Building a $3,500,000 Business for a Stranger in 42 Mins
The Game podcast takes an in-depth look at the financial performance of a company generating $1.72M in revenue with a 40% gross margin and 6.4% net profit. Guest Cody Schulson and host Alex Hormozi dissect the tactics, metrics, and business model with a focus on optimizing pricing and growth strategies.
They explore the benefits of value-based pricing over cost-plus, potential efficiency gains like consolidating locations, the pros and cons of online versus brick-and-mortar sales, and marketing channels like SEO, Etsy, and TikTok. Hormozi also proposes evaluating the acquisition of a $3M competitor to accelerate the company's growth.
This is a preview of the Shortform summary of the Apr 1, 2025 episode of the The Game w/ Alex Hormozi
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1-Page Summary
Business Performance and Financial Metrics
Cody Schulson and Alex Hormozi examine the financial details of a company with $1.72M in revenue and a 6.4% net profit margin last year. While the 40% gross margin varies by product, some offerings have low margins, suggesting past pricing issues. High fixed costs also impact profitability. Notably, the company has a strong 11:1 customer lifetime value to acquisition cost ratio, with repeat customers driving 50% of revenue.
Pricing and Profitability Optimization
According to Hormozi, the cost-plus pricing model limits profit margins. Instead, he proposes shifting to value-based pricing focused on customers' willingness to pay. This could allow substantial margin improvements through tactics like monthly 5% price increases and split-testing on best-sellers.
Growth Strategies and Marketing Channels
While the majority is e-commerce, the company utilizes various channels. SEO and sales on platforms like Etsy, Amazon, and the successful TikTok Shop drive growth. TikTok content, influencer partnerships, and ads boost viral potential. Meanwhile, the retail location underperforms, prompting suggestions to consolidate operations to one location for efficiency.
Brick-And-Mortar vs. Online Business Model
Schulson and Hormozi consider closing the break-even brick-and-mortar store to shift focus to the more scalable e-commerce model, recognizing online's profitability advantages. They also mull acquiring a $3M competitor, contingent on assessing potential risks. These discussions reflect strategic choices between physical retail and direct-to-consumer online sales.
1-Page Summary
Additional Materials
Counterarguments
- The 6.4% net profit margin might be healthy depending on the industry standard; some sectors operate on thin margins successfully.
- A 40% gross margin is not inherently problematic; it depends on the industry and the company's operational efficiency.
- High fixed costs could be a sign of investment in quality or necessary infrastructure that could pay off in the long term.
- An 11:1 customer lifetime value to acquisition cost ratio is impressive, but it's important to ensure that the quality of service or product doesn't decline as the company scales.
- Value-based pricing could alienate existing customers who are accustomed to the current pricing structure.
- Monthly 5% price increases might not be sustainable or could lead to customer attrition if not matched with perceived increases in value.
- Split-testing on best-sellers could potentially disrupt the sales of these products if not done carefully.
- Diversification across various channels is a strength that mitigates risk; focusing too heavily on e-commerce could expose the company to new risks.
- TikTok and other social media platforms are subject to algorithm changes and trends, which could affect the stability of sales driven by these channels.
- Closing the brick-and-mortar store ignores the potential benefits of an omnichannel strategy that integrates both physical and online experiences for customers.
- Acquiring a $3M competitor involves risks that might outweigh the potential benefits, such as cultural clashes, integration issues, or hidden liabilities.
- The assumption that e-commerce is more scalable and profitable than brick-and-mortar may not hold true for all products or customer demographics.
Actionables
- You can analyze your own spending habits by creating a simple spreadsheet to track expenses and identify areas with high fixed costs. Start by categorizing your monthly expenses into fixed and variable costs, then highlight the ones that take up a significant portion of your budget. Consider ways to reduce these costs, such as negotiating better rates for services or cutting unnecessary subscriptions.
- Experiment with a personal value-based pricing approach when selling items online, such as on eBay or Facebook Marketplace. Instead of setting prices based solely on what you paid, consider the item's perceived value to the buyer. For example, if you're selling a vintage camera, research what similar items have sold for and price yours based on its unique features and the value it provides to photography enthusiasts.
- Optimize your online presence by focusing on the most effective platform for your needs, whether it's for personal branding or selling items. If you notice more engagement or success on one platform, like Instagram over Facebook, concentrate your efforts there. Tailor your content to the platform's strengths, such as using visually appealing posts for Instagram, and track your results to see which strategies increase your followers or sales.
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Business Performance and Financial Metrics
Cody Schulson and Alex Hormozi examine the financial details of a company experiencing improvements in its business performance.
The Company's Current Financial Performance
Last Year's Revenue: $1.72M, Net Profit: 6.4%
The company saw a total revenue of $1.72 million last year, with a net profit of approximately $110,000, resulting in a net margin of about 6.4%. Cody Schulson points out that these numbers are a result of price adjustments he made to improve the company’s margins from previous levels where they were “not making money at all.”
Profitability and Cost Structure
Gross Margin Varies By Product, With Some Having Low Margins
The company has a gross margin of 40%, which varies by product. Cody acknowledges that there are some products with low margins, highlighting a cost of goods structure that suggests past pricing issues. Alex Hormozi adds that the company is very product heavy with these low margins. Previously, under prior management ran by Cody's mother, there were cases where the cost of goods was $50 while the retail price was just $45.
Company Has High Fixed Costs Impacting Profitability
High fixed costs are also impacting the profitability of the company. This expense structure contributes to the variations in gross margin and challenges underlying profit levels.
Customer Acquisition and Retention
High Customer Ltv to Acquisition Cost Ratio of 11:1
Cody states the company has two different customer lifetime value to customer acquisition cost (LTV:CAC) ratios: a notable 13 to 1 for direct traffic and internal channels, and a blended ratio of 11:1 overall. This high LTV to CAC ratio indic ...
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Business Performance and Financial Metrics
Additional Materials
Clarifications
- A net margin of 6.4% indicates that for every dollar of revenue the company generates, it retains $0.064 as profit after accounting for all expenses. This percentage reflects the company's efficiency in managing costs and generating profits from its operations. A higher net margin generally signifies better financial health and profitability for the company. In this context, the company's 6.4% net margin suggests a moderate level of profitability in relation to its revenue.
- A gross margin of 40% means that for every dollar in revenue, the company retains $0.40 after accounting for the cost of goods sold. It indicates the profitability of the company's core business operations before considering other expenses. Gross margin is a key metric used to assess a company's efficiency in producing goods or services.
- The Customer Lifetime Value to Customer Acquisition Cost ratio (LTV:CAC) is a metric used to assess the relationship between the value a company derives from a customer over their lifetime and the cost associated with acquiring that customer. It helps businesses understand how much they can spend on acquiring customers relative to the value those customers bring over time. A higher ratio indicates that the company is generating more revenue from each customer compared to the cost of acquiring them, which is generally seen as a positive sign for business profitability. This ratio is crucial for evaluating the effectiveness of marketing and sales strategies in terms ...
Counterarguments
- The net margin of 6.4% might be considered low for some industries, indicating there could be room for improvement in cost management or pricing strategies.
- While price adjustments have been made, it's unclear if these adjustments are sustainable or if they could lead to a loss of competitive advantage or market share.
- A gross margin of 40% with variability by product could suggest that the company is not optimizing its product mix or that some products may be acting as loss leaders without a strategic purpose.
- High fixed costs could indicate inefficiencies in the company's operations or an overinvestment in assets that are not generating proportional returns.
- A high LTV:CAC ratio is generally positive, but it could also mask underlying issues such as a small customer base or heavy reliance on a few key customers for the majority of revenue.
- While repeat customers driving 50% of revenue shows strong loyalty, it also suggests that the company may be overly dependent on existing customers and may need to diversify its customer acquisition strategies to ensure long-term growth.
- The fact that some custo ...
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Pricing and Profitability Optimization
Businesses can significantly enhance profitability by optimizing their pricing strategy, moving away from cost-plus models to a more customer value-centric approach.
Current Pricing Approach
Cost-Plus Pricing Model Limits Profit Margins
Most businesses currently rely on the conventional cost-plus pricing model, where a fixed margin is added atop all production costs, including labor. A massive spreadsheet detailing all costs is typically used in this model. This price-setting method commonly limits profit margins and reflects a somewhat rigid pricing structure.
Schulson observes that gag gifts, for instance, operate on a higher margin, suggesting that commodities with tighter margins might benefit from revisiting their existing cost-plus model.
Vendor Cost Increases Drive Pricing Decisions, Not Market Factors
Annually, prices are tweaked in response to vendor cost adjustments. Hormozi criticizes this approach as reactive, indicating that it's dictated by vendor price hikes rather than being informed by proactive market-based strategies.
Opportunities For Pricing Optimization
Implementing Value-Based Pricing Could Improve Profitability
A shift to value-based pricing offers one avenue to superior profitability. This method centers on what customers are prepared to pay, ignoring the cost of goods. The potential for profits via value-based pricing is virtually boundless, with attention focused on customer willingness to spend rather than on vendor costs.
Hormozi sees the current lack of pricing discipline as a prime opportunity for substantial improvement. By embracing an improved pricing strategy, there's potential to pursue much higher profit margins.
Optimize Margins By Testing Prices On Best-Sellers
Hormozi proposes monthly price increases of about 5%, which might potentially double profits. Additionally, he suggests employing split testing on items with high sales velocity, as this could rapidly burgeon profi ...
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Pricing and Profitability Optimization
Additional Materials
Clarifications
- The cost-plus pricing model is a common method where a business calculates the price of a product by adding a markup to the production cost. This markup typically covers expenses like materials, labor, and overhead, along with a desired profit margin. It is a straightforward approach but may limit profit potential and flexibility compared to other pricing strategies like value-based pricing.
- Vendor cost adjustments driving pricing decisions means that businesses adjust their prices based on changes in the costs of goods or services provided by their suppliers. This reactive approach can lead to price increases for customers when vendors raise their prices, impacting the profitability and pricing strategies of the businesses. It highlights a reliance on external factors, like supplier pricing, rather than internal factors or market dynamics when setting prices. This practice can sometimes limit a company's ability to optimize pricing based on customer value or market demand.
- Value-based pricing is a strategy where prices are determined by the perceived value of a product or service to customers, rather than production costs. It focuses on what customers are willing to pay based on the benefits they receive. This approach aims to set prices that reflect the value customers place on the product, potentially leading to higher profitability by attracting customers who prioritize value over price.
- Split testing, also known as A/B testing, is a method used to compare two versions of something, like a webpage or a product, to determine which one performs better. It involves showing variant A to one group and variant B to another, then analyzing the results to see which variant yields better outcomes. This process helps businesses make data-driven decisions by testing changes and improvements in a controlled manner. Split testing is a valuable tool for optimizing strategies and maximizing results based on real user feedback.
- The "sweet spot for selling units at the greatest gross profit" refers to finding the optimal price point where you can sell the maximum number of units while still achieving the highest overall profit margin. It involves balancing the price at which customers are willing to buy in large quantities ...
Actionables
- You can analyze your personal expenses and income to adopt a value-based approach to your budgeting. Start by categorizing your expenses based on the value they bring to your life rather than their cost. For instance, if a gym membership is costly but brings high value in terms of health and well-being, prioritize its payment over a streaming service that costs less but is used infrequently. This helps you allocate your funds more effectively, ensuring you spend on what brings the most value to your life.
- Experiment with negotiating for goods and services by emphasizing the value you offer as a customer. When discussing rates for services like landscaping or subscriptions, propose a price based on the long-term relationship and consistent business you provide, rather than accepting a standard rate. This could lead to better deals and savings as you leverage your customer loyalty as an a ...
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Growth Strategies and Marketing Channels
The company utilizes both online and offline marketing and sales channels. Here, we delve into strategies that have succeeded and consider changes for increased efficiency and profitability.
Online Marketing and Sales Channels
The majority of the company's business is e-commerce, experiencing fast growth through gag gifts.
Growth Through SEO and Sales on Etsy, Amazon, TikTok
The company began its Etsy business in 2019, earning $70,000 in the first year. By 2023, they expanded to Amazon, earning approximately $300,000, and made about $270,000 from TikTok Shop. Schulson and Hormozi highlight the importance of SEO, suggesting targeting ads toward specific groups like leagues and event organizers.
A successful TikTok video in December led to sales of $250,000, making it clear that viral content can significantly boost revenue. Schulson mentions SEO as the key driver of direct site traffic.
Alex Hormozi suggests focusing on products with immediate purchase likelihood, such as trophies, and implies that effectively targeted SEO strategies could lead to a 50% increase in revenue. Schulson confirms that PPC will yield good returns for the business.
Company's TikTok Strategy Drives Sales Spike Through Viral Content and Influencer Partnerships
TikTok content has become central to the company's marketing efforts. One video went viral with over 20 million views, significantly boosting sales. Schulson discusses how tagging products in TikTok Shop led to selling 70 to 100 items. They make about one TikTok a day, aiming to increase to three a day.
Hormozi points out that gag gifts are suitable for TikTok and suggests focusing on trends and hiring younger staff to stay current. He also recommends leveraging influencer partnerships and TikTok ads to create a feedback ...
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Growth Strategies and Marketing Channels
Additional Materials
Counterarguments
- While SEO is highlighted as a key driver of traffic, it's important to note that SEO strategies can take time to yield results and are subject to the changing algorithms of search engines.
- The success of a single TikTok video may not be a reliable indicator of future performance, as viral success can be unpredictable and not easily replicated.
- PPC campaigns can yield good returns, but they also require continuous investment and careful management to maintain profitability and avoid overspending.
- Focusing solely on products with immediate purchase likelihood might limit the company's long-term growth potential by not investing in products that require brand building and customer education.
- The suggestion to hire younger staff to stay current with trends on TikTok could be seen as ageist and overlooks the value of experience and diverse perspectives in a marketing team.
- Influencer partnerships and TikTok ads can be effective, but they also carry risks such as potential misalignment with brand values or negative publicity if the influencer behaves controversially.
- The idea of consolidating operations to one location for efficiency assumes that the current dispersion of resources is inefficient without considering potenti ...
Actionables
- You can boost your online visibility by learning basic SEO principles and applying them to your personal blog or website, focusing on niche topics you're passionate about to attract a targeted audience.
- Start by researching keywords related to your interests using free tools like Google Keyword Planner. Then, incorporate these keywords into your blog posts or website content in a natural way. For example, if you're into sustainable living, write articles about zero-waste products and optimize them for search terms like "eco-friendly home goods" or "sustainable lifestyle tips."
- Create a personal brand on TikTok by sharing content related to your hobbies or interests, aiming to post consistently and engage with current trends to increase your chances of going viral.
- Begin by identifying what you're passionate about, be it cooking, DIY crafts, or fitness. Then, plan a content calendar with ideas that align with trending hashtags or challenges on TikTok. For instance, if you enjoy cooking, participate in a popular recipe challenge and add your unique twist to ...
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Brick-And-Mortar Versus Online Business Model
Alex Hormozi and Cody Schulson discuss the complex strategic decisions faced by businesses choosing between traditional brick-and-mortar and modern online models.
Evaluating the Future of the Business Model
In deliberating the future of business operations, Hormozi indicates that there is a critical decision to be made concerning the focus of the business model.
E-Commerce vs. Physical Retail Decision
There is active contemplation over whether to close the brick-and-mortar location, with Schulson noting a potential pivot towards an e-commerce strategy for enhanced efficiency and profitability. The majority of their sales already occur through e-commerce channels, which reinforces the consideration towards this shift.
Online Shift Allows Greater Scalability and Profitability
Hormozi and Schulson discuss the suitability of their business for e-commerce direct-to-consumer sales rather than a B2B wholesale model. Given the trend towards online shopping, they recognize that an e-commerce approach might be more appropriate for scalable growth. Hormozi also suggests that by closing a regional brick-and-mortar location that is merely breaking even or losing money — and thereby saving on rent — the business can significantly increase its profitability.
Potential Acquisition Opportunitie ...
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Brick-And-Mortar Versus Online Business Model
Additional Materials
Counterarguments
- While e-commerce offers scalability, it also brings intense competition and the need to stand out in a crowded online marketplace.
- Physical retail can provide a tangible brand experience and customer service that online cannot replicate, which can be crucial for certain products and services.
- The assumption that closing a brick-and-mortar location will always increase profitability ignores the potential loss of local customers and brand presence in the community.
- Direct-to-consumer sales models can be challenging due to the need for significant marketing efforts and customer acquisition costs.
- A B2B wholesale model might offer stable, recurring revenue streams that could be less volatile than direct-to-consumer sales.
- The potential acquisition's high revenue concentration from a single customer could be mitigated by diversifying the customer base post-acquisition. ...
Actionables
- You can evaluate your current business or side hustle to identify which aspects could be transitioned to an online model to increase scalability. For instance, if you sell handmade crafts at local markets, consider setting up an online shop to reach a wider audience and operate without the constraints of physical location and market hours.
- Conduct a cost-benefit analysis of your current expenditures to see where you can cut costs without sacrificing quality or customer satisfaction. If you're running a small catering business from a rented kitchen space, explore the feasibility of a shared kitchen or creating partnerships with local venues to reduce overhead costs.
- If you're considering a partnership or acquisition, create a checklist t ...
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