Business Growth Rules: Margins, CAC Payback, Retention

Key Quotes

"If you're closing at 80% or more in whatever you sell, so four out of five people you talk to buy your thing, you are typically underpriced by three to four times. That might sound mind-blowing to you, but that is just the data that I've collected over many years of business."

Alex Hormozi argues that a high close rate, specifically 80% or more, indicates that a business is significantly underpricing its products or services. He suggests that this data, collected over many years, points to a potential for increasing prices by three to four times. This highlights the direct relationship between sales efficiency and pricing strategy.

"The reason that's important is it's not like, 'oh, your price should be this.' That would be ridiculous; every business is different. But when we take two different pieces of the business, which is typically paired or antithetical in nature, like for example, this would be like speed and quality. These are things that are going to be ratios."

Alex Hormozi explains that business rules of thumb are often ratios rather than absolute numbers because they represent relationships between different aspects of a business. He uses the example of speed and quality to illustrate how these paired or opposing concepts can be combined into a ratio to create a more nuanced and applicable guideline for business analysis.

"Now, if you've got two of these three. So now let's say we'll run ads, and we have a person who's taking the phone call, closing, and then the delivery is also service. This is honestly, this is many of you guys, is that you're in service businesses, and this is what it is. When I'm in this situation, I want nine to one."

Alex Hormozi outlines a tiered approach to the LTV to CAC ratio based on the number of human touchpoints in the business process. He states that for businesses with two human elements (e.g., sales and service), a 9:1 LTV to CAC ratio is desirable, emphasizing that this scenario is common for many service-based businesses.

"The amount of screenshots of content and reach and impressions that I've gotten for people who actually tick the box 100 days in a row doing 100 actions, then they get their first customer. Most people get it by like the third week, but you have to commit to doing 100 days."

Alex Hormozi introduces the "Rule of 100," suggesting that consistent action, specifically 100 actions per day for 100 days, leads to significant results, often including the first customer within three weeks. He emphasizes the importance of commitment to the full 100 days to achieve the desired outcomes.

"Rule of thumb here, for the love of God, please call your leads within 60 seconds. I don't know how many times I have to say this across how many videos, and it's just like, do you hate helping people? Do you hate having more revenue and more profit in the business?"

Alex Hormozi strongly advocates for immediate lead response, recommending that businesses call their leads within 60 seconds. He frames this as a fundamental aspect of helping customers and increasing revenue, questioning why businesses would delay this crucial step, which he believes leads to higher costs and lower profits.

"If you have your sales team completely booked out, fully utilized, here's two things that happen as a result that are bad. Number one is that your total lead conversion will go down. You will make more sales because they're booked out, for sure, absolute will go up, but your conversion rates will go down, meaning your CAC, cost to acquire customers, will go up, which is, depending on how sensitive your numbers are, could be very bad for the business."

Alex Hormozi explains the negative consequences of having a sales team that is fully utilized, or booked out. He notes that while total sales might increase, conversion rates can decrease, leading to a higher Cost of Customer Acquisition (CAC), which can be detrimental to the business's financial health.

"For me, ideally, I try to do it within 30 days. So payback period in general is how fast you get the money back from what it cost you to get somebody. My goal is within 30 days. Why? Because just about every business owner, at least in America, and at least the developer world, can typically gain access to a credit card, which gives you 30 days of interest-free money."

Alex Hormozi defines the payback period as the time it takes to recover the cost of acquiring a customer, ideally aiming for within 30 days. He connects this goal to the availability of interest-free credit card financing, which allows businesses to grow without using their own capital.

"Gross margins are wildly misunderstood, which is interesting. If you are a business owner, you have to learn the language of business. It is for sure, there are different languages, but there's not a huge amount of words that you have to know. You might need to know like a hundred terms, and think about this as like you were studying for a test, right? Like learning a hundred terms, not that hard to understand."

Alex Hormozi emphasizes that gross margins are often misunderstood and that business owners need to learn fundamental business terminology. He likens learning these terms, which are often relationships between two numbers, to studying for a test, suggesting that understanding about a hundred terms is manageable and crucial for business comprehension.

"The reason that most businesses cannot get big is because they are always filling the leaky bucket. Now, you've heard this terminology before, but think about how difficult it is to acquire a customer. It's a lot of work, right? And to go through that entire process only to lose them, to have to go get another one, is exhausting."

Alex Hormozi explains that a primary reason businesses fail to scale is their struggle with customer churn, likening it to constantly filling a "leaky bucket." He highlights the significant effort required to acquire a customer and the exhaustion that results from losing them and needing to repeat the acquisition process.

"Industry averages are dumb. And so what do I mean by that? The amount of times I've, the margins have had a conversation where someone says, 'hey, you know, manufacturing these, these, uh, you know, these are these margins are pretty good for manufacturing,' or, 'hey, uh, you know, our margins are this in our industry.'"

Alex Hormozi dismisses industry averages as a benchmark for success, arguing that they are "dumb." He questions why a business owner would want to measure themselves against the performance of the average business, especially if that average is characterized by financial struggles and mediocrity.