which is basically how much does it cost you to customer versus how much money you get from that customer over the lifespan, specifically in gross profit, not lifetime revenue.
Now, the reason I like to always delineate this, and I say LTGP, which is a mouthful, is because most of the literature that exists on LTV, so lifetime value for a customer, how much they pay you in gross profit over time, is typically written in the software world. And software tends to be virtually 100% gross margins in most businesses.
Many businesses look at that literature and then say, oh, well, let me just say someone stays with me for 10 months, they pay $100 a month, therefore my lifetime value is $1,000. Well, that's only true if you sell information, media, or software. Something that has zero incremental cost. But a lot of businesses don't have that.
If you sell chocolate chip cookies, and the cookies cost you $20 for each of those $100 shipments. I mean, these are expensive cookies, but let's just go with it. So this costs you $20 for every $100 shipment. Your lifetime value is not $1,000. So we have our $100, right? Times 10 months. That's the revenue.
What we're looking at is $80, because we have to take out the 20 in cost, times the 10 months, which actually equals $800, which is our real lifetime gross profit, which in the business world sometimes where people refer to as CLV or LTV, they all more or less mean the same thing, which is how much money you're gonna get from the customer.
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Chapter 5: What metrics should be used to measure revenue retention?
I really do believe that you can just keep tinkering with the business, keep tinkering 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 if some of you guys 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 into 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 added. 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 gonna make from that customer in order to weather that storm and allow you to kind of grow into that, you can almost like grow into your LTV to 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. You have to bring people in for outbound that are not going to be proficient.
So you're going to have to incur the cost of new SDRs that either aren't going to work out at all or aren't going to work out in the beginning and then eventually going to work out. So you have to incur that cost.
But imagine incurring that cost and then also incurring the cost of new salespeople who are actually going to be trying to convert those prospects and they're going to suck and they're going to lose opportunities. And so you're going to be paying them while they literally close fewer sales for you. So you lose twice.
And then also sometimes you spend all this money and time to get them hopefully to be proficient and then they aren't. So they just lost you money three different ways. Real quick, guys. Thank you. Thank you. Thank you. You guys are awesome. This podcast continues to grow. We had our highest month ever last month, which is huge. And we don't run ads to grow the show. It's just you guys.
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Chapter 6: How can businesses determine their LTV to CAC ratio?
It's just you guys. And so if this podcast has provided you value, if you could text it to a friend or you could send it on Slack or share it on your Instagram, that is how this podcast grows. And that is why I continue to make them. It's because of you guys. So thank you guys, first and foremost. And if you have it in your heart, if there's somebody who could use this, then please send it.
Lots of love. Enjoy the rest of the podcast. The third component of this is the delivery piece, which is like, okay, I'm going to have to onboard and hire all of these other people. And if you have anything that's like higher expertise, then forget about it. It's going to take even longer for you to both find these people and then also to train these people up.
But again, recruiting itself can be a super expensive task. There's recruiting firms and it usually costs you 25, sometimes 30% of their first year pay. And if you're paying someone $300,000 a year, it's like, You're going to pay 80 grand just to get somebody, let alone hope that they're proficient and you still have all this onboarding.
So you have this lumpiness of people that aren't going to be effective. And if you're at three to one, boom, you're done. Like that three to one disappears real fast. It's like you have this lumpiness of like, okay, boom, we got these new SDRs in. Okay, now this is coming back up. But then this starts growing down. So now we start at 20 to 1 or 30 to 1, but it's more like a wave.
It undulates with the efficiency of the business and how stable it is as you're scaling. And the faster you're scaling, the more inefficient it's going to be. So that's why you need to have as much as you can in terms of LWD CAC. It's padding. The third piece here is that we just went over it, LTV to CAC. One, we wanna make sure that we're doing this off of gross profit, not revenue.
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.
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Chapter 7: What strategies help to scale a business effectively?
If you have $400,000 in profit that's left over, if you wanna bring in a stud who's gonna really help you there, you're probably gonna be looking at $250,000 per year in all-in comp, kind of at a minimum, to bring somebody who's a real star into the business. Let's look at that in comparison to what the profit is for this business.
You're looking at risking more than half of your income on one person with the hopes that it's gonna work out. But what happens when this person comes in and then they aren't that good? They don't expand your capacity. It's like, well, shoot, I just lost half my profit for a year and then I'm still not further along. This is why this is the swamp.
And I've just spent a lot of time thinking about that because I was like, why is one to $3 million so hard? You need the help, but you don't have the money to afford the help. And so you either just got to go overdrive and go nutso mode, right? Or you make a huge bet proportional to what you have in terms of net profit to bring this person in. And that's why it's so hard.
And so if you're in the swamp right now, my encouragement to you is this. I have almost always been the like, I'm going to go into overdrive. And... I'm going to hire the person.
Because the idea is, what if I just do things that are more unscalable but still generate higher profits for the business so that I can afford to take two or three shots with somebody else who's coming into the business knowing that I'm not going to get it out of the park on the first shot. I mean, if I do, I'm stoked. But I want to win either way.
And so either I'm going to win with more profit faster or less profit slower, but I want to make sure that I'm guaranteed to win. I kind of do this as a plus strategy. scenario. And then the fourth thing we just covered is why one to three million is the hardest. And the main thing is, is cash flow and time.
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Chapter 8: What is the importance of customer retention in business growth?
You don't have the time and you don't have the cash flow to do more work, but you have to in order to grow. So either you work overtime or you bring someone else in to work overtime or you do both, which is what I recommend. And that means it's going to be hard, which is why most people stay stuck. So that's number four. Number five. So 2024,
for, was probably the first year that I didn't have FOMO. So fear of missing out. It is the hardest part of business is staying focused. It's the hardest part. The reason you hear Bezos talk about it, you hear Zuck talk about it, you hear Jobs talk about it, you hear Elon talk about it. You have to be incredibly focused on what the points of greatest leverage are in the business.
The reason that this was a big lesson for me, not the focus part, I obviously talked about that, but I was like, why was this year different? Why was this the first year where I didn't have FOMO? It's actually because the idea of rush is where the fear of missing out comes from.
It's the arbitrary timeline that I set for myself that I just grab from thin air, and then I measure myself against this thing that I made up to make myself miserable at all times from whatever success I'm achieving. In thinking about that, I've coined the term for myself, which is that rush is imaginary. It's made up. It's completely made up.
There's only one caveat that I'll make to this, which is, and if this is you, you probably already know, if you have a business that has a tremendous network effect, and there's a very small amount of people, or even a big amount of people in that network that you're trying to gather towards, then yes, it's likely that you have a winner-take-all business model, and in which case, you've probably already raised a ton of money, and you're probably trying to aggressively grow to capture that network so that eventually you can turn something into a profitable business.
Fine, for everybody else who's not running a tech platform that's trying to build a network effect of some sort, you don't need to rush. There was Ani, actually I don't think her episode's come out yet, but anyways, I'm gonna give you a sneak peek. So I was talking to Ani Truong, and she has nail salons, okay?
And so she has one core nail salon that worked really well, and then she decided to partner with other people doing like three or four other nail salons. And the biggest issue she has for growing right now is that her partnerships are kind of a mess. I'll just put it like that. Why did you do these partnerships? She said, because if I had more locations, I'd make more money.
And I said, why didn't you just make more money with your existing location, save up the cash, and then open a second location all for yourself? The thing that I kept trying to tease out of her is I was like, she was just in a rush. Like that was the reason. She was just in a rush. There's no actual reason for have three or four other different random partnerships with each of these locations.
And the thing is, is that some of you guys are, you do this. There was a guy who was here at our headquarters yesterday. He has a TikTok shop management thing, right? Where he just like helps people start their TikTok shops for e-commerce businesses. And he was like, but I also have this brand that I started on my own using TikTok shop and it's doing really, really well.
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