The Biggest Mistake That Stopped Me From Getting Past $30M Ep 412

Alex Hormozi, the owner of acquisition.com, delves into the common pitfalls that businesses encounter as they scale, emphasizing the importance of avoiding a reliance on a single growth strategy. Hormozi outlines three inevitabilities—rising cost per impressions, reaching colder audiences, and increasing infrastructure costs—that can erode profit margins. He advises businesses, especially those in mass market sectors, to pause at the $1-5 million revenue mark to re-evaluate and adjust their approach. Hormozi suggests focusing on customer experience, word-of-mouth marketing, and managing customer expectations to build a strong brand reputation and achieve sustainable growth. He warns against short-term sales tactics that can harm long-term brand equity and stresses the power of premium pricing once a strong brand is established.

• Alex Hormozi introduces the topic of how to grow businesses effectively.
• He expresses a desire to document his journey to building a billion-dollar enterprise with acquisition.com.
• The purpose of his content is to help other businesses grow and potentially partner with them once they reach $3 million a year.
• The focus is on mass market businesses, consumer product businesses, and business opportunity companies that may hit a plateau.

"I'm trying to build a billion dollar thing with acquisition.com. I always wish Bezos, Musk and Buffett had documented their journey. So I'm doing it for the rest of us."

Alex Hormozi is aiming to build a highly successful business and regrets that leading entrepreneurs like Jeff Bezos, Elon Musk, and Warren Buffett did not document their growth processes, so he's doing it to guide others.

"Make these because I want you to get to $3 million a year so I can partner with you. That's why."

The intention behind Alex Hormozi's advice is to help businesses reach a level of success where he can consider partnering with them, indicating a strategic approach to content creation.

• Alex Hormozi outlines the typical stages of business growth from zero to seven figures.
• Initially, businesses experience unreliable customer acquisition from various channels due to a lack of understanding.
• As they grow, businesses establish a single reliable acquisition channel, focusing on one product and one customer avatar.
• Reaching seven figures in revenue typically indicates product-market fit (PMF), meaning the product is in demand.

"Zero to 100k. You sell something to someone. That's what you have to do in order to get to. Usually it is unreliable."

In the early stages of business growth, sales are made but the process is often unreliable and inconsistent.

"Now, you create a reliable and usually a single reliable acquisition channel, which means you pick one channel, one product, one avatar, all right? And you sell that thing. That's all you do. And if you do it reliably, you can get to seven figures that is what happens here."

To reach a higher level of growth, businesses need to establish a dependable method of acquiring customers by focusing on a single channel, product, and customer type.

• Businesses often make the mistake of assuming that simply doing more of what led to initial success will continue to drive growth.
• Alex Hormozi identifies three "logical eventualities" that can erode profit margins and lead to a growth plateau.
• He notes that businesses are usually most profitable at the beginning due to low overhead and infrastructure costs.

"At this point, we have what I would call PMF, or product market fit. It means that people actually want the thing that you're selling, which, believe it or not, a lot of people sell stuff that people do not want."

Achieving product-market fit is a critical milestone, indicating that there is a genuine demand for the product being sold.

"If you do more of what you do, there are three variables that are logical eventualities that will occur in the business that will eventually rob you of your margins."

Expanding on what has worked in the past without strategic considerations can lead to diminishing returns and reduced profit margins.

• Profitability is often highest in the early stages of a business due to lower costs.
• Physical product businesses may see some benefits from economies of scale, but these benefits diminish over time.
• The initial savings from bulk purchasing are significant, but subsequent savings are minimal.

"Because you usually had to figure something out. And you usually have very low overhead, less infrastructure costs, et cetera. In the beginning."

Early profitability is attributed to the necessity of innovation and minimal operational costs at the start of a business.

"In a physical products business specifically, you do have some economies of scale. That happens when you buy more stuff, but those are diminishing, meaning the first two increases in orders of magnitude of purchase size is where you get the vast majority of your savings."

Economies of scale can provide cost savings for physical product businesses, but the extent of these savings reduces after the initial benefits are realized.

• Alex Hormozi begins to list three eventualities that affect mass market businesses but is cut off before completing his thought.

"These are the three eventualities that happen in every business. That's mass market, all right? Number one is tha"

The quote is incomplete, but it suggests that there are three specific challenges that commonly occur in mass market businesses which impact growth and profitability.

• Over time, advertising becomes more expensive, and cost per impressions (CPMs) go up.
• As businesses scale, they must market to colder audiences, leading to lower conversion rates.
• Deeper penetration into a channel results in reaching less likely buyers.
• Scaling entails higher infrastructure costs, leading to increased fixed costs and potential margin compression.

"Advertising today is more expensive than it was yesterday and more expensive than it was ten years ago, right? Cost per impressions go up."

This quote highlights the inevitable rise in advertising costs over time, which affects the cost of acquiring customers.

"As you scale, the conversion rate that you have on these audiences will go down."

Alex Hormozi explains that as a business reaches out to broader audiences, the likelihood of conversion decreases due to the audience being less targeted.

"And then the third piece is that as you scale a business, costs of infrastructure go up, all right? Which means that you have higher fixed costs in the business, which means your margins in a railway can't compress."

This quote emphasizes that scaling a business often results in higher operational costs, which can squeeze profit margins.

• Scaling can lead to a compression of profit margins, despite increasing revenues.
• The three inevitable outcomes of scaling are increased advertising costs, decreased conversion rates, and increased infrastructure costs.

"This margin still starts to compress and we start to get razor thin."

Alex Hormozi describes the effect of scaling on profit margins, indicating that despite higher revenue, the margins can become very tight due to the increased costs and lower conversion rates.

• To combat the challenges of scaling, businesses need to focus on reducing customer acquisition costs and increasing gross profits.
• Alex Hormozi suggests leveraging word of mouth as a powerful tool to counteract scaling issues.
• Word of mouth is described as quadratic, where one person tells two, two tell four, and so on, effectively reducing the cost of acquisition over time.

"We have to have an equally strong thing that is going in the other direction, that is decreasing our cost of acquisition and increasing our gross profits."

The speaker outlines the need for a strategy that offsets the negative effects of scaling by reducing acquisition costs and boosting profits.

"Word of mouth is quadratic in nature, meaning one person tells two, two people tell four, four people tell eight."

This quote explains the concept of word of mouth and its exponential nature, which can serve as a powerful and cost-effective marketing channel.

• Alex Hormozi emphasizes that certain aspects of scaling, such as increased costs and decreased efficiency, are absolutes and cannot be avoided.
• He acknowledges that improvements in media buying and advertising can occur but insists that the three core challenges of scaling remain.

"But these three things are absolutes. Cost impressions will go up. You will market to colder audiences who are less likely to buy your thing, and the cost of infrastructure will increase."

The quote reinforces the idea that certain scaling challenges are inevitable and must be planned for in any business growth strategy.

• Businesses in the $1-5 million per year range need to reassess their approach to avoid margin erosion.
• Continuing the same path that initially led to success can result in high revenue but low profit margins.
• A business hiccup can turn a seemingly successful company into one struggling to meet payroll with no margin.
• Alex Hormozi warns of creating a "massive nonprofit" that the owner is liable for, emphasizing the need to pause and fix the underlying issues.
• The solution involves slowing down to address core problems to ultimately speed up long-term success.

"And so we have to. And this is the piece that everyone misses. You have to pause. When you're in that one, three, maybe $5 million per year range, you have to pause to do something entirely different, and you have to stop doing the thing that got you there, because continuing down that path will eventually lead to a point where you have lots of revenue and basic no margin."

This quote emphasizes the crucial point where businesses must pivot their strategies to prevent reaching a state of high revenue but negligible profit margins.

• Improving customer experience is key to sustaining business growth.
• Establishing a customer success team or director to track metrics like time to value, NPS scores, and customer health scores is important.
• The ultimate goal is to drive referrals, which are critical for business growth.
• Neutral or negative word of mouth can significantly impact customer acquisition costs.

"So what we have to look at is how can we improve the customer experience? The customer experience. How can we create a customer success team or director who can start tracking things like time to value? Like how quickly can someone achieve this value? What are NPS scores? What are our customer health scores? What are the things that are going to drive the one thing that matters most, which is referrals."

Alex Hormozi suggests that focusing on the customer experience and tracking relevant metrics can lead to increased referrals, which are vital for a business's success.

• Negative word of mouth can lead to increased customer acquisition costs.
• When acquisition costs rise faster than the cost per impression, it indicates negative market sentiment.
• Negative experiences are more likely to be shared than positive ones, creating a challenge for businesses to maintain a positive reputation.
• To counteract negative word of mouth, businesses must focus on product integrity and customer satisfaction.

"And so here's a way that you know if you have negative word of mouth, negative word of mouth is when your cost of acquisition increases at a faster rate than the cost per impression increases."

Alex Hormozi explains how increasing acquisition costs relative to the cost per impression can signal that negative word of mouth is affecting the business.

• Businesses must focus on long-term goals rather than short-term gains.
• Anticipating potential issues that could erode margins is essential for sustained growth.
• By prioritizing product integrity and customer experience, businesses can build a positive reputation that acts as a shield against negative sentiment.
• The right sequence of focusing on what matters most can provide hope and a path forward for businesses.

"Because if we do this in the right sequence and we say we're going to pay attention to the things that matter most, because we're thinking about ten years, not ten days from now, we know that these three things are going to be the inevitable things that eat our business and eat our margins."

This quote summarizes the need for businesses to plan strategically for the long term, focusing on product quality and customer experience to protect against factors that could harm the business.

• The "invisible hand" refers to the positive effects of word-of-mouth promotion.
• Businesses need to turn potential negatives into positives to avoid becoming a "massive nonprofit."
• Understanding what clients really want is crucial to surprise and delight them.
• Increasing the discrepancy between expectations and delivery can create a positive business impact.

And so that is how you can use this thing to give you the positive invisible hand that can combat you.

This quote emphasizes the importance of leveraging the concept of the "invisible hand" to create a positive impact on business through word of mouth.

• At scale, businesses may reach an equilibrium where costs equal cash flow, resulting in high stress.
• To avoid this, businesses must focus on building an enduring brand.
• Slowing down might be necessary to truly understand and fulfill client needs.

And you will reach a point of equilibrium where your costs and your cash flow are the same, and you have run a massive nonprofit that you are in 100% liable for.

This quote highlights the risk of businesses reaching a point where revenue and expenses balance out, leaving the owner with high liability and stress.

• Setting high expectations for short-term sales can lead to an inability to meet them.
• A negative expectation to delivery gap can drive negative word of mouth and doom a business.
• Modest expectations allow room to over-deliver, leading to positive experiences and word of mouth.

We want delivery to be up here, and we want expectations to be on here.

Alex Hormozi explains the strategy of setting modest expectations and aiming for high delivery to create a positive gap that enhances customer satisfaction.

• A brand is essentially the reputation of what people say about a product behind the back.
• Improving product quality and keeping promises build a strong, enduring brand.
• A strong brand can command premium pricing power and protect against market evils.

A brand is simply what people say about your product behind your back.

Alex Hormozi defines a brand as the reputation of a product or service, as perceived and discussed by customers.

• Love for a product or service can allow for significant price increases without reducing demand.
• Premium pricing power is attainable only with a strong brand.
• Without a brand, businesses are at risk of falling victim to market forces that can erode margins.

Because once people love your products and services, if you do a 10% or a 20% bump in price... you can only do this and have premium pricing power if you have a brand.

Alex Hormozi discusses how a beloved brand can successfully implement price increases, enhancing profitability, which is only possible with a strong brand.

• Pursuing short-term sales at the expense of long-term branding is a mistake.
• Sometimes businesses need to slow down to ensure they are building something valuable.
• Building a brand worth scaling may require a slower, more deliberate approach.

And sometimes you have to go slow to go fast to build the thing that's worth building.

Alex Hormozi advises that sometimes it is necessary to slow down and focus on building a strong foundation for a brand that can scale and endure over time.