Leverage and scaling in business growth

From: alexhormozi

Leverage is defined as how much you get for what you put in [00:57:01]. In business, the goal is to maximize leverage, meaning getting a lot for a small investment of effort [00:57:35].

Understanding Leverage [00:56:57]

Leverage allows you to achieve greater output for the same amount of work [01:00:32]. While in the beginning of a venture, you may have low leverage, requiring high volume of work, this volume builds skill, which is a form of leverage [01:00:44]. The more you do, the better you get, creating a virtuous cycle of work and improved outcomes [01:01:16].

Forms of Leverage

• Brand/Reputation [00:57:51]: A strong brand leads to higher click-through rates on ads and higher conversion rates, even at higher prices, as people are more inclined to buy from a trusted source [00:58:01]. For example, a branded t-shirt might sell for $30whileablankonefor$5, yet the branded one has a higher likelihood of purchase due to the leverage of the brand [00:59:09].
• People [00:58:27]: By bringing in others with experience, you can expand your business potential beyond your own capabilities, effectively multiplying your efforts [00:58:33]. This is how successful leaders like Steve Jobs built massive companies, not by knowing how to build every component, but by building a team that could [00:46:27].
• Code/Products [00:59:22]: Writing code once that millions can use, or a book that continues to sell without additional effort, provides immense leverage [00:59:25].
• Skill [00:59:58]: As you gain experience and improve your skills, you become more efficient, getting more results per unit of effort [01:00:00].

Scaling in Business Growth

Scaling refers to the ability to increase output with minimal increases in cost [00:19:06]. It’s not about whether something is scalable, but how scalable it is [00:19:47].

Elements of a Scalable Product/Service

A product or service that is designed for scalability typically possesses four key characteristics:

• Unique: It has a proprietary element that prevents others from easily replicating it [00:17:43].
• Expensive: It commands a high price relative to its cost of production, leading to higher profit margins per unit [00:17:49].
• Sticky: Customers repeatedly purchase the product or service, creating recurring revenue [00:17:55].
• “Air” (High Gross Profit): The cost to deliver the product is very low, meaning it costs pennies to make but can be sold for much more [00:18:03].

Coca-Cola is an example of a product that fits these criteria: it has a unique, secret recipe, is expensive relative to its production cost, is sticky (customers continue drinking it for life), and is “air” because it’s cheap to produce [00:18:24].

Incremental Cost of Adding a Customer

The core of scalability lies in the incremental cost of adding a customer [00:20:05]. The most scalable businesses incur almost no additional cost to bring on a new customer, such as cell phone carriers adding users to their network or platforms like Facebook or School adding new members [00:20:16].

Conversely, businesses that are harder to scale often have high incremental costs or rely heavily on specialized, hard-to-replicate expertise, such as accounting firms or law firms [00:20:51]. While still possible to scale, it requires more complex structures, like partnerships, to maintain quality and retain talent [00:21:13].

Strategies for Increasing Customer Lifetime Value (LTV)

To make a customer worth more to your business, implement the following eight strategies:

1. Increase Price: Charge more for the same product [00:37:10]. For beginners, a “five to five to five” model is recommended: after every five sales, bump the price by 20% until people stop buying [00:41:03].
2. Decrease Costs: Reduce the cost of making or delivering the product [00:37:24].
3. Increase Purchase Frequency: Get customers to buy more times (e.g., subscriptions) [00:37:41].
4. Sell Other Products: Offer new or complementary products (e.g., fries with a burger) [00:37:56].
5. Increase Quantity Purchased: Encourage customers to buy more units at once (e.g., bulk purchases) [00:38:20].
6. Increase Quality: Sell a higher-quality version of the product or service (e.g., premium ingredients, priority support) [00:38:41].
7. Decrease Quantity (Downsell): Offer a smaller, less expensive version to convert a “no” into a “yes” [00:39:33].
8. Decrease Quality (Economy Version): Provide a discount or economy version of the product or service [00:40:02].

For beginners, raising prices, increasing purchase frequency, and encouraging higher quantity purchases are the easiest to implement [00:42:24].

The Role of Employees in Scaling

Scaling a business requires help from others [00:45:15]. The size of a company is limited by the collective knowledge within it [00:45:31]. By bringing in individuals with specialized knowledge (e.g., finance, HR), the business’s potential expands significantly [00:46:01]. The most valuable skill for a business owner is to get others to do tasks effectively [00:46:38].

Management Diamond Framework

This framework addresses why an employee might not be performing as desired:

1. Didn’t know what to do: Lack of clear communication of tasks [00:47:19].
2. Didn’t know how to do it: Lack of training or process [00:47:29]. Solved by the “3Ds”:
   • Document: Create a step-by-step checklist [00:48:10].
   • Demonstrate: Perform the task in front of them using the document [00:48:50].
   • Duplicate: Have them perform the task in front of you using the document [00:49:11].
3. Didn’t know when to do it by: Lack of deadlines [00:47:37].
4. Didn’t know why to do it: Lack of motivation or understanding of how their role contributes to the bigger picture [00:47:46].
5. Something was blocking them: External factors preventing task completion (e.g., lack of resources) [00:50:52].

This framework helps diagnose and address performance issues, ensuring productive discussions rather than blame [00:51:53].

Three Pillars of Business

Businesses stand on three core pillars:

1. Acquisition: Marketing and sales—letting people know about your product and getting them to buy [00:52:55].
2. Delivery: Creating and providing the product or service, including design, distribution, customer success, and onboarding [00:53:04].
3. Operations: Everything else that supports acquisition and delivery, such as legal, finance, payroll, HR, and recruiting [00:53:30].

For a business to scale effectively, it must be balanced across these three pillars. Partnerships should complement missing skills or provide necessary capital, ensuring all legs of the stool are strong [00:55:13]. If a partnership over-indexes on one pillar (e.g., two marketing experts), the business becomes top-heavy and unstable, hindering scaling [00:55:02].

Sustaining Growth and Improvement

Once a business is growing, the key is to expand the gap between you and competitors by continuously building on your leverage [00:56:50].

Compounding and Focus

The concept of compounding, often referred to as the “eighth wonder of the world,” applies directly to business growth [01:02:03]. The objective is to never interrupt it [01:02:07]. Ruthless focus over long periods is crucial for entrepreneurs [01:02:37]. Focus is defined by the quality and quantity of things you say “no” to [01:02:52].

Entrepreneurs often fall into the trap of restarting their efforts when faced with the “valley of despair” in one venture, chasing new “uninformed optimism” in another [01:05:02]. This disrupts compounding and prevents long-term success [01:06:15]. True success often comes from concentrating all efforts into one basket until significant success is achieved, then diversifying [01:06:50].

Continuous Learning Loop

To get better and sustain growth, a continuous learning loop is essential [01:09:44]. This involves:

1. Volume: Generating a lot of data through consistent effort [01:10:02].
2. Common Factors Analysis: Analyzing the data to identify what works (top 10%) versus what doesn’t (bottom 10%) [01:10:06]. This helps in acquiring new skills, refining strategies, and understanding customer avatars [01:11:18].

This feedback loop of effort and analysis forces continuous improvement, allowing you to discover more efficient ways to apply your leverage [01:11:00]. The pursuit of larger goals is not just about the money, but about the personal growth and transformation required to achieve them [01:15:45]. Business, like life, is an infinite game where the objective is to stay in business and continue becoming [01:17:02].