The 3 Most Important Lines In Your Business Ep 364

In this episode, Alex Hormozi of acquisition.com, a company generating $85 million annually, discusses the crucial business strategy of balancing price, value, and cost of goods to maximize company profits and customer surplus. Hormozi illustrates how creating a significant gap between the value provided and the price charged can lead to a viral business model, exemplified by Netflix's success. He emphasizes the importance of a mental framework where increasing customer surplus and reducing costs can lead to exponential growth through word-of-mouth, differentiating between merely making money and building a fortune. Hormozi shares this as a practical tool for entrepreneurs to evaluate and enhance their business's potential for profitability and impact.

• Alex Hormozi introduces the concept of drawing three important lines in business.
• These lines represent price, value, and cost of goods.
• Understanding the interplay between these lines can significantly impact a company's financial success.
• Alex Hormozi owns acquisition.com, with an annual revenue of about $85 million.

"In this video, I'm going to be sharing with you the 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 will ultimately build."

The quote explains the central idea of the video, which is to teach business owners about three critical financial lines that can influence their company's profitability and overall value.

• The three lines every business has within everything they sell are price, value, and cost of goods.
• Price is how much you sell a product or service for.
• Value is how much benefit the customer receives.
• Cost of goods is the expense incurred to 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. You have how much you sell it for, you have how much value the person gets, and you have what it costs you."

This quote outlines the three fundamental financial elements in business: price, value, and cost of goods, providing a framework for understanding how they interact.

• Customer surplus refers to the excess value customers perceive they receive compared to what they pay.
• Adjusting the price can affect the customer surplus.
• A low customer surplus indicates that customers perceive they are getting less value for the price they pay.

"If we move our price up, see how little value we have here. This means that we have a low customer surplus. Customer surplus is the excess between what they pay."

The quote introduces the concept of customer surplus and indicates that increasing prices without adding value reduces the perceived surplus for the customer, potentially affecting satisfaction and sales.

• The perceived value of a product or service is linked to the surplus customers feel they receive.
• A significant discrepancy between the cost and the perceived value can make a business go viral.
• Netflix is cited as an example of providing high value at low cost, leading to its success.

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

This quote emphasizes the importance of creating a large gap between the perceived value and the actual cost to the customer to enhance the virality of a business.

"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 do a new release to rent a new release."

This quote illustrates the high value proposition that Netflix offered compared to traditional video rental services, which contributed to its rapid growth and popularity.

• Netflix's pricing was low compared to the value offered, but their cost of goods was even lower.
• The low incremental cost of adding a new customer contributed to high gross margins.
• Understanding the interplay between cost, price, and value is crucial to building a fortune.

"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."

This quote explains Netflix's strategy of low pricing while maintaining low costs, especially in terms of scaling up the customer base, which is key to their profitability.

"And so their gross margins here, very important, is still very high, because for them, they could still lower these things even more."

The quote highlights the significance of maintaining high gross margins by managing costs and pricing, which is a strategic move for business growth.

• Businesses with high customer surplus and low costs may not need to market aggressively.
• These businesses could be service-based with operational difficulties and thin margins.
• Such businesses are often traditional and grow steadily without large reinvestment capacity.
• They rely on operational efficiency to maintain profitability.

"This is going to be a business that probably doesn't need to market very much. This is going to be a business that is probably operationally difficult, probably a service based business, and probably runs on very thin margins."

This quote describes the characteristics of a business that operates with a high customer surplus and low costs, indicating that such businesses can survive with minimal marketing due to the value they offer.

"Many businesses run like this. These are a lot of old school businesses that grow consistently every year by 10%, 15% per year, and they don't have a ton of money to reinvest in resources."

The quote provides insight into the growth pattern of traditional businesses that operate on thin margins and high customer surplus, which allows for consistent but moderate growth.

• Alex Hormozi encourages listeners to connect with him on LinkedIn.
• He suggests sending a connection request along with a note mentioning the listener's interest in the show.
• Alex advises tagging relevant individuals in his or Layla's posts to facilitate connections.

LinkedIn in and want to connect with you. All right, so send me a connection request, a note letting me know that you listen to the show, and I will accept it.

This quote indicates Alex Hormozi's openness to networking with listeners on LinkedIn, provided they mention their interest in his show.

There's anyone you think that we should be connected with, tag them in one of my or Layla's posts, and I will give you all the love in the world.

Alex Hormozi is expressing his willingness to engage with listeners' networks by suggesting they tag others who might be beneficial connections.

• Discusses the typical nature of small businesses, referring to them as "generic mom and pop businesses" with "decent margins" and "decent value."
• Alex Hormozi describes these businesses as neither underwhelming nor overwhelming, indicating a level of mediocrity.

Is most of your generic mom and pop businesses all right? Decent margin. Let's say this is the baseline here. Sorry, there's our baseline. Decent margins here. Decent margins, decent value. Just kind of another run of the mill business.

The quote summarizes the average nature of many small businesses, which Alex Hormozi refers to as having decent margins and value, but not standing out in any significant way.

• Alex Hormozi aims to create businesses that offer high value at a low cost to produce, which he refers to as "excessively valuable" and "costs me almost nothing."
• He emphasizes the importance of creating a "big customer surplus" for a business to become viral.
• Alex Hormozi believes in the power of word of mouth for business growth, which he says should be the ultimate goal, contrary to common marketing advice.
• He stresses the need for a business to be so good that customers feel compelled to share their experiences, making the business "remarkable or remark worthy."

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

This quote reflects Alex Hormozi's goal to create a business model that delivers high value at minimal cost, making the product or service unique and desirable.

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

Alex Hormozi is explaining that the greater the difference between the value provided and the cost, the more likely a business is to go viral.

Because 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.

Here, Alex Hormozi is highlighting the importance of customer surplus in achieving scalability through organic growth like word of mouth.

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

Alex Hormozi identifies a common issue where businesses fail to generate sufficient word of mouth due to inadequate customer surplus.

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.

The quote emphasizes the need for a business to move beyond being just good, to a level where the quality of the product or service compels customers to share it with others.

• Alex Hormozi emphasizes the importance of providing value and managing costs in business.
• He suggests that businesses can grow quadratically rather than linearly by focusing on three key variables.
• The goal is to provide high value at a low cost which results in significant profit margins.

"That is the difference between making money and building a fortune."

This quote highlights the distinction between simply earning income and amassing wealth, implying that strategic business practices can lead to exponential financial growth.

• Alex Hormozi uses a visual metaphor of three lines to explain the concept of value creation.
• He stresses the importance of understanding and controlling these variables in business.

"And I thought of this visual with the three lines, and I just thought it was really telling."

The quote refers to a conceptual tool used to visualize the relationship between value, cost, and profit in a business context.

• Entrepreneurs should focus on how they can provide the most value.
• Controlling variables such as value offered, cost of goods sold, and price is crucial.

"But when I'm trying to diagnose a problem that I want to solve as an entrepreneur, I think, how can I provide the most value?"

This quote emphasizes the entrepreneur's mindset of problem-solving by enhancing the value offered to customers.

• Reducing the cost of goods sold is a strategic step for increasing profit margins.
• Alex Hormozi advocates for creating products with minimal costs that can be sold at a higher price, delivering substantial value to customers.

"How can I lower my cost of goods sold to a crazy degree?"

The quote stresses the importance of drastically reducing the cost of goods to increase profitability.

• Hormozi shares a framework to plot the potential value of a business and compare it to competitors.
• The framework assists in creating value, margin, and maximizing profits while helping people.

"And so I think this is a useful framework. You can plot your own business, you can probably plot your competitors business using this simple framework."

This quote introduces a strategic tool for assessing and planning business growth and competitiveness.

• The cost of creating value for Alex Hormozi includes time and the lessons learned from failures.
• He shares his frameworks with the intent to help others avoid financial hardship.

"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."

The quote reveals the personal investment and experiences behind the development of the business frameworks Alex Hormozi shares.

• Alex Hormozi is motivated by a desire to help others avoid poverty.
• He emphasizes that he has nothing to sell and is sharing this information to support others in their entrepreneurial endeavors.

"The reason I make this stuff is because a lot of people are broke and I don't want you to be one of them."

This quote explains Hormozi's altruistic motivation for creating and sharing business advice freely.