Use the Shape of Your Business to Scale | Ep. 1005 | The Game with Alex Hormozi

there are only four main types of businesses.

So your business is one of these four.

And understanding what shape my business was has allowed me to develop a portfolio of companies that generate over 250 million a year at acquisitioncom.

And so if you have a business, you need to know what shape your business really is to maximize the opportunity you're in.

And if you don't have a business, you should know what you're getting into so you can pick the right one for you.

So let's get started with the first shape.

What type of business is this business?

I love it if you actually think about it right now, like if there's different types of businesses, what do you think this one really is?

This is the shape of an e-commerce business.

So in the very beginning you'll typically have to get some inventory, especially if you want to have a bigger business.

No gigantic businesses are drop shipping.

So if you want a bigger business like a brand, you're going to have to do some sort of inventory off the front.

A little bit of cash.

Right.

But as soon as you start selling because it doesn't require a lot of operational infrastructure you can grow really quickly.

But then you will hit these breaking points that stop your growth flat.

And so either of these will be cash constraints in the business, as in like, you don't have money to buy more inventory.

It could be traffic constraints, like all of a sudden your ads just stop and then the ads don't perform past a certain point.

It could be that you've maxed out your distribution.

Let's say if your retail distribution is like, okay, we got 7,000 more 7-Elevens.

It's like, okay.

And then we continue to stay at that level until we get CVSs.

And then we stay at that next level.

And so each of these kind of unlocks typically occur when you have a supply chain unlock or you have distribution that unlocks.

So distribution can be literally physical retail distribution, or can be ad based and or affiliate based distribution.

All these different ways are promoting it.

So it gets it in more hands.

So this is why the shape of this business looks this way.

And you also can get stopped by all of a sudden you run out of stuff.

Right.

Your supply chain dries up because your manufacturer can only do a thousand units a day and you need ten thousand units a day.

And so while you find the next manufacturer, you're flat again.

Right.

And this is the nature of the business that you're really in.

And if you're curious, what experience do I have with e-commerce?

Well, I'll give you two.

So first off, Prestige Labs was a physical products business.

We sold through brick and mortar distribution distributors.

Obviously our gyms and then also any consumers could buy directly from the store.

So we had ads that were running as well.

And so both those elements were e-commerce.

In addition to that, the launches that we had for my last book, the world record-breaking Guinness world record-breaking book.

This is literally e-commerce.

It's a physical product that gets bought through a store and then shipped out like very straightforward.

And so the reason that this video is so important before I dive into all the other four is that most people think that there is something inherently wrong with their business, when it is in reality a feature of this business, not a bug.

And so the more you can zero in on.

Okay, if these are the big hairy problems that exist within the shape of my business, then How do I put disproportionate effort on solving these key foundational issues or problems to this model that will allow me to out-compete all the other people in my space that don't know this?

And I'm telling you, this is the sauce.

And also sometimes you'll have to switch 3PLs as you scale too.

So even if you have the inventory, somebody might not be able to ship out 10,000 orders a day.

Like when we did the book launch for me, I had to find 3PLs who could ship out millions in 72 hours.

That's absolutely absurd, which is why we had to have multiple across different states in order to make sure that every single person got the book within days, not weeks or even months.

I talked a little bit about the cons, but let's talk about the pros of this.

So e-commerce, it can scale relatively fast compared to some of the other business models.

And the reason for that is, once you have the stuff, I mean it's really just like, how fast can you hand it to somebody in exchange for money?

And if you have a Shopify store or a WooCommerce store, any kind of online store, they can just click and buy.

And then you have somebody else who's shipping it straight to them.

As long as they can ship it and they can buy it, you can sell a lot of them.

The issue is when you run out of stuff, the guys can't produce it.

You can't get raw materials.

They can't ship enough of them.

These become the constraints.

But fundamentally, if you're operating within all of those as in, they can ship more than you have, you've got enough inventory.

As long as people keep buying, the number just goes straight up.

What's interesting about this particular business is that it also typically isn't going to be nearly as kind of key man risk from the founder.

Of course, there can always be key man risk for key skills.

But if you have a product that people love and people keep going to your store and buying it, It's a very sellable business.

Okay, and so that's maybe the upside.

Let's talk about the dirty.

One of the first things that sucks about this business is that in general most people who own e-commerce stores, they can do significantly more revenue than some of the other business models really quickly.

It's one of the fastest ones you can grow revenue on.

And it's also because people are willing to spend more money for stuff than they are for the other three categories.

Because there's inherent value, because everyone knows there's an inherent cost to creating it and sending it.

So people are just more willing to spend money on it because it's tangible.

And it's the reason if you look at gross sales, what are some of the top companies in the world?

Walmart, huge amount of sales.

Amazon, huge amount of sales.

It's stuff, right?

And people love stuff.

And as somebody who came to selling physical products much later in my career, I was amazed at how easy they were to sell compared to some of these other things.

Which then brings the next question, which is like okay well, sometimes they're easier to sell.

People are easy to take their wallet out.

But what makes it harder?

So this is very capital intensive.

Because people know shit costs money, you also have to have the money to buy the shit.

And so it is capital intensive in that This thing might make profit on paper.

But as soon as you make some profit, what are you going to do with that money?

You got to go buy more inventory.

And so, unless you have a flat e-commerce business, if you want to grow, the extra growth requires the profit from the earlier part of your growth path to fund that, the next level of inventory, so you can sell through more in a shorter period of time.

And so you can be very asset rich in this business.

You can have lots of inventory.

You can have maybe a lot of enterprise value, but it's very common that entrepreneurs will get I mean, I'm saying unbelievable numbers.

They'll go to hundreds of millions a year and pretty much only live on their salaries, which there's nothing wrong with that.

It's just different than some of the other models that are out there.

In terms of the things that can also be difficult about this is that you have to rely very heavily on your partners.

And so it's very rare for an e-commerce business to be vertically integrated.

It sometimes happens, but it's super, super uncommon.

That means that are you the one who's manufacturing the stuff?

Are you the one who's actually shit?

You know pick pack, shipping all the things both locally and internationally.

Are you sourcing raw materials or do you have a raw material mine that you're you know?

You're collecting milk from cows and turning them into a protein?

Probably not, and so you have core dependencies on other businesses and if those businesses fail, you fail like very real and And so having many redundancies within each element of the business.

Okay, how do we get raw materials?

What about manufacturing?

What about logistics in terms of pick, pack, ship?

And then On the capital side, it's like, do we have lending partners?

Because we might run out of capital if we're scaling really quickly, because there can literally be nothing wrong with your business.

But think about this.

If you have 10 units of something and you make 10 of profit on each unit and you sell all of them in a day and the next day 10 more people want to buy, there's nothing you can do.

And so that might mean that you might have 300 units worth of demand and you only have 10 units worth of profit.

What do you have to do next month?

You can only buy 10 more.

And so your growth rate will be dictated by the amount of free cash flow that the business kicks off.

And then that will be the growth rate that you'll be able to sustain, or only growth rate that you'll be able to have in the business.

And you'll be constrained by that capital.

There are lending partners, because this is clearly a capital-constrained business if you're growing quickly.

But those are some of the negatives or some of the downsides.

Now, if you own one of these businesses, what's the big hairy problem?

What's the big problem that you have to solve?

Number one is managing cash flow.

So you have to be able to forecast cash flow.

You have to look at inventory cycles.

How long is it?

If it's a 12-week lead time for you to buy stuff, you have to predict how much you're going to be selling in 12 weeks.

That can be difficult, especially if it's your first time.

Um, number one, number two, your distribution, you're going to live and die by your distribution.

So add accounts um brick and mortar distribution partners that you can have affiliates or influencers who have kind of I would call it synthetic distribution through their audiences.

All three of those are your, their partners of yours, right?

Product like great product will always find a great distribution.

Great distribution will always find great product.

Right.

But the problem, the big problem that you'll have to manage is going to be supply chain.

How can you have enough stuff to sell?

Right.

Logistics isn't that hard because there's some decent pickpockets that are out there.

Everybody always has complaints because it's not their business.

They would do differently, blah, blah, blah, blah, blah.

You wish they didn't charge you as much, et cetera, et cetera.

But by and large, I would say that problem has been solved relatively well.

The next issue is going to be making sure that the product you have has a brand behind it.

And this is the real nasty one.

Because if you just have a pure I call them smash and grab businesses, which is just your media arbitrage business.

You know, you can buy eyeballs at 10 and you can sell them something where you make 11 in gross profit.

That's just a smash and grab business.

And if somebody else sees you smashing and grabbing, guess what they do?

The downside of physical products is that because anybody can own it, anybody can also sell it.

And so if you've got a widget, somebody else can go to China and make the same widget as you.

And that's where patents come important.

That's where, if you actually do own your manufacturing, have some special sauce in terms of how you make your stuff.

These become the competitive moats for the business.

But the largest of all of them by far is brand.

Right.

Why like Nike shirts are inherently the same shirts that other shirts, you know, shirt companies make.

They literally buy the same raw materials.

But why are you willing to pay so much more for a Nike shirt versus, you know, an unnamed shirt?

Because of the brand.

And so even if someone can copy every single thing down to the threat count of your business.

They still can't copy the brand.

Some of the best brands are in e-commerce because you have to be in order to get big.

And so we think, if we translate what brand does and this applies to all of them, it's super important with e-commerce because it's so easy to commoditize is that the value that brand delivers is that you have higher click-through rates, as in more people show interest because they have a history of good experiences with you or good word of mouth.

Number two is that you have higher repurchase rates.

People will buy once and they'll continue to buy again.

And number three, you'll be able to charge higher premiums for the same thing.

So that means lower cost of acquisition, higher LTV because they're buying more, and higher gross profits because they're buying at premium prices.

Those are very real benefits of building the big brand.

And so when you have these types of businesses and they are kicking off cash, that means that that is somewhere you have to continually invest to expand and reinforce the associations that you want your products to stand for, which also means what affiliates or influencers you're not going to associate with, even if they can drive quick sales, what discounts you're going to choose to make or not choose to do, because of what kind of brand you want to demonstrate for your target audience.

There's some brands that never do discounts and there's some that live and die on discounts.

And so it really depends on what kind of brand you're trying to build.

You got to be specific about it and you want to be as deliberate about as you can day one.

And so if this is you, I think probably the most important question is how do you win, right?

I'll just do this by describing the perfect e-commerce company, and then you can reverse engineer what you were missing.

So the perfect e-commerce company would have its own manufacturing that it makes.

It would have a very trusted third party or be able to ship directly out of their manufacturing facility to you.

You know all the markets that they have now, if they're international, more likely they'll have to have international partners that do the logistics.

But even more likely, if that becomes bigger markets, they'll start creating decentralized manufacturing in each of those markets.

So they have lower shipping costs and faster turnaround times and faster cycles for returning inventory.

So that's we're going back to front.

They make the stuff.

Right.

They have some trade secrets or unique partners that they get their ingredients from, or and, or they have a unique way of combining unique ingredients, which makes them incredibly difficult to copy.

They have great logistics in terms of pick pack ship.

On top of that they have a very lean team team on the paid ad side.

That is, a performance marketing team that is done in tandem with a team that understands brand first approach.

And so what does that mean?

The most successful companies that persist over a long period of time in e-commerce tend to have a 70-30 split in terms of how they spend their money.

70 going towards top of funnel and brand awareness and associations and only 30 going to direct to purchase.

And most companies that are starting out and the vast majority of the ones that I talked to.

It's basically 100 just straight to purchase.

You are building a dropship company that has no competitive moat and you will always complain about the dupes and the Chinese companies that are going to come in and undercut you, because they're in China and they have some of these other competitive edges that you don't have.

And so you have to know the game you're playing, because if you know the game you're playing, you'll know how to win.

And the last piece of this kind of competitive advantage that I would have in this perfect e-commerce business, assuming they have invested that extra money to have these premium brand associations.

They have strong performance marketing.

We then have two more components to it.

One is we want strong brick and mortar retail partnerships so that you have 50000 retail stores that are pushing your stuff out or you choose to, long term, create your own pop up stores that actually are your own.

There is what's interesting is that nowadays the model has reversed.

It used to be build a huge brick and mortar presence across many, many states and then start an online store.

The last kind of version of that was like Lululemon, that I would say that was more popular and that I can think of at least.

And more recently, it's kind of the reverse of that.

You look at like the Gymsharks, right?

They're almost all e-commerce, and then they choose to open up these flagship stores in key locations that are brand additive.

Now on a long enough time horizon.

Once brand awareness has been completely saturated for an e-commerce brand, then you actually open up stores all over the place because you remove the cost of shipping each of those markets, because people actually go straight to the store and it increases their average order when they're in person.

And so the actual cost of acquiring the customer becomes rent divided by sales per month.

And so that's what happens at the ultimate scale level that many brands don't get to.

And some of them just choose not to do that because they don't want to, because it's super capital intensive.

Right.

But at some point, when everybody already knows who you are, you just want to make it even easier for them to buy.

And so that is the ultimate version of an e-commerce brand and how you do it right.

And it takes years to build that level of brand, but you can scale revenue incredibly quickly.

And I'll add one last caveat, which is that you have to be an absolute savage email marketer.

And so the amount of backend, the iceberg underneath of here that exists in terms of messaging, different process flows, the campaigns that you're running.

Attribution, so that you can see your true metrics.

Like these are some of the, like I think some of the best marketers in the world are here.

And it's because, to be fair, once you have a killer product, It's you know back end dweebs that we're going to.

You know they're going to be working on making sure that we have no product.

You can, you can hire the people who can make sure the cashflow is there, all that kind of stuff.

But like the best, I think some of the best marketers in the world are e-commerce marketers.

Oh, last thing the product's got to be exceptional because, no matter what you do, you're going to have all the best marketing in the entire world.

If you get someone to buy it and then it sucks, doesn't matter.

And as you scale these businesses, the cost of acquiring customers continues to rise, because And so the only thing that you have that's a compounding vehicle that can scale proportionally to increasing cost of acquisition is a referral word of mouth chain that does two things.

One is repeat visitors.

What percentage of your sales are customers that are coming back because they really like the product?

And then number two, what percentage of those customers are bringing more customers?

And if you're like, well, what percentage is right?

It depends on the growth rate of the business.

So if you're growing by 1,000%, you're always going to have more new customers in the beginning.

What matters more in terms of you want to make this thing sellable is you want to be able to demonstrate that you look at this new cohort.

How many of them are going to come by again?

If you can get 60 70 to buy again after the first purchase, you likely have a product that's pretty strong.

So that's e-commerce.

What's this puppy?

So this is the puppy that 78 of businesses in the United States are based on, which is big, bad service.

All right.

And service businesses look like this because they are slow and steady.

So if I wanted to make it a little bit more accurate, I would have drawn it more like a straight line, because this one's taller, but I only had this much space.

All right.

But it's a slow and steady growth curve.

So why does it look like that?

It looks like this because it's very people heavy.

And typically a service business has people at all three, two out of three or all three components of the business.

So what do I mean by that?

If we break a business into three chunks, attraction, a conversion point, and then delivery, right?

If those are the three components of the business from an attraction perspective, that's the only one where you could have a very scalable front end.

You could have just be running ads.

You have content on the front end, super scalable.

Now, Typically, if you're selling services, it's going to have a higher ticket.

If it has a higher ticket, usually a person is involved.

So you might have a person who's taking phone calls or meeting with customers at their homes or meeting in person in order to convert or transact.

All right.

Close the sale.

Once the customer has transacted, now we have to deliver.

And it's a service business, which means that you have people who are involved in the delivery.

You do some sort of services to them.

All right.

Now what becomes challenging about this is that as you scale, it is easier to go find more product to sell than it is to find exceptional people significantly harder.

And if the thing you sell is people with a premium, which is what a service business is, then you have to find very good people, and very good people are even harder to find right.

And they also cost even more money.

And so service businesses in general.

They typically don't run high gross margins and you want to design them in a way that do run higher gross margins, because you need the padding for the inevitable volatility that exists within the business.

And the volatility is a factor of when someone new comes into any function of the business, whether you're doing outbound on the front end or running ads.

You're doing sales or you have delivery.

If you have one sales guy, when you hire the next sales guy he's not going to be as good as the first one.

He's got to get trained up.

And so we have to be able to swallow, slow down.

We have to be able to deal with the padding here.

We need some cushion for the pushing, if you will, on how much gross profit we can have here.

Because if our conversion rate drops in half because our new sales guy is not as good. right?

He's got to get up to speed in 30 days.

Then we got to be able to eat that.

Calm down.

All right.

Now the next thing is that on the delivery side, let's say we've got one good account rep or two good account reps, and they've been with you for five years.

Okay.

We finally figured out a little bit more marketing, a little more selling.

And guess what?

Now we need another account rep, but they're not as good.

So now you have to worry about your reputation because they're not going to be able to deliver the same scale.

And so service businesses are very easy to start because they cost nothing.

At the very beginning, you literally just sell your time, which is why it's the most common business that people do start.

They learn one thing and then they start doing that work for other people.

Very simple.

But then once you learn that thing, the better you get at that thing, the harder it is to get more people who are as good as you at that thing, which makes it like the more you can charge, the harder it is to get more people that you can charge that money for and still deliver that quality.

This is the inherent difficulty with service-based businesses.

My credibility with this is that I had... six brick and mortar gyms that I scaled.

Then I had a turnaround business that we flew around the country and did turnarounds.

I did 30 something turnarounds over almost two years where we turned other gyms around which are service businesses.

Then, so that was my B2C service experience.

Then I went online and basically built a gym consulting firm that sold services like marketing services, ad creation services, things like that, to gym owners across the US and basically the English speaking world.

And so I built both B2C and B2B businesses to, you know, I think mid $30 million a year.

And then now at acquisition.com, we advisory practice, which is a non-figure plus business.

Yeah.

So we're very familiar with building out high quality service businesses.

And so I feel confident in saying I can help you grow yours.

I'll give you two polar examples here because I come from the fitness industry.

A fitness coaching business, a gym, is a service-based business.

The pros of that particular type of business is that it's easy to hire that talent because one, it's low skill and two, many people love it.

It's almost like hiring musicians.

Plenty of people would do it for free.

They'd coach classes for free.

They're passionate about fitness.

Where it's more difficult in that business is it's very hard to Number one, sell.

And number two, retain customers because people don't like working out.

Now, on the flip side, I would say many or the vast majority of businesses are actually not like the fitness coaching business.

The vast majority of service businesses are people doing work that other people don't want to do.

And so this is the fitness coaching business is unique in that it is coaching the vast majority service businesses.

There is no coaching.

You just do the work.

Right.

You fix the roof.

You put in the garage.

You do the accounting for them.

You do the legal work.

You you build the website for them.

Right.

So for any of those businesses it's actually very easy to do the sale, because I'm going to give you the outcome and you have to do anything.

Right.

And so if you're actually good, almost all service businesses when they are done for you.

Service businesses almost never, if they're any good, have a problem getting customers.

The difficulty they have is hiring good talent, because customers will stick because you're doing the service and they don't want to learn it and they don't want to do it.

And the difficulty you have is you got to teach other people to do it and do it well.

And so you almost always be supply constrained, um, in this business model.

So what are the good things about this?

Um.

Service businesses are the least risky business because you can always keep a service business profitable.

So what I mean by that?

So, outside of rent, which should be a lower cost relative to you know, whatever your business is almost always for service, with the exception of maybe like a gym um, or like a med spa or something like that, where you have, like some capital intensive stuff.

But that's less of a service business, more medical.

I won't get into it.

But for the vast majority of the true humans are the, are the are the labor right.

Um, if revenue goes down, you can always cut headcount.

I'm not saying it's pretty, but you can always stay profitable and you can always cut it all the way back down to just you doing work for money.

Right.

And so you can always make sure, as long as you are priced appropriately, that you can make money in a service business.

Now, If you do a decent job for people, they will tend to stick around.

And so it can be very stable.

It's very predictable.

The difficulty is like, how do you triple a service business year over year over year?

Incredibly hard to do, especially as you get bigger and bigger.

Now, some of the other benefits of service businesses is they do have the potential for high margins.

Um, it's rarer, but the way that you I'll, I'll tell you.

I'll tell you in a second how you can create high margins.

Uh, in a service business, but they do have the potential for high margins, but almost always they have high cashflow because there's not a tremendous amount of capital intensive reinvestment that must occur in a service business.

We don't have to buy inventory.

We don't have developers.

We have to buy, I'm going to get a little ahead.

Right.

Um, but basically, uh, You sold work for $100,000.

Your cost on that work was $50,000.

And then there's $50,000 left over.

And next month, you're going to sell the same work for $100,000.

And the cost is $50,000.

And there's going to be another $50,000 left over.

And you can pocket that.

And so they tend to be very stable, very high cash flow businesses.

And I would say the majority of them.

If you do a decent job, have pretty good retention, because people don't want to learn it and they don't want to do it.

So what sucks about this business?

Talent is the bottleneck.

You.

Finding good people is going to be the difficult part of this business, whether you're trying to find HVAC technicians plumbers electricians, on the home services side.

If you're trying to find maids on the low skill side, very difficult.

So all the way up.

It's always hard because even at the lowest skill, if we use maids as the lowest skill labor for a service business as an example, well then, just finding people who speak English, show up on time, are competent and actually do a good job cleaning and want to work for the amount of pay that the pricing package that you have allows for some margin is difficult.

That's the hard part.

If you go up a level in terms of, I would say trades, then finding the tradesmen who are good and experienced and can do more complex work becomes difficult.

So it's a more compliant supply-constrained business.

If you go white-collar, then you've got accountants lawyers, management consultants, investment bankers, right.

All of these people require a ton of education, a ton of learning.

And so most of those, like the ones I just mentioned management consulting uh, investment banking legal, like they all have multi-year learning paths before they're really even allowed to do work on their own.

And so when you have multi-year kind of gestation periods for the talent, that becomes one of the big things that sucks about the business, and i'll tell you how to fix that in a second, but that's one of the big things that sucks um, and oftentimes when you have one of these businesses, the founder tends to be not always, but tends to be one of the best technicians, And so this is a double-edged sword, because you know how to do it better than everyone.

And, as a result, people tend to always come to you in order to solve the big, complex problems which makes your life big and complex all the time.

Which kind of sucks.

And the last piece is that it's just slower to scale than the other three models.

So what is the big problem that you have to solve with this business?

If we believe that hiring, onboarding, and training talent is the...

So if we take the position, which I do, that supply, or the supply of good talent is the hardest part about this business, then one of the core components of your business must become your attraction as, in your recruiting process, how you onboard those people and how you train them.

Because if we think about a business as the difference between the value of the inputs and the value of the outputs, that delta is where profit is created.

You are creating value in the economy, and so you take raw materials, people who are underskilled.

You have a way of bringing them in, adding value, giving them skills, teaching them, and then you can sell that skill set at a higher premium later.

That's the idea.

Now, where you have a 201 version of this is where you have three or four different people that all have different skill sets, that the aggregate of three or four of those skill sets put together uh, becomes even.

The sum is greater.

Some of the whole is greater than the parts, right?

You get even more gross profit.

And that's where this gets a little bit more interesting.

And so that core has to be one of the things that you do exceptionally well.

And if you're like, well, we don't really do that very well in our business.

No shit.

That's why most service businesses don't scale.

And the second element that you really want to focus on is, like how many ways can you reduce your own founder technical expertise by?

The business is dependent on your technical expertise.

How can I productize my own knowledge to such a degree?

And what you have to get very good at doing is you have to get very good at teaching.

Fundamentally, if you're in a service business, you're actually in a teaching business.

You have to teach your talent how to do what they do.

And I think this is one of the big mess ups is people expect oh, I'm going to train some guy in a weekend to do something that's taken me 10 years.

And then I'm going to get upset that he's not that good.

Ridiculous, right?

We have to have far more robust training for these people.

But as a result, it's more front loaded than most people expect.

But if you do that well, those people ramp up faster.

They stick longer.

You're able to charge longer premiums and your reputation continues to compound over time.

How do you win with this model?

So number one is that most service businesses, especially in the beginning, is they do any kind of work for any kind of person with a pulse.

Very normal.

But as soon as you start to develop a little bit of business chops, you start to say OK, some of these clients suck.

Some of these clients are great.

We do a better job with this.

And so you start to narrow down who your real customer should be.

This happens usually in the 1 to 3 million range is when you start to have to make those decisions.

In the beginning, you're just trying to make money.

Fine.

But when you really want to scale like, you have to start deciding what business you're really going to be in.

And usually it's around, like I said, one to three million.

That's when you decide what business you're really in.

And then that's where you really start going on this path.

But in order to do that, we have to decide on what customer we're going to really serve.

And then, as a result, because we have one consistent customer, we should only have one two, three max customers consistent deliverables that we're giving so that we can start systematizing or productizing the way that we deliver our services.

So, rather than everything being bespoke or just say whatever you want your wildest dreams is what I can deliver.

You then say, You probably want this problem solved.

We solve in one of three ways.

This is the way that I think is best for you.

And here's how we do it.

And then you can start driving operational efficiency within the business, which then expands the gross margins.

Okay.

Now, in order to do that operationalized bucket of things, it becomes more repeatable for you to then build training process to each of those desired steps or outcomes in the systematized delivery.

And so that then the systematized delivery then feeds into the operational infrastructure in terms of onboarding, hiring or training and talent selection on the way in.

All right.

And so when we do these two steps, then the next thing is that you'll end up having to replace yourself in some level of the operations at some point so that you can lead the company.

So if you were trying to win here systematization of delivery, selection of the avatar, being very clear about recruiting hiring, onboarding and training, and having very good, defined career paths for your talent.

So they want to stay with you and not go somewhere else because they're so hard to get.

And so you're in that business typically getting customers not that hard, and so then we think okay, if then we can just blow the back end out so we can have 10 20, 30 new amazing people who are getting activated uh, per month.

On my delivery side i can.

Finally, the goal that you want to have is that you want to have an amazing reputation and actually get to the point in a service model where your demand is the constraint very rare but doable now in this business.

Where do i reinvest my capital?

So I said this is very high cash flow.

So number one is that this is a business that you can live well throughout the entire time of doing the business, which is why I've always been a fan of service businesses.

The other business models that exist here, two of them basically.

The founder almost never makes any money until a point of an exit.

And let's be real, exits are far rarer than people try and make them out to be.

And so service businesses.

You can kind of live your life and continue to scale your income as it goes up.

Now, where do you invest your cash?

So you want to invest your cash in two core places.

Number one is going to be talent, meaning you want better, smarter people who are coming in.

So the raw materials that are coming in, we want to increase the quality of those raw materials.

Now we still have the training that we have.

But if you're training a genius versus training a dodo bird, training the genius is still going to work better.

So we want higher base level people, higher horsepower, higher intelligence.

If we look at the ultimate versions of some of the highest grossing service businesses out there, what do they all have?

They have unbelievable talent machines and they attract the best and brightest, right?

So number one is that you're going to be reinvesting money into the recruiting side of the business so you can get the best talent.

The other side that you're going to be putting money into is going to be brand.

Right now, brand is going to benefit in both places.

One, it's going to allow you to charge premium prices over time.

It's also going to allow you to attract premium level talent because they want the association.

They have their own personal brand.

They want their association with your brand.

Now, the way that I can see how scaled up or how progressed an entrepreneur is in the service business is actually with one metric, which is what they charge.

So I'll explain why I think this is a very interesting North Star metric.

If you do a good job of what you do, then you should have a supply constraint in your business, because more people want your services.

If more people want your services and your supply constraint, what happens?

Well, if we're supply constrained and we have more demand than we have supply, what should we do?

We should raise our prices.

And as we raise our prices, we should increase our gross margins.

And as long as we have good training and we can maintain a reputation, what happens?

More customers come in, more demand, and then we can continue to raise our prices.

And so it should be a process of consistently being able to raise price over time and go after better and better avatars, better and better ICPs, if you want to use that language.

Ideal customer profile.

I think that stands for basically the type of customer that you're going after, right.

The prospects.

You want better and better people who can write stroke bigger and bigger checks.

And the only way to do that is to typically have the track record, having done this for years and continuing to level up.

And you can only do that if you're good because you have more demand than you have supply.

And that's the game that you ultimately want to be in.

Now, is there a world for a low-cost service provider?

Yes, with one very important caveat.

You have to decide day one, when you build this business, that you're building it as the low-cost provider.

And that doesn't mean, oh, people didn't want to buy this price.

I'm going to go cheaper.

It means that day one, every decision you've made, you've made with that North Star, which is that we want to be as operationally efficient as humanly possible.

So we're going to offshore all of our talent.

We're going to have as much automation built into our business as humanly possible.

And our primary USP or selling proposition is going to be that we are the cheapest.

It is absolutely a game where you can make a lot of money.

But you have to decide to be in that game day one.

I have spent the vast majority of my life on the premium side, which is where I recommend most of you go.

Because service businesses are inherently more difficult to scale, because you have to scale headcount.

And so if you're going to have 20 people that work for you, I'd rather be making a million dollars per person than making less than that.

I'll just say that.

I'd rather make a million dollars per person, because then it'll be worth the headache that comes with the headcount.

So, that's shape number two.

Drum roll, please.

That brings us to shape number three.

So, quick guess, what do you think this is?

This is an education consulting info media business.

So, What is the shape?

This shape scales faster than any other of the four shapes.

You can notice that it's almost a straight line up.

And so this business makes money quickly.

And then it hits a hard stop or becomes very difficult to make it make more money from there.

So why is it shaped this way?

So one of the most difficult parts about information or education-related businesses is that there's low retention right.

If you do a good job educating someone, they graduate.

Your high school isn't like, oh my God, I can't believe we didn't retain that kid.

The goal is not to retain them, right?

The goal is to actually graduate them.

Now, what's the continuity program for education?

Well, you go four years of high school, you go four years of college and you have a master's degree.

They have a PhD.

Then you have a double PhD.

So they definitely have an ascension program.

But the point, ideally, is that you provide more value than the cost of the education.

And then, as a result, this person now has a skill that is more valuable in the workplace, in the competitive environment.

That's the point.

So the reason that education can make so much money so quickly is that if you have a valuable skill and that skill is unique and difficult to acquire in the marketplace, then you can charge a big amount of money for something that actually costs you very little.

It costs you a lot of money and time to acquire the skill one time for you, But then you get to duplicate that skill through the education over and over again, through other people.

And so I'll just use simple math here.

If I can teach someone a skill that takes them from 40000 a year to 100000 a year, many people would pay lots of money to add 60000 of income per year for the rest of their life.

That's an unbelievable, valuable proposition.

So what would someone be willing to pay for that?

A lot.

The education industry at large, I think the livestock tax is like $10 trillion globally.

It's a very big industry.

Because, if we think about an economy at large, there are only two things that drive GDP gross domestic product, the production of the economy, education and technology.

And that's per capita.

Right.

So if if per person, what do you got?

They can get more skills and they can have more tools to use those skills.

That's what drives GDP.

And so it's a huge driver of the economy, which is why education is such a massive market now.

It's shaped this way for most businesses though, because once someone graduates, they leave, which means that you always have to fill up the business again.

And if you're good at something, you usually get this quick shot up because people know you're good at it.

So you can quickly charge a lot of money to a handful of people and actually deliver that value, because people know you're good at that thing.

And then very quickly you make money.

But then you're like, oh shoot, I graduated all those people.

What do I do?

I got to get more customers, right?

And the other side of this that is kind of bad is that, once I teach someone really well how to do that thing, what stops them from selling the exact same thing that I just taught them?

Almost nothing.

Right.

And so these are some of the.

This is why the shape is shaped this way, because more entrance, if you teach more people, starts putting this downward pressure.

So you've got downward pressure, in that people are exiting and you've got more competitors that are always entering the market, because it's very easy to one create competition.

Number two, start an education business because it costs almost nothing if you have the skill.

So what's good about this?

Because that sounded a little bit negative in terms of the shape.

You're like, why would I want to why would I want to stop here?

Right.

Well, the great thing is that there's fast initial cash.

There's very few businesses that can get you out of, you know, poverty as quick as this.

Dare I say there's almost nothing that's as fast as this.

And I'll tell you one thing that I've learned about humans over my many years in business is that people love fast.

All right.

And it's also one of the easier ones.

So fast and easy, very compelling value proposition.

And I'll give you the third value proposition.

It's also cheap.

So fast, easy, cheap to start.

Wow.

Very compelling.

Now, when you have something that's fast, easy, and cheap to start, what's the downside of that?

Well, lots of competitors.

It's also fast, easy, and cheap for them to start.

All right.

And so what sucks about this?

It's difficult to scale typically past one to three million dollars a year.

Now, I think a big part of that, this is pure rule of thumb, anecdotal observation for me.

It's hard, because most people don't have the promotional skill, to get beyond the first one to three million.

And the more talented the individual is, the more difficult it is for them to scale themselves.

Um, the delivery.

So these businesses sometimes start to bleed into service businesses, right?

They have some sort of DIY, you know, do it yourself, self, self led education thing.

And then people are like, well, I'd like some teacher, I'd like some help.

And so then it starts to get a little bit of crossover into services and it starts to get some of the negative sides of services, which is oh, now I got to train all these people to be as good as me at delivering this thing.

That's taken me 10 years to learn.

And so people take one of two paths.

They'll either say, well, I'm just not going to do that.

I'm going to make it one to many forever, which I do recommend for a lot of people.

I think it's actually not a terrible idea.

The other option they do is they say oh, I'm going to get a bunch of coaches or teachers that I'm going to teach in a weekend how to do my thing, and then I'm just going to outsource all the work to them.

But if the thing that you have is so valuable that you charge so much money for it if you could teach someone in a weekend to teach it you're either not selling something that's that valuable or you're lying about the fact that they're actually as good as you.

And so the analogy that I have for this is, Imagine I have the world's best milk.

All right.

The world's freshest milk.

Let's assume that you have no dairy dairy issues.

You're just a good old fashioned, you know, Wisconsin boy.

All right.

You can just drink your dairy.

Now, let's say that I have 10 customers and I only have one glass of milk.

So I have two options.

Option one is I can do 10 shot glasses and I can pour the milk into those shot glasses.

Option two is I can have glasses of the same size that are all filled with water and I put a shot glass worth in each of them.

So I give you this much of a shittier milk or I give you a much smaller amount of the same quality.

Which would you rather have?

In my opinion, most people would rather have a smaller amount of a good thing than a larger amount of a bad thing.

To me, this is what the vast majority of businesses choose to do by saying oh, I'm going to hire this person.

I'm going to train them for five hours.

And then I'm going to sell the services at the same price that I sell for myself for this person.

So then they get this very diluted thing.

Now what happens here?

Your reputation starts to take a hit.

And so you, just you started getting word of mouth and that stops happening because you're not teaching as well, because they're not teaching as well, because they're not as good as you.

On the other hand, these businesses were the main educator also learned some skills with promotion.

Those people, because they just continue to dilute down access.

The rate of you diluting down access is almost always proportional with how good you are.

And so if you have the best milk in the world, you can actually give that tiny shot, the tiniest shot, and it's still good and better than one guy who's mediocre giving 100 of his attention.

And so one of the interesting things about this model is that, with technology, technology has democratized, has made it even access for people to get educated, and when you have democratized access, you often will have consolidated um production meaning, if you're the best in the world, you get to do it for everyone.

So What sucks?

Easy to compete.

So it's double-edged sword, right?

Many competitors.

You also create your competition when you educate them.

Retention is almost nothing.

And growth relies on almost constant marketing.

And then you always have a little bit of reputational risk if you're not good at ops, which is a totally different skill set than education, where you can actually scale the other components of the business.

And so reputation can take a hit.

And that's why many businesses can shoot up quickly, and either they fizzle out and they become what I call offer hoppers.

So they just come up with a new thing every year that they're selling.

From an education perspective, that is a way to do it.

I don't think it's the way of life that I would prefer to live, but some people do that.

The alternative is that they just kind of putter along at that same level and they just get new people in, the old people leave, and that's just what they do.

And it's very difficult for them to scale.

So what's the big problem that you have to solve if you have this business?

Number one and this is the nasty one, but it's.

The reality is that you have to find a way to create stickiness in a fundamentally unsticky model.

Meaning, how do we create revenue retention in an education business?

So I'm going to give you a couple of tactical strategies for this.

So number one is that you want to have some component of the business that's consumption-based.

If we were to teach someone a core skill, there's going to be some components that need to be refreshed.

If I teach you how to run ads, you're going to need something on a regular basis.

What's that?

Creative.

So maybe I sell you a one-time price that's significantly more expensive on how to run ads, and then my recurring price for the the creative might be lower, right.

Um, a different version of this is I'll teach you uh, this education, but you probably want a community to be with other people.

That's what school.com is about, right?

And I'm a co-founder of that company, which is a different one of these models that I'll get to in a second.

What's the only one that's left, but maybe I, maybe I'm, I'm sure I'm sharing too much.

Um, So people want community, but let's be real.

Community is less valuable than education is.

And so where people get into trouble is they say oh, I will charge 25000 for this education and that might be appropriate.

And so then they make a payment plan where they say you have to pay 2000 a month, or whatever, to pay for this education.

Fine.

But the first payment of that 2000 so amazingly worth it, because they just got this 25000 thing.

They got this education up front.

But the day before I know how to do math, Knowing how to do math is unbelievably valuable.

The day after I know how to do math, the value of a math course is approximately zero.

And so now I'm paying 2000 a month for a community, which is not as valuable as what a community is worth.

And so when you're looking at your product offering, especially within education, we have to think what components of this are consumed on a regular basis.

Communities consumed on a regular basis.

If I taught someone how to do 3D printing and I said hey, these are the hot items that are trending right now for 3D printing, and I do that research and I deliver that list every single week, that's consumable.

We have to think about what are the elements of this, and that's on a uh, you know, for if we're, if we're teaching someone how to do anything right elements of the business that are consumable.

And then there's some elements of the business that are one time.

The appropriate billing structure is very high, high price, price to value for the one-time thing that is inherently valuable but has no recurring.

And then make sure the recurring elements of the business are also appropriately priced, which might be significantly lower.

And this is what gave birth to the, the little ism that i have, which is big head, long tail, And typically it also leans into psychological bias of hey, I just paid a lot of money for this thing.

Why would I cancel this recurring subscription just to maintain my skill set here?

Now, the two more elements that you can add in terms of stickiness can be uh, discount buying, which is that if you have a lot of people who are buying paint brushes because you taught them how to paint, if you say Hey, if you buy, you know, I have this collective buying power.

And so I will give you, you will get discounts on your materials that are half or in excess of my subscription price.

It's highly likely that people will be uh, people will stick on your thing because it's very clear ROI for them.

They save more than they spend.

So they'll keep doing it.

The other component that you can add in from a stickiness perspective is continued education.

So some of the most valuable companies in the education space are actually adult continued education meaning.

Oh, I'm a nurse.

I need to get these continued credits.

I need to keep up with the up-to-date technology and think of news as the thing.

So what's the news in the industry?

What are the new techniques?

What are the new tools? that I can teach on a consistent basis so this person can stay up to speed.

And again, the amount that you have to pay to become a doctor versus the amount that you have to pay to stay a doctor significantly different.

You might have to pay 250000 to become a doctor and 3000 a year for your continued credits.

All right,

And so make sure that the pricing is appropriate to the values being provided.

All right.

So that is the problem that you have to solve within that business.

And so how do we actually win in the model?

One is we split out the value to make sure that we're charging appropriately for the one-time thing versus the recurring thing.

We add the consumer components to the recurring elements of the business.

We want to use the cash engine that we get from the one-time purchases to fund one acquisition.

And most importantly, and this is the biggest one of all, Brand.

And you might notice this as a recurring theme here.

But how can you defend against the low barrier entry?

You creating your competition.

How do you defend against that?

Brand.

And in all of these models, I think the one that is the most impacted by it's tough to even say that, because they're all impacted by brand.

This one also is impacted by brand a lot, is education, right?

Why are people willing to pay to go and take calculus at Harvard versus calculus at CCBC, and pay 2000 versus 200000?

Why are they willing to pay that difference?

Because of the brand, right?

That is why.

And so that brand association also becomes another value add to the person, because that brand actually approximates for a decrease in risk, an increase in likelihood that they will get the education that they ultimately want.

Now, Harvard Cup, because it becomes a stamp in and of itself, which is a little bit different.

But that is the ultimate direction you want to go in.

Is that, when your brand is so good, that when people know that they have been educated by you, that that actually confers value to them for whatever they're trying to do next?

So you might have heard of Cordon Bleu, which is a cooking school, right?

And if someone's like, oh, I'm a Cordon Bleu chef, then you're like, oh, well, there you go.

Cordon Bleu or whatever they say.

All right.

If you are one of the chefs, then you're more likely to get a job afterwards, because they have a good reputation for delivering good chefs.

So what does that mean they get to do?

They get to charge more for the education they have because their people are more successful.

And so that is how you win in this model.

And if you're in a B2C setting, so you sell a consumer skill or education, so you teach them how to cook, you teach them how to paint, you teach them how to skateboard, you teach them how to whatever.

In that business model, the best way to be successful is to be really good.

If you're really good at skateboarding, people want to know, learn how to do ollies from you.

Even if many people could do an ollie, they will want to learn it from you, because humans have this very interesting phenomenon, something that I've thought about a lot which is that we have, like this, overkill bias.

So what does that mean?

If I want to buy a jacket, I want to see that the jacket is still warm on Mount Everest.

Because I think okay, if it's still warm on the top of Mount Everest, it'll probably keep me warm from my car to the door right.

And to the same degree, they do the same thing within education.

I want to go to Tony Hawk, who's a skateboarder, for those of you who were born under a rock.

First 900, shout out to Tony.

I want Tony Hawk to teach me how to do an ollie.

Now, how many skateboarders could probably teach you to do a ton?

But if you're going to, if you had your druthers, if you had your pick, who'd you pick?

The best guy.

So one of the best branding strategies that you can have is real world proof, right?

Why does, why does the ACQ business content do?

I would say disproportionately better than many other?

Quote business, business educators.

Well, one, I think the, I, you know, I try to do a good job on the stuff.

But I think the other just reality of it is like well, people didn't pay attention as much to my stuff until I had a 4600 exit.

And then all of a sudden people were like, oh, you know, stuff might be pretty good.

And then people just paid more attention.

You could have the exact same education if you took everything that Warren Buffett has taught between every single public appearance and you turned it into a course and you said how to invest for the long term.

How many people would want to buy it?

Probably not that many.

You could make it even better than Warren Buffett, all this stuff.

The only thing you forgot to do was build Berkshire fucking Hathaway.

They did $89 billion in profit last year.

That's what you forgot to do, starting at age seven and doing it for like a hundred years, almost literally.

All right.

And so he has the world real world proof.

And so if you want to win an education, the best way to start is be better than everyone.

And if you're like, well, how easy for you to say, yes, easy for me to say hard for me to get here.

And I'm not saying I'm better than everyone.

I'm just saying that, as there are levels to the game and you will be truncated, you will be capped by how good you are.

Because that will have a direct correlation to the amount of brand association that you will be able to get, the amount of credibility that you have.

So if you want to have a bigger brand and you want to get into education, my two cents is even though it is easy, fast and cheap to start, The real way to win is to take the much longer time path of proving that you're very good or one of the best at the thing.

And then, when you do decide to start educating people, they will listen to you immediately and they will not question why you're more expensive.

They will not question whether or not you can do it.

You will pay down all of the biggest risks within this business, and you pay it down doing the one thing that the rest of your competition will do, which is be patient and do the work.

So this is information businesses.

My credibility around information businesses is that I happen to own a software platform that allows people to start information businesses, called school.

And so I have access to quite literally millions of data points in terms of what makes this business work and what doesn't.

I've also been somebody who's consumed a lot from the alternative education world and done a lot of studying on what makes these businesses work.

Because, as somebody who is a continuous student of all games, especially the business game,

I always want to see what makes, what separates the best from the rest, which brings us naturally to number four.

What is the shape of this business and why is it this shape?

So software starts the slowest because you have to put a lot of capital in.

You have to put people together and you have to have people code for extended periods of time.

Not really sure if people actually even like the thing.

And if they do like the thing, how long does it take for it to actually do all the functions that you have in your mind for it?

And so this takes, you know, for in the beginning, you know, not that long ago, it took many years.

And it still takes time now, even with the vibe coding world.

I still real talk have yet to see a truly vibe coded from A to Z business.

That is like 100 million a year.

And I even you know, we had a conversation with Amjad, who's Replit's CEO.

One of the key I think they're 150 million or something ARR in a very short time period.

We had a conversation about people who use Replit to vibe code software.

And interestingly, I think he mentioned one or two examples and they have like lots and lots and lots and lots of customers of like 1 million businesses, 2 million businesses that use the VibeCoded software.

And so I think that it is getting better and better.

Is it there yet?

I think it has struggled to have the robustness of I'll just call it manual or human-based software.

But I think that will get fixed in time and probably relatively quickly.

But for right now it still does take time and takes years to make a truly good product that is also scalable.

So sure, maybe you can sell it to a handful of people, but can it support a million users?

Not currently.

The vibe coding won't.

But it's shaped this way because... taking out vibe coding for a moment.

Once you do have product market fit.

The way that Y Combinator describes this is that getting product market fit is like pushing a boulder up the hill.

And once you have it, it's like chasing, getting chased by the boulder on the other way down, right?

Is that you're chasing after this because you have so much more demand than you can even handle and like the wheels come flying off.

So it's shaped this way because it's hard to build a good product.

Engineering is, especially good engineering, is incredibly expensive.

You have to front that capital because you have no income.

Think about this.

The rest of these businesses, you can get pretty close to bootstrapping.

SaaS.

The reason there is such a big venture capital industry is because it costs money millions of dollars to get the level of talent required to make great products in engineering.

And you have to front that for like a year, sometimes two years, before you even turn a dollar right.

And definitely not enough dollars to make it profitable.

And so you have this very long, very unprofitable runway.

And so, as a result of all the businesses I just described, the fewest number of businesses are here are in software.

And it's because the barriers to entry are higher.

Now, vibe coding, things like that have made it easier.

More people are coding now.

Some engineers can.

There's coding bootcamps plus vibe coding where people can do components of their job with it.

And so it's becoming more democratized.

That being said, it's still, between the other three, way fewer people here compared to the other ones.

But it is shaped this way because once you have a product, more fit, you can go to the sky, because it is the most scalable of all four business models once you have it.

Again, that's the hard part.

So what's the great part about it?

Infinite scale, incredibly high gross margins once you have it.

If done well, if done well, very sticky revenue.

The vast majority of people who build software don't have sticky revenue.

But if done well, can be incredibly sticky because it gets integrated into someone's workflow.

And you can have huge enterprise value long term.

So why do software companies have such high valuations?

One person can exit it because somebody else can own the product and the customer can have the exact same experience.

So there's almost no risk at point of sale if all the other metrics of the business are there.

Number one.

Number two the components that drive valuation are outside of that.

Core component of software is going to be gross margin and growth rate.

So how much gross margin do we have and how quickly are we growing?

Now, the third element of this growth rate, which almost always happens at scale it gets factored in, is going to be revenue retention.

So of course you can go from zero to 10 million very quickly because you can just sell a lot of people something and you'll have high growth rate and high gross margins.

But if the customers are leaving, we have no stickiness.

And this is where many people who come from this world, in the information, education world or services world, or even e-commerce world, they say oh, this shouldn't be hard.

I can have an infinite backend.

I'll just cobble some stuff together.

I'll get an outsourced developer, and we'll go sell the thing.

The problem is this business looks identical to this business, the information business.

Until you have revenue retention.

Real.

So, That becomes the priority in this business.

And I'm getting ahead of myself.

So I'll tell you how to do that in a second.

So let me tell you what sucks about this, because I just told you oh, the infinite scale.

Lots of money, huge enterprise value, lots of gross margins.

Why does it suck?

Very slow start.

Founders often quit early.

Very high burn in terms of cash before you start having money.

And even when you do make money, you're still burning more than you're making because, Because of how software works, because of its infinite scale, the vast majority of people are not willing to pay a lot of money for it.

So if you think about how much even enterprise software costs, it might cost a few hundred thousand dollars a year.

But compared to the expenses that an enterprise actually spends on other costs, it's nothing, right?

It feels high to the software company, but it's nothing compared to how much the enterprise actually spends.

And on the consumer level, the amount that you have to do to get 9 a month from a person speaking from experience is a lot right.

Think about, think about Netflix, which is a combination of media and kind of software.

They have to make the entire.

They have to entertain the world and make world-class.

You know shows.

They have to make the Witcher.

They have to make They have to make these unbelievable shows just so they can get their $10 a month.

And they go to $13 and people are like, I'm leaving, right?

Outrageous, $13.

What are these people talking about, right?

And so people's willingness to pay because they know there's almost no incremental cost is very low, which means you have to have tremendous volume to actually make real money.

Now, the advantage is it can handle that volume automatically.

But it sure as hell is hard to get 100 million customers.

Right.

And so it can become very emotionally difficult for this long period of time where it basically never makes money.

And so then you have dependency on VCs, or you have to just watch your banking go down month after month after month in order to maintain as much equity as you can.

So you don't dilute yourself to the point where finally, it does succeed and you own 4 percent of the business.

And that there's more, you know, scar stories behind that than, than I can possibly tell you.

So what's the problem that you have to solve?

Number one is you have to survive the early years before product market fit.

This is the biggest issue.

And this is where marketers basically just can't do software.

It's just like it's.

It's incredibly hard for them to do because they want to market, they want to sell it.

But in order for this thing to actually become big, you have to make sure that people want it.

And again, Keep wanting it.

It have to stick, and so not only do they have to buy, they have to keep using it, and so that is the hardest part of doing it.

I was listening to an interview by the dropbox uh founder.

He was talking about how he used to pay people from craigslist to come in and just use his product in front of him, and he said the first time they did it, five out of five people who used it didn't upload a file because they couldn't figure it out, and so that is the kind of just raw work you have to keep doing, and it's like maybe it takes them another three weeks or four weeks to get the next user flow going.

And then they have to get more people in front of them.

And then those people still don't figure it out.

And you keep doing that until eventually like, oh my God, they uploaded a file.

And then from there, we're like, okay, well now they didn't come back.

Shit.

So then we have to fix that loop.

And so there's many loops that have to get completely lubricated within the user experience of the business so they can actually deliver core value.

And you have to do that as fast as humanly possible.

And so within the software world, there's a great interview or a presentation that the head of growth at Facebook said And he drew this line and he said people think growth looks like this.

He said, growth actually looks like this.

So what does he mean by that?

He means that users start, they get activated, and then they never churn.

That is what growth looks like.

Because if you can retain a certain percentage of customers forever, then it means all you do is you can just keep billing in the front end, but then that base level just keeps sticking and growing, and growing and growing.

And that is how software companies become incredibly valuable.

So the biggest problem you have to solve is number one, making a product that people want to buy.

And number two, making sure that they keep buying it.

They keep coming back.

They keep spending money on it.

That's the issue.

And so, on a consumer side, if you're keeping over 60 by the end of the year from Logo's perspective, ideally over 100 from a revenue perspective, that becomes an incredibly valuable business.

And so what do I mean?

The difference between I'm going to get a little bit softwarey, but Logo churn versus revenue.

So revenue retention is if I have 10 customers that pay me 10 a month, that means that I'm making 100 a month.

A year later, Am I still making $100 a month from those initial customers?

Now I might have lost a few of those customers, but if some of those other customers spend more money because we build our software in such a way that we have the opportunity for them to spend more, if we have more than 100 from those original customers, we have 100 or greater revenue retention.

That's the game you want to be in.

And that works the same for consumers as it does for enterprise sales, for B2B.

So all the way through.

Now it tends to be easier to have stick on enterprise customers because they're willing to incur more costs.

Switching costs are higher for them.

Whereas consumers, it's harder.

But there's a whole hell of a lot of them.

So how do you win in software or in SaaS?

Number one, you have to obsess over product quality and customer feedback.

You have to be absolutely customer obsessed.

So at school, for example, so we have a software platform.

We have 20 million users.

Right.

So kind of, you know, kind of.

People think people think it's a big deal.

So in order to do that, you have to be absolutely militant.

And one of the interesting things about this is that it's not that you listen to the customers, that you give customers everything they want, because the customers will hang themselves with their own requests.

And so if you just keep feature adding, feature adding, feature adding, you end up building a Frankenstein that no one can make their way through.

And so you have to be incredibly diligent in terms of what features we really think are going to be worth the cost of the user experience that we're adding in complexity.

And so complexity is the antithesis of elegance, right?

And so when you add more stuff, it almost always adds complexity, unless you have exceptional product design and that you can only do with just tons of loops of iteration, of thinking time and intelligence um, and feedback, to make it.

It's kind of like standing off the edges.

Um, and it's the tiny little details that make software work.

So two companies can have the same core problem that they're solving, but the level of quality that they can approach it with is so much greater.

Um, with that.

So next one is in terms of the way you went in this.

So you have to retain the customers.

The next one is you have to have some sort of viral component to the business.

We want to have a loop to this so that when we bring one customer, they bring 1.1, right?

They get an extra customer in the door for us because at the ultimate scale, especially with software that tends to be lower priced, it becomes very difficult to use paid ads as your primary way of requiring customers.

And so you can absolutely use paid ads as a way to get customers, but you need to have some viral loop that, over time, can continually compound down the cost of acquisition.

And so like Facebook would have had to spend gazillions of dollars.

They spent for sure a lot of money to acquire customers.

But the key component that they knew is that if they could spend to acquire one, they could get two more, or whatever their viral coefficient was to come afterwards.

So it takes that cost and then divides it by three, because two other customers, but then those customers get two other customers and it continues to proliferate, right.

ChatGPT was able to get to a million users in a week because of virality, because of strong word of mouth.

The other way that I would note is that software is a quality over quantity game when it comes to talent.

There absolutely are 10X and 100X engineers.

They also tend to cost 10 or 100X the price.

And so you have to be willing to spend a huge amount of money for way better talent.

The difficulty is, if you've never built software before, to have the perspective from which to make the judgment on that talent.

And so this is where you becoming educated or you being very good in and of yourself or getting a strong technical co-founder can be important for having a good filter for who really has the chops to code and always building with the end in mind of like we need to build this thing with scalable code, good documentation from day one, so that this thing can really rip once we have product market fit and our viral coefficient figured out.

And then the loops where we get return loops, we get referral loops, we have upgrade loops, all the different loops that have get built into the user experience.

We've removed all the friction from them.

And I'll leave you with one final thing from design, which is the way you make an exceptional product, is that you cannot actually make something good.

What you do is you find a good outcome, that everybody wants.

That's the easy part.

And then you remove all friction between where someone is and them getting that outcome.

That is what good software does.

And so if you think about all the benefits that come with having a phone and you remove all the friction associated with that, you get an iPhone.

That's what Steve Jobs did so brilliantly.

He looked at what everyone wants with a phone and said how can I make it so?

It's So easy that a child literally babies, people who don't speak English can figure out how to use the device and get what they want out of it.

And they can do it immediately.

That is how good software is built.

It's by the removal of friction.

If you remove everything that sucks about getting what someone wants by default, you will have something good.

The reason I wanted to go over these in so much depth is that every business has features and bugs, like I said earlier.

And one of the big mistakes that I'll see businesses do at different levels and I'm talking not just like a million or 10 million, but I see 30 million, 50 million, 100 million businesses come and come with similar issues, which is their complaint will be a core feature of the business.

And they will say there's something wrong with my business because I'm struggling with supply chain issues.

I'm struggling with cashflow as we're scaling too quickly, or I'm really supply constrained because it's really hard to find good people.

Or you know what, you know, getting customers is tough.

Like ad spend is, is going up and it's costing me more to get customers every single year.

And ads don't really work like they used to.

Or you know, it's really expensive to do this company and we're burning a ton of money and we're just hoping we can make it to our next round, but we're not keeping customers as long as we really need to.

We're not hitting our revenue retention goal.

Every one of these businesses has features, all right?

These are the core hairy problems that make these businesses these businesses.

And so, as soon as you can identify one, there's nothing wrong with your business.

This is the core struggle that creates the model that you chose to get into.

And so if you know that the flip side is that what's hard for you is hard for somebody else, which means that if you conquer that problem, you unlock huge amounts of enterprise value,

And so the way I think about this when I'm approaching these problems is how much enterprise value will I unlock if, all of a sudden, my service business I can get two people up to speed per month?

Well, if I got two people up to speed per month, I might add 10 million enterprise value or 50 million enterprise value to my business.

Okay.

Well, if that were the case, am I willing to dedicate 100000 of resources, 500000 of resources, in time to solve that 50 million problem?

Hell yeah, I am.

And so, once you can appropriately appreciate the value of the hairy problem that you're trying to solve, you can then put the right resources towards solving it, rather than constantly questioning yourself and thinking oh, there must be something wrong with my business.

And I think just having that level of clarity of there's nothing wrong.

This is the problem that I get to solve.

This is what the marketplace will literally pay me gobs of money to just figure out.

And so by then saying okay, this is my focal point and just shutting the rest out, You can then get really clear on okay, if I have to solve this problem and I have to thoroughly solve it, not half-assed, not duct tape this is core to the value creation of my business.

That's where you win.

Because then you can put all that depth of effort into it and get exceptionally good at recruiting, training and building amazing people.

You can get exceptionally good at cash flow management, supply chain management and logistics and building the brand around it.

You can get exceptionally good at building the brand and getting very clear on how to separate out what you charge for in terms of one time and continuity and building in those components of stickiness so that somebody who gets educated still wants to stay with you.

Or building the most world-class cracked engineering team on the planet so that you can shorten the amount of time that it takes you to find the product market fit.

And you build a scale of infrastructure so that people actually love the product, they retain revenue, and then this thing compounds and takes off like a rocket.

That's the core hair problem that you have to solve.

That's the 10x or 100x value that you as the entrepreneur, this is what we get paid for.

This is the game.

And so if you haven't started a business and you're like wow, all of these sound great and all of them sound hard,

Well, which one is right for you?

It depends a little bit.

I almost wanted to make a quiz on this for like, what's your personality type?

Can you match the business to the personality type?

I think you kind of can.

Um, because some personalities are just like more willing to suffer for longer periods of time.

They're more, you know, uh, detail oriented and they're, they're very particular.

It's like well, if I said Hey, I have an engineering person who has some mix of creativity, disregards uh, the opinions of other and is willing to suffer for long periods of time.

Who's that?

Software founder, right?

If I said I've got somebody who's like really excited, super promotional, doesn't like details but just like loves promoting.

What's a good business for that person?

One of these, right?

Good promoters do really well in e-commerce.

Good promoters do really well in education.

Now again, you still have to have a good product, like all businesses, but these tend to be more marketing heavy.

If I have somebody who's just exceptionally skilled at something and is a very good teacher ironically, some of the best teachers at stuff can have amazing service businesses and if you're somebody who loves people, this is a business that you want to be in right, because you're going to always have people around you.

If you love building culture, if you love which i actually didn't talk about um, but culture is going to be the internal brand of this business and because you have to get many people to behave in a specific way, brand is how you do that to customers.

Culture is how you do that to your employees.

And so, if you can develop people and you love pouring into people and you like leading people,

Notice people being the main word for all of this.

The three other business models have far fewer people.

There's people for sure, but far fewer than a service business.

Service businesses, you got to love people in order to do them.

And so that should give you a little bit of a mix of which one might be right for you and what path you might be on.

Here's the best part of all.

I've owned all of them.

And I've done well in all of them.

So it's not to say that one is better than the other.

It's just that which one's right for you and which one's right for you right now.

And the best part is life is long.

You can change your mind later because you can get out of that business.

Because the reality is that if you've never started a business before, the likelihood the first business you start is the last business you'll own is almost zero.

Bonus section.

So what shape is acquisition.com?

If you're curious, acquisition.com, it depends on the revenue line, actually.

So the book And the books, if we want to include that, and ACQ AI is kind of a blend of these right here, because ACQ AI is software.

But the books and the bundle was an education-related product, if you want to call it that.

And so because I have marketed a lot and I have a lot of people that have made money using my stuff they've had good experiences with my free stuff.

And so they were like well, if he has the AI and I'm willing to donate books to help Alex's mission which is my whole thing, which is getting more books in the hands of entrepreneurs, because books are what changed my life then

That was a combination of these two, which is why it was able to do a significant amount of revenue in a weekend.

How else could you scale a business?

People are like, they went from $0 to $100 million in ARR in X period of time.

It's like, well, I went from $0 to $100 million in 60 hours.

If you can promote enough and you have a good offer and a good product and you have a good history with an audience, then they're likely that they'll want to buy the next thing.

And this is where I think people go wrong is that the best marketers in the world find the best product?

Because they know, like, I feel confident that I can sell a lot of stuff.

But because I don't care about the first sale, I want to care about the 10th sale.

I want to make sure the thing that I deliver is exceptional, so that my second sale is bigger than my first one, right?

If my first book sucked, no one would have come to my sec, my, my first book launch with leads.

If the leads book had sucked, no one would have come to the money models launch, right?

If the products and the playbooks and money models book sucks, no one's going to come to the next one.

But I feel pretty good, based on how everything's going, that people like that book too.

All right.

Because I put so much time into it and it's what I know and what I'm good at.

That is the, the media component of the business.

If you consider um So media also kind of tends to fall in this little bit of a blend between these two of like you have a scalable deliverable.

In terms of the advisory practice, pure, pure service.

The advisory practice is pure service business.

It's white collar service.

We have associates who basically have analysts that come in and they have career paths that then lead them to be associates.

And there's career paths within associates, a junior associate and then senior associate.

Um, and then from there they can become, uh, directors.

And so we have clear career paths for people and it takes years for people to go through that uh to learn, kind of an apprentice style model, which is very akin to many professional service types businesses accounting management, consulting which is basically what we are uh legal.

Many types of businesses have same similar style models, which is very high uh education, uh people.

We have lots of Ivy league guys uh, who work on the team, many people who've had ex uh, entrepreneur experience or combinations of both of those.

Um, and so that is, that's the game.

And that's the, those are the two, uh, kind of models that we have.

So we have ACQ AI, which is technically this.

We had the um the media, uh and books, which is technically here.

We have the service, um, that's here.

Uh, I mean Layla did a.

You know she had a t-shirt drop or an apparel drop, but that's technically e-commerce.

Um, and so, yeah, I've, I've owned All those, but the contribution margin, you know, contribution for, I won't even mention, well, you know, the contribution for the e-commerce stuff is minimal compared to the other components of the business.

Acquisition.com, from the portfolio perspective, we have an insurance company.

So an insurance company, I would say, is more akin to this service business because you have account reps, they have to maintain accounts and it tends to be a high headcount business because you have to get more and more agents in.

Um, we own brick and mortar service, which also falls in this category.

We have teeth whiting chain, uh, with we widen.

Uh, and so that chain, um, we have a B2B, um, kind of, uh, operational consulting business.

Um, that I would say is a bit of a blend between these two.

I would say it's like tech enabled uh, or media enabled, education enabled, if you will, but we have really good revenue retention.

So it's a, it has a little bit more, it skews more towards service. on that side.

And so we have different businesses inside of the portfolio that continue to grow.

And yeah, so that's what we do.

Hopefully, if you're a business owner, that helps you at least know a little bit more about the path that you're on.

And if you are about to start on the business journey, first off, good luck.

It'll take longer than you think, and it'll probably suck for way longer than you think it will.

And once you get in, you never get out.

Enjoy.

[The Four Shapes of Business: Decoding Your Growth Model]-[Use the Shape of Your Business to Scale | Ep. 1005]

📋 Summary

Decoding the Four Fundamental Business Shapes

1. E-commerce: The High-Volume Physical Product Model

2. Service-Based: The People-Heavy Model

3. Education/Info-Media: The Fast-Scaling Knowledge Model

4. Software (SaaS): The Infinite Scalability Model

Conclusion: Features, Not Bugs

🎯Key Sentences

📝Key Phrases

📖 Transcript

[The Four Shapes of Business: Decoding Your Growth Model]-[Use the Shape of Your Business to Scale | Ep. 1005]

📋 Summary

Decoding the Four Fundamental Business Shapes

1. E-commerce: The High-Volume Physical Product Model

2. Service-Based: The People-Heavy Model

3. Education/Info-Media: The Fast-Scaling Knowledge Model

4. Software (SaaS): The Infinite Scalability Model

Conclusion: Features, Not Bugs

Deep Learning with ListenLeap

🎯Key Sentences

📝Key Phrases

📖 Transcript

ListenLeap Brings You Into Real Context Learning