From: alexhormozi
Every business must address four core problems to achieve growth and increased profitability [00:00:00]. These challenges often present themselves as “rock and hard place” scenarios, where seemingly impossible choices must be made [00:06:01].
1. Defining the Ideal Customer
Initially, businesses often need to sell to everyone to generate income [00:00:20]. This is normal and expected when starting out [00:00:35]. However, accepting every customer leads to significant operational complexity [00:01:13]. At revenue levels of 3 million annually, this becomes a major sticking point [00:01:10]. Diverse customer needs, promises, and price points strain resources when the business still relies heavily on the owner [00:01:17].
To overcome this, a business must learn to say no to non-ideal customers [00:01:34]. To identify the ideal customer, analyze past clients across four criteria [00:01:43]:
- Which clients do you love working with? [00:01:50]
- Which clients spent the most money? [00:01:53]
- From which clients did you derive the highest operational profit? [00:01:56]
- Which clients were the easiest to deliver results for? [00:02:02]
By focusing on common themes among these categories, a business can identify its ideal customer [00:02:09]. If just 10% of customers fit this ideal profile, imagine the potential if 100% did [00:02:29]. This shift can result in five to ten times more revenue without requiring additional infrastructure [00:02:42].
In marketing and sales, one of the most attractive things is demonstrating you don’t need their money [00:02:56]. By telling those you don’t want to sell to that you won’t serve them, you create an exclusive appeal for the right customers [00:03:05]. This refined messaging attracts more of the right type of customer, allowing for premium pricing and a more operationally efficient, higher-service model [00:03:36]. Performing the same service for every customer leads to higher success rates and better margins due to higher prices and lower costs [00:03:46].
2. Optimizing Pricing and Compensation
The second common sticking point involves either charging too little or paying too much [00:04:24]. While hiring great talent is important, excessive compensation can cripple a business model [00:04:35]. For example, paying frozen yogurt counter staff 20% of revenue or physical therapists 50% of revenue makes scaling impossible [00:04:43].
Business owners often avoid addressing misaligned compensation for fear of losing employees [00:05:48]. However, not making these changes prevents growth [00:05:53]. The solution requires difficult, honest conversations with employees, admitting past mistakes in compensation structures that hinder career growth and business expansion [00:07:31]. The owner must also be willing to sacrifice their own lifestyle by taking less money out of the business to facilitate the necessary changes [00:06:55]. This intestinal fortitude and willingness to live on very little allows for bigger risks and a longer-term perspective [00:06:25]. Some employees may leave, but this develops the skill of recruiting talent under a new, sustainable compensation structure aligned with the business’s vision [00:08:31].
Undercharging for Services
Another facet of this problem is not charging enough for the core offering [00:08:56]. Many businesses operate at full capacity but still struggle to make money, leading them to believe they need to open new locations or add product lines [00:09:00]. If the core business at full capacity isn’t profitable, the business model itself is flawed [00:09:44].
The solution is often to simply charge more [00:10:02].
- Overcoming Impostor Syndrome: The feeling of being an impostor when charging more typically stems from misrepresenting what you offer [00:10:03]. Instead, tell the truth about your capabilities and limitations [00:10:53]. If a customer is willing to pay for what you offer, it’s a voluntary exchange and part of capitalism [00:11:22].
- Pricing strategies and profit maximization: Charge based on the value you provide to the customer, not based on what’s in your own wallet [00:11:44]. If customers say no to higher prices, it presents an opportunity to learn how to sell better – a crucial skill for building a large business [00:12:10].
3. Avoiding Overexpansion
Problem 2 often leads to problem 3: overexpanding or “getting over your skis” [00:12:55]. When the core business isn’t profitable, owners might try to do “more of the wrong thing” [00:13:01]. This means scaling problems instead of solutions [00:13:12].
A common example is a brick-and-mortar business opening a second location when the first isn’t performing well [00:13:24]. This stems from an ego-driven focus on revenue goals rather than on refining the core model [00:13:41]. Revenue should be a consequence of quality inputs, not the goal itself [00:14:12]. Trying to hit arbitrary revenue targets can lead to building “stupid things” or making rushed decisions [00:14:47].
The core issue of overexpansion is selling to too many people too fast before hiring and training good enough people to deliver quality [00:15:54]. This leads to high overhead, a poor reputation, and a vicious cycle of needing to sell more to cover costs [00:17:04].
Quality creates growth, whereas growth without quality creates bloat [00:16:34]. Making “getting better” the goal will lead to organic growth [00:16:45]. Solving this requires owners to decrease their lifestyle, stop taking money from the business, and have hard conversations, potentially working overtime for extended periods [00:17:14]. While painful in the short term, addressing these mistakes is crucial for long-term success [00:18:08].
4. Maintaining Focus
Focus is a sneaky problem because entrepreneurs are often rewarded for taking leaps of faith and trying new things [00:19:57]. This reinforces a loop where, when things get hard, the instinct is to switch or try something new [00:20:27]. However, “the best diet is the one you follow, the best person to marry is the one you stay with, the best business is the one you stick with” [00:24:41].
- Commitment as Elimination of Alternatives: Commitment means eliminating other options [00:22:48]. The word “decision” comes from Latin “diader,” meaning “to literally cut off or to kill off” [00:24:00]. True commitment involves turning down even incredibly tempting new opportunities [00:24:08].
- Persistence: Leaders like Jeff Bezos, Steve Jobs, and Sam Altman emphasize persistence and staying the course despite all odds and shiny objects [00:25:27].
- Measuring Focus: Focus can be measured by the number and quality of things you say no to [00:25:54]. An entrepreneur who runs one business for 50 years, consistently improves, learns, and avoids repeating mistakes is almost guaranteed success [00:26:18].
It’s crucial to understand that you cannot be the CEO of two businesses simultaneously; you can own multiple, but if your phone rings when something goes wrong, you are still the CEO [00:27:03]. The “fallacy of success” suggests that if something works, it was the “right” call [00:28:32]. However, multiple paths can lead to success, and straddling multiple ventures almost guarantees failure [00:28:39].
Bonus Problem: Product vs. Business (Recurring Revenue)
Many entrepreneurs have a product but not a true business [00:29:33]. This means selling one widget one time to one person, with no backend, upsell, or recurring revenue [00:29:42]. Such a model is not a valuable asset; it’s an amplified job requiring constant input [00:30:03].
Businesses should aim for recurring revenue or repeat purchases [00:30:51]. If customers aren’t buying again, understand why [00:31:06]. Not all businesses are worth owning, especially if they don’t lend themselves to a scalable, recurring model that can become a self-sustaining asset [00:31:11].
Push vs. Pivot
A quintessential entrepreneurial question is whether to push through a problem or pivot to something new [00:31:39]. Nine times out of ten, you need to push [00:31:47]. Businesses don’t die; entrepreneurs lose their passion and fade [00:32:36].
Staying engaged with a business over time requires learning new skills and reframing challenges [00:32:42]. Instead of saying “this business won’t work because…”, reframe it as “I don’t know how to…” [00:33:18]. This shifts blame to accountability, recognizing skill deficiencies that can be changed [00:33:52].
Like a car requiring all its components (wheels, engine, chassis) to function, a business needs all its pieces to go from zero to one [00:34:58]. Once the core components are in place, you can emphasize different areas for growth (e.g., better grip on tires, more cylinders in the engine) [00:35:17].
Ultimately, at the highest level of scaling any business, the owner’s day becomes similar: managing a handful of intelligent, leveraged people [00:36:36]. If you don’t like the business you’re in, switching won’t avoid this fundamental structure, as all successful paths lead to managing key departments (marketing, sales, IT, legal, finance, operations, customer success) [00:36:54]. The challenge is to push through discomfort and confront mistakes, accepting short-term pain for long-term gain [00:37:43].