Price to Value Ep 345

In this episode of Mosey Nation, Alex Rosie of acquisition.com, who oversees a business generating $85 million annually, elucidates the crucial relationship between price, value, and cost of goods in business strategy. He emphasizes the importance of maximizing customer surplus—the difference between perceived value and price—to encourage viral growth and word-of-mouth promotion. By adjusting these three elements, businesses can create exceptional value at minimal cost, leading to exponential growth and the transformation of revenue into a fortune. Rosie also introduces his book, "100 Million Dollar Offers," as a resource for listeners to deepen their understanding of creating compelling offers. He concludes by encouraging businesses to use this framework to analyze and enhance their value proposition to achieve success and avoid failure.

• Alex Hermozi introduces the concept of three important lines in business: price, value, and cost of goods.
• He emphasizes the significance of these lines and their combinations on the company's profit and value.
• Alex owns acquisition.com, a company with an annual revenue of around $85 million.

"Three most important lines that you need to draw in your business that you probably are not."

"And I want to show you some different combinations of these lines and how dramatically it will impact how much money you make and ultimately the value of the company that you ultimately built."

The quotes stress the necessity of recognizing and managing the three crucial lines in business to maximize profits and company value.

• Price: The amount at which a product or service is sold.
• Value: The benefit or utility a customer receives from the product or service.
• Cost of Goods: The expense incurred to create or provide the product or service.

"You have price, you have value, and you have cost of goods. All right? So every business has these three lines within everything that they sell."

This quote defines the three lines every business has to consider for each product or service: the selling price, the value it provides to the customer, and the cost of goods involved in its production or delivery.

• Alex presents a mental framework to understand the relationship between price, value, and cost of goods.
• The interplay between these lines can significantly shift a business's operations and profitability.

"What I want to show you is a mental framework and the interplay between these things and how dramatically it can shift your business."

The quote introduces the idea of a mental framework to analyze the interaction between price, value, and cost of goods, which is crucial for strategizing business shifts and improvements.

• Customer surplus is defined as the excess of value received over the price paid.
• A higher customer surplus indicates a larger gap between the value provided and the price charged, which is desirable for customer satisfaction.

"Customer surplus is the excess between what they pay and what they get. The higher the surplus, the greater the distance between these two things here."

This quote explains the concept of customer surplus and its importance in business, suggesting that a higher surplus can lead to increased customer satisfaction.

• The discrepancy between the cost of services and the perceived value can drive virality in a business.
• A significant perceived value over actual cost can lead to a business model similar to Netflix's.
• Netflix offered vast content at a low price, with high gross margins due to low incremental costs per customer.

"The bigger this discrepancy is, the more viral your business will be."

This quote emphasizes that a large gap between the perceived value and the actual cost to the customer can lead to word-of-mouth marketing and a viral business model.

"Imagine there was a day, years and years ago, where you could have access to everything in the entire blockbuster store on demand, from the comfort of your home, and you could do it for less than it costs to rent a new release."

This quote illustrates the high perceived value of Netflix's service compared to the traditional model of renting movies from a store like Blockbuster.

"And so what they did was they priced it so low, but their cost of goods was still lower because the incremental cost of adding a single customer is basically nothing, right?"

This quote explains Netflix's business strategy where the pricing was kept low to attract customers, yet the cost of servicing an additional customer was negligible, resulting in high gross margins.

• Understanding the interplay between cost of goods, pricing, and perceived value is crucial to building a successful business.
• The speaker suggests that focusing on these three factors can lead to substantial wealth creation.

"If you can think about your business just using these three lines, then you will be able to build a fortune."

This quote is the speaker's key takeaway, stressing that mastering the relationship between cost, price, and perceived value is the secret to financial success in business.

• A business with high customer surplus and low-cost goods may not require much marketing.
• Such businesses are often operationally challenging, service-based, and run on thin margins.
• These are typically traditional businesses that grow slowly year over year and have limited resources to reinvest.

"If we have here our cost of goods at the bottom and we raise this all the way to here and we have a ton of customer surplus, what kind of business is this?"

This quote introduces a business scenario where there is a significant customer surplus, indicating a high perceived value compared to the cost of goods.

"This is going to be a business that probably doesn't need to market very much."

The quote suggests that businesses with high customer surplus may rely less on marketing due to the inherent value perceived by customers.

"These are a lot of old school businesses that grow consistently every year by 10%, 15% per year."

This quote describes traditional businesses that have steady, modest growth without significant reinvestment or operational efficiency.

• Speaker C promotes their book, "100 million dollar offers," available on Amazon with high ratings.
• The book is a resource that presumably relates to creating valuable offers in business.

"To the podcast, I have a book on Amazon. It's called 100 million dollar offers. At over 8005 star reviews, it has almost a perfect score."

This quote serves as a promotion for Speaker C's book, highlighting its success and relevance to the podcast's audience.

"You can get it for Kindle. The reason I bring it up is that I put over 1000 hours into it."

The quote emphasizes the effort put into the book, suggesting it is a well-researched and valuable resource for listeners interested in business strategy.

• Aim to create businesses with high value and low production cost.
• The goal is to provide something that's excessively valuable yet costs almost nothing to produce.
• Focus on creating a large customer surplus to encourage word-of-mouth promotion.
• The discrepancy between value provided and cost leads to business virality.
• Strive for a business that grows on word-of-mouth, which is contrary to common marketing advice.
• A significant customer surplus can transform a business from good to great, making it so remarkable that customers feel compelled to share.

"My goal is always to find a way to provide something that's excessively valuable, that costs me almost nothing to make."

This quote emphasizes the speaker's strategy of creating a product or service that offers tremendous value to the customer while incurring minimal production costs, setting the foundation for a successful and scalable business model.

"The bigger you do this discrepancy, the more viral your business will become."

Here, the speaker is highlighting the direct correlation between the value-cost discrepancy and the potential for business virality, suggesting that a larger gap can lead to more organic growth through word-of-mouth.

"If you conquer this piece, you conquer the customer surplus in terms of how much value they are getting for what they are paying. Then you will have an infinitely scalable business because you will have a quadratic way of expanding, which is through word of mouth..."

The speaker describes the concept of customer surplus as the key to scaling a business. By providing more value than the customer pays for, the business can expand exponentially through natural customer referrals, which is a more powerful growth mechanism than traditional marketing.

"If you have the surplus big enough, and you go from good to great and great to so good that people cannot help but tell their friends about you. Remarkable or remark worthy, that is how good it is..."

This quote illustrates the transition from a good business to a remarkable one. When the value provided to customers is so great that it becomes a talking point, the business achieves a level of excellence that drives word-of-mouth and customer acquisition.

• Most small businesses have decent margins and provide decent value.
• They are typically run-of-the-mill and neither underwhelming nor overwhelming.
• Small businesses often lack the customer surplus needed to spur word-of-mouth growth.

"So this is most of your generic mom and pop businesses. Decent margin. Let's say this is the baseline here. Decent margins, decent value. Just kind of another run of the mill business."

The speaker is characterizing the average small business as one that maintains adequate profit margins and delivers acceptable value but doesn't stand out in the market or provide exceptional customer surplus.

• Customer surplus is the concept of delivering more value than the cost to the customer.
• Achieving a significant customer surplus is crucial for organic business growth.
• Businesses with large customer surpluses can transition from good to great, becoming so remarkable that customers naturally promote them.

"The problem is, most people don't have enough word of mouth because this surplus is not big enough."

The speaker identifies a common issue where businesses fail to generate sufficient word-of-mouth promotion due to an inadequate customer surplus. This implies that increasing the surplus can lead to better organic marketing outcomes.

• Virality is a result of creating a significant value-cost discrepancy.
• Word-of-mouth marketing is presented as the antithesis of traditional marketing strategies.
• The goal is to create a product or service that is so good it becomes 'remarkable' or 'remark worthy'.

"But the goal should always be to have a business that grows on word of mouth."

This quote conveys the speaker's belief that the ideal growth strategy for a business is to rely on word-of-mouth, suggesting that this organic approach is more effective and desirable than paid marketing tactics.

• Alex Hermozi discusses the exponential benefits of reducing acquisition costs in business.
• Emphasizes that achieving zero cost of acquisition can result in a business growing quadratically rather than linearly.
• Quadratic growth is associated with building a fortune, as opposed to just making money.

"and your cost of acquisition will be zero, and your business will grow quadratically, not linearly. That is the difference between making money and building a fortune."

This quote highlights the significance of eliminating acquisition costs to shift from a linear to a quadratic growth model, which can substantially increase wealth.

• Hermozi presents a three-step framework for entrepreneurs to diagnose problems and create value.
• First, focus on providing the most value possible.
• Second, drastically reduce the cost of goods sold (COGS).
• Third, aim to have a product that costs very little but has high perceived value.

"I think, how can I provide the most value? Step one. Step two. How can I lower my cost of goods sold to a crazy degree?"

This quote outlines the first two steps of Hermozi's framework, focusing on value provision and COGS reduction.

• The framework is a tool to evaluate the potential value of an enterprise.
• It helps in creating value, increasing margin, and maximizing profit while also helping the most people.
• Hermozi emphasizes that the framework allows plotting both one's own business and competitors' businesses.

"And I thought I would give it to you because it's one of the tools that I use when I'm thinking through how valuable an enterprise could potentially be and how I can move these lines around to create value, create margin, and ultimately take home the most money and help the most people."

This quote explains the dual purpose of the framework: to enhance business profitability and to have a positive impact on customers.

• Hermozi shares that the cost for him in creating these frameworks is the time invested and lessons learned from past failures.
• He expresses a desire to help others avoid being "broken" by providing these insights for free.

"And the cost of goods sold for me is the time that it takes me to do this. And the many failures and lessons I've learned and suffered the hard cost of failure to make these little frameworks for you."

This quote relates Hermozi's personal investment in creating valuable content to his own version of COGS, which is the time and experience he has put into developing these frameworks.

• Hermozi expresses affection for his audience, referred to as "mosey nation."
• Encourages engagement by asking viewers to subscribe if they find value in his content.
• Conveys that he has nothing to sell, focusing instead on providing value and supporting his audience.

"So anyways, mosey nation, I love you guys... As always, I have nothing to sell. You keep being awesome."

This quote showcases Hermozi's connection with his audience and his commitment to providing value without expecting a direct financial return.