These 3 Things Will Make Your Business Unstoppable | Ep 815
The Game w/ Alex Hormozi
Deep Dive
Why do many businesses fail despite having a good product or service?
Many businesses fail because they serve small or volatile customers, leading to structural churn. For example, a gym CRM experienced high churn not due to its product quality but because a third of the gyms it served went out of business annually. This volatility is inherent in serving small customers, making the business unstable.
What is structural churn and how does it impact businesses?
Structural churn occurs when customer loss is baked into the market structure, such as small businesses frequently failing. This impacts businesses by making their revenue streams unstable, as seen in the gym CRM example where 40% of customers left annually despite the product being sticky.
Why is it better to serve larger customers rather than small ones?
Larger customers are more stable, have higher spending power, and are less likely to churn. For example, big ad agencies serve Fortune 100 companies, ensuring consistent revenue. Smaller customers, like small business owners, are volatile, leading to higher churn and instability for businesses serving them.
How does Shopify manage customer retention despite serving prosumers?
Shopify retains 60% of its customers annually, which is considered best-in-class, despite serving prosumers who are volatile. This is achieved by offering a product with a high price-to-value discrepancy, making it affordable even during customers' bad months.
What is the key to creating a stable business model?
The key is to serve customers who are financially stable and have long-term staying power, such as Fortune 100 companies. This reduces structural churn and ensures consistent revenue. Additionally, businesses should focus on creating a high price-to-value discrepancy to retain customers even during tough times.
Why is it important to ask customers for feedback when iterating a product?
Asking customers for feedback helps identify pain points and areas for improvement. For example, Alex Hormozi’s software company initially missed the mark by not addressing gym owners' need for lead generation. By shifting focus to agencies, which had more stable revenue, the company was able to iterate the product effectively.
What are the two schools of thought for product iteration?
The first is the 'rank and build' model, where customers vote on features to be developed, leading to a feature-rich but potentially complex product. The second is the 'Mac model,' which focuses on creating an elegant, simplified solution by removing unnecessary features. Both approaches work but cater to different customer needs.
Why is it a mistake for service businesses to pretend to be software companies?
Pretending to be a software company when you’re a service business can lead to misaligned valuations. Investors value businesses based on revenue quality and margins, not labels. For example, a solar company trying to license its recruitment software would struggle to achieve software-like multiples because its core revenue still comes from services.
What is the key to long-term business success according to Alex Hormozi?
Long-term success comes from doing the obvious thing consistently over an extraordinary period of time without overcomplicating or pretending to be something you’re not. Businesses should focus on their core strengths and avoid chasing labels or trends that don’t align with their actual operations.
Shownotes Transcript