Building Wealth While Building A Business | Re-Air Ep 290
In this episode of The Game w/ Alex Hormozi, Alex reflects on the challenges he faced while scaling his gym launch business, including high refund rates that led to significant financial losses. Alex shares how this experience prompted him to shift his focus from solely growing his business to prioritizing generating personal income.
He discusses the importance of balancing reinvesting profits into growing a business with paying oneself "owner earnings" to ensure financial stability. Alex emphasizes the distinction between merely increasing business size and actually making money. By adopting a mindset centered on boosting personal cash flow, he found a path to building a successful business while simultaneously securing his financial well-being.
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1-Page Summary
Challenges and Risks of Scaling: Refund Rates and Financial Difficulties
In Alex Hormozi's Gym Launch business, operational risks led to high refund rates around 25% that caused him to lose $150,000 in a week. Hormozi says gyms encouraged refunds since their marketing costs were covered, while he struggled with refund-related losses exceeding margins.
From Building a Business To Making Money
Initially, Hormozi focused on growing Gym Launch, not increasing personal wealth. However, financial troubles forced him to prioritize revenue generation. He pivoted to Leila's online fitness business, generating $1,000 in daily revenue by cutting out middlemen. Hormozi also packaged his gym launch system as a product, selling the information to solve refund issues.
Paying Yourself Vs. Reinvesting In Your Business
Hormozi realized building a business doesn't ensure wealth - he reinvested everything, leaving him vulnerable. He advises focusing on "owner earnings" - profits after maintaining competitiveness - instead of reinvesting all profits into growth. This mindset shift enabled Hormozi to build a profitable business while earning for himself.
Growing a Business Vs. Making Money
Hormozi emphasizes the difference between growing a business and making money. Many entrepreneurs overly focus on growth over income. Hormozi says prioritize "owner earnings" or personal cash flow over just increasing business size. Selling the business isn't reliable; he focused on boosting his personal income which solved financial troubles.
1-Page Summary
Additional Materials
Counterarguments
- High refund rates could indicate deeper issues with the product or service quality, not just operational risks or marketing strategies.
- Encouraging refunds as a marketing strategy might be short-sighted and could damage the brand's reputation in the long term.
- Focusing solely on revenue generation without considering customer satisfaction and product quality might not be sustainable.
- Cutting out middlemen to increase profits could lead to a loss of valuable partnerships and business opportunities.
- Packaging a system as a product to solve refund issues might not address the root causes of customer dissatisfaction.
- The concept of "owner earnings" might not be applicable to all business models, especially those that require significant reinvestment for innovation and staying competitive.
- Prioritizing personal income over business growth could limit the potential for long-term business success and scalability.
- While selling the business might not always be reliable, it can be a legitimate and lucrative exit strategy for many entrepreneurs.
- Boosting personal income as a solution to financial troubles might not address systemic issues within the business that could lead to future problems.
Actionables
- You can analyze your personal spending to identify areas where you're losing money, similar to how a business would assess operational risks. Start by tracking all your expenses for a month, categorize them, and then highlight any areas where you see unnecessary spending or consistent losses. For example, if you notice you're spending a significant amount on subscription services you rarely use, consider canceling them to reduce your financial outflow.
- Develop a side hustle by leveraging a skill or hobby you already have, and focus on direct sales to customers to eliminate middleman costs. For instance, if you're good at graphic design, create an online portfolio and offer your services directly to clients through social media or freelance platforms, avoiding agencies that take a cut of your earnings.
- Create a personal financial plan that prioritizes building an emergency fund and saving for personal wealth over reinvesting in non-essential expenses. Set a goal to save a specific percentage of your income each month, and put it into a high-yield savings account or investment vehicle. This approach ensures you're not left vulnerable during unexpected financial downturns and steadily increases your personal net worth.
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Challenges and Risks of Scaling: Refund Rates and Financial Difficulties
Alex Hormozi's Gym Launch business faced significant operational risks and financial challenges when scaling, primarily due to a high refund rate that triggered a financial "death spiral."
Alex Hormozi's Gym Launch Business Faced Operational Risks and Financial Difficulties, Including High Refund Rates Causing a "Death Spiral" Of Needing More Sales to Cover Refunds
Hormozi's business encountered operational challenges with salespeople flying out to gym facilities to close deals. Unfortunately, this led to gym owners telling their customers to refund the Programs sold by Gym Launch and repurchase them directly through their gyms, resulting in substantial refunds for Hormozi's company.
Hormozi Lost $150,000 In a Week Due to Dishonesty
The rapport between Hormozi and gym owners was lost as the salespeople did not have the same relationship with the owners, who conversely didn't have a financial reason to maintain low refund rates since it was Hormozi's investment on the line, not theirs. This disconnection and the gym owners' encouragement of customer refunds resulted in Hormozi personally losing around $150,000 in a single week.
High Refunds From Poor Fulfillment Forced Hormozi to Sell More
Customers asked for refunds at a high rate—around 25%—mainly because of dissatisfaction with the fulfillment provided by struggling gym owners. These owners had no financial involvement with the marketing costs and thus were indiff ...
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Challenges and Risks of Scaling: Refund Rates and Financial Difficulties
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Clarifications
- A financial "death spiral" typically describes a situation where a company faces increasing financial challenges that lead to a downward cycle of needing more sales or capital to cover existing debts or losses. In this context, it means that the high refund rates and financial difficulties experienced by Alex Hormozi's Gym Launch business created a situation where he had to keep selling more just to cover the refunds from previous sales, putting immense pressure on the business and making it unsustainable in the long run.
- Hormozi's personal loss of $150,000 in a week was a direct financial hit he experienced due to the high refund rates in his business. This loss occurred because of customers seeking refunds at a significant rate, leading to a substantial financial impact on Hormozi himself. The refunds were a result of customers being dissatisfied with the fulfillment provided by struggling gym owners, which ultimately affected Hormozi's finances. This financial setback highlights the challenges and risks faced by Hormozi's business during its scaling phase.
- A negative financial treadmill describes a situation where a business is stuck in a cycle of needing to generate more sales just to cover previous losses from refunds or other financial setbacks. This constant pressure to sell more to compensate for past financial challenges can lead to stress, financial strain, and an unsustainable business model.
- An unsusta ...
Counterarguments
- The high refund rates could be indicative of a deeper issue with the product or service quality, rather than just operational risks or dishonesty among gym owners.
- It's possible that the business model was not adequately stress-tested before scaling, which could have revealed potential issues with refund rates and financial sustainability.
- The strategy of having salespeople fly out to gyms might not have been the most cost-effective or efficient method of scaling the business.
- The loss of $150,000 in a week might reflect a lack of proper controls and oversight in the business operations.
- The relationship between Gym Launch and gym owners might not have been structured optimally to align incentives, which could have contributed to the high refund rates.
- The 25% refund rate might not solely be due to poor fulfillment by gym owners; it could also be a result of misaligned customer expectations or inadequate support from Gym Launch.
- The financial difficulties faced by the business could be a result of a combination of fact ...
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From Building a Business To Making Money
Alex Hormozi's entrepreneurial journey underscores a pivotal shift from focusing on business growth to prioritizing revenue generation to solve financial troubles.
Hormozi Shifted Focus From Business Growth to Increasing Revenue to Escape Financial Trouble
Initially, Alex Hormozi's efforts with Gym Launch were concentrated on the growth and expansion of his business, not directly on increasing his personal wealth. Over time, as financial struggles arose, Hormozi consistently found ways to generate the necessary revenue to meet his obligations, such as making payroll.
Through the trials faced with Gym Launch, Hormozi encountered a financial predicament that propelled him to reconsider his strategy, recognizing the urgency of revenue generation to pull through his financial woes. He became acutely aware of the vicious cycle of refunds and how unsustainable it was, leading him to the stark realization that making money was essential for escaping his monetary difficulties.
Hormozi Pivoted To Leila's Online Fitness Business, Generating $1,000 Daily Revenue Quickly By Cutting Out the Middleman
In response to the crisis and in need of a swift financial turnaround, Hormozi redirected his attention to his wife Leila's online fitness enterprise. By eliminating intermediaries in the sales and marketing processes, the online business scaled rapidly, achieving $1,000 in daily revenue. This pivot was a crucial move that quickly bolstered the couple's financial situation.
Mindset Shift Helped Hormozi Solve Financial Troubles By Selling Gym Launch System
The pressing need for considerable profit to remedy the issue of refunds led Hormozi to devise a swift solution. He packaged the system he had used to launch gyms as a marketable product, selling this valuable ...
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From Building a Business To Making Money
Additional Materials
Counterarguments
- The focus on revenue over growth can sometimes be short-sighted and may not always be sustainable in the long term.
- Prioritizing immediate revenue generation could potentially neglect aspects of the business that contribute to long-term stability and market position.
- The narrative may oversimplify the complexities of business management by implying that a singular focus on revenue is the solution to financial success.
- The success of Hormozi's pivot to selling the Gym Launch system might not be replicable for all entrepreneurs, as it relies on specific market conditions and personal expertise.
- The idea that concentrating solely on money-making is crucial for financial success might not align with all business philosophies, particularly those that value social impact or other non-financial metrics equally or more.
- ...
Actionables
- You can assess your current business model for untapped revenue opportunities by conducting a thorough analysis of your customer base, services, and pricing structure. For example, if you run a small bakery, consider offering baking classes or personalized cake design consultations to increase revenue without expanding the business size.
- Create a daily revenue goal and track your progress to stay focused on income generation. Start by determining a realistic daily income target based on your current financial obligations and business capabilities. Use a simple spreadsheet to monitor daily earnings and adjust your strategies accordingly, such as by running limited-time promotions or upselling to existing customers. ...
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Paying Yourself Vs. Reinvesting In Your Business
In a candid discussion about the financial strategies in entrepreneurship, Alex Hormozi draws from his experiences, emphasizing a balanced approach to personal wealth and business growth.
Hormozi Realized Building a Business Doesn't Ensure Wealth, Having Tied Up Resources Without Paying Himself
Hormozi reflects on a pivotal realization in his entrepreneurial journey—the understanding that building a successful business does not automatically translate to personal wealth. Initially, like many entrepreneurs, Hormozi reinvested everything back into his company, a strategy that led to a vulnerable position. His operational resources were entirely tied to the business, and he wasn't compensating himself, exposing him to risks that could have left him with nothing.
Hormozi Risked Vulnerability By Reinvesting Everything Into the Business
This approach of reinvesting all profits for growth made Hormozi's business and personal financial health precarious. He speaks openly about the operational risks when a business faces unforeseen challenges, which could potentially devastate both the business and the personal livelihood of the entrepreneur.
Focus On "Owner Earnings"—Profit After Maintaining Competitiveness—Over Reinvesting all Profits Into Growth, Advises Hormozi
Hormozi advises entrepreneurs to focus on "owner earnings," a term he uses to denote profits after the costs of maintaining the business competitivel ...
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Paying Yourself Vs. Reinvesting In Your Business
Additional Materials
Counterarguments
- While focusing on "owner earnings" can provide personal financial security, it may limit the potential for rapid business expansion that could be achieved through reinvesting all profits.
- Paying oneself too much could deprive the business of essential cash flow, potentially stunting growth or leading to cash crunches in times of unexpected expenses or downturns.
- Hormozi's advice may not be universally applicable, as different industries and business models may require different financial strategies for success.
- The balance between paying oneself and reinvesting in the business is highly individual and may not be as clear-cut as Hormozi's experience suggests; some businesses may benefit from a different approach.
- Hormozi's strategy as ...
Actionables
- You can assess your personal finances by creating a "Freedom Account" where you allocate a percentage of every income source directly to this account before addressing expenses. This mirrors the concept of owner earnings by ensuring you pay yourself first, leading to a more sustainable financial habit. For example, if you're a freelancer, you might decide that 10% of every invoice paid goes straight into your Freedom Account, which is not to be touched for reinvestment into your business or other expenses.
- Develop a "Vulnerability Budget" for your side projects or investments, determining in advance how much you're willing to reinvest without compromising your personal financial security. This helps you balance the risk of vulnerability with the necessity of personal financial health. For instance, if you start a side hustle, decide on a set amount or percentage of profits that you're comfortable reinvesting, ensuring it's an amount that, if lost, won't affect your ability to meet personal financial obligations.
- Engage in a monthly "Mindset Audit" ...
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Growing a Business Vs. Making Money
Alex Hormozi discusses the critical difference between growing a business and making money, arguing that while many entrepreneurs prioritize business growth, they should focus more on personal income.
Hormozi Contrasts Business Growth With Personal Income, Noting Many Entrepreneurs Overly Focus On Growth Over Income
Hormozi emphasizes the importance of entrepreneurs to reassess their priorities when it comes to the health of their business versus their personal income. He points out that the two should be closely related but are often viewed as separate concepts.
Hormozi: Prioritize "Owner Earnings" for Personal Profit Over Business Growth
Throughout his entrepreneurial career, Hormozi has learned that focusing on "owner earnings" or the cash flow an entrepreneur takes out of the business, is essential. He highlights the importance of prioritizing actions that generate personal cash flow over actions that may only contribute to the size and growth of the business.
Hormozi Realized Betting On Selling the Business Isn't Reliable; Prioritize Personal Profit
Hormozi points out the improbability of selling a business for a meaningful amount, as less than one percent of businesses sell for a sum that can be considered wealth. He shares from his own experience how he made the strategic decision to ensure his ventures provided for him personally, not just grew in value on paper.
Money-Focused Mindset Solved Hormozi's Financial Troubles and Boosted Business Profitability
By adopting ...
Here’s what you’ll find in our full summary
Growing a Business Vs. Making Money
Additional Materials
Counterarguments
- Business growth can lead to economies of scale, which might increase profitability in the long run, even if it temporarily reduces personal income.
- Reinvesting in the business rather than prioritizing immediate owner earnings can lead to a more sustainable and valuable business, which can provide long-term financial security.
- Some businesses require significant upfront investment and growth before they can generate substantial owner earnings, so focusing solely on immediate cash flow might not be feasible.
- Selling a business can be a reliable path to wealth for entrepreneurs who build a business with a clear exit strategy and who understand the market for mergers and acquisitions.
- A money-focused mindset might lead to short-term decision-making that could harm the business's reputation and long-term viability. ...
Actionables
- You can create a personal financial dashboard to track your income from the business versus its growth metrics. Start by setting up a simple spreadsheet where you input monthly figures like net profit, owner's draw, and reinvestment amounts. This will help you visualize the balance between taking profits and reinvesting in the business, allowing you to make informed decisions about your financial priorities.
- Develop a cash flow improvement plan by identifying and cutting unnecessary expenses. Begin by reviewing your business expenses over the last three months and categorize them into 'essential' and 'non-essential'. Then, challenge each non-essential expense by asking how it contributes to your personal income or business growth. Eliminate or reduce costs that don't align with your goal of increasing personal profit.
- Experiment with creating new revenue streams tha ...
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