From: alexhormozi
Every business needs to solve four core problems to increase revenue and scale [00:00:00]. A fifth “bonus” problem highlights the difference between merely having a product and owning a valuable business asset [29:40:00].
1. Defining the Ideal Customer
Initially, businesses often sell to anyone to generate income and word-of-mouth [00:00:20]. However, around $1 million to $3 million in annual revenue, operational complexity becomes significant due to diverse customer needs, promises, and price points [01:10:00].
To overcome this, businesses must learn to say no to non-ideal customers [01:34:00]. Identify your ideal customer by evaluating past clients based on:
- Customers you genuinely enjoy working with [01:49:00].
- Those who have spent the most money [01:53:00].
- Clients with the highest operational profit [01:56:00].
- Customers who were the easiest to deliver results for [02:02:00].
Look for common themes across these categories. If even 10% of your customers fit this ideal profile, imagine the impact if 100% did – it could lead to 5 to 10 times more revenue with your existing infrastructure [02:29:00].
In marketing and sales, a powerful strategy is to communicate who you don’t want to sell to [03:05:00]. By clearly defining the “perfect unicorn” customer with specific traits, you attract more of the right people, allowing you to charge premium prices and operate with higher efficiency, service levels, and margins [03:19:00]. The challenge lies in having the fortitude to say no to immediate money for long-term growth [06:07:00].
2. Optimizing Pricing and Compensation
Many businesses get stuck by charging too little or paying too much [04:28:00]. While hiring great talent is essential [04:35:00], unsustainable compensation models (e.g., paying 20% of revenue to frozen yogurt staff or 50% to physical therapists) prevent scaling [04:43:00].
You must establish an individual financial model that allows sufficient profit at full capacity [05:12:00]. If employees’ compensation structures hinder business growth and reinvestment, a difficult conversation about changing compensation is necessary [05:50:00]. The business owner must be willing to face short-term pain, potentially reducing their own lifestyle and profit, to make the necessary changes for long-term health [06:47:00]. This may mean employees leave, but it develops the skill of recruiting talent under a new, sustainable structure [08:31:00].
Pricing
If your business is at full capacity but not making much money, the model is flawed [09:44:00]. You either need to dramatically decrease delivery costs (which could be employee compensation) or, more often, you are charging too little [09:59:00]. Pricing should be based on the value you provide, not your personal financial situation [11:48:00]. If customers are willing to pay for the value, then charging that price is capitalism at work [11:31:00]. Charging more, even if it leads to some “no’s,” forces you to learn how to sell better, a crucial skill for business growth [12:13:00].
3. Avoiding Overexpansion
Problem two often leads to problem three: overexpanding a flawed core business model [12:59:00]. This is common in brick-and-mortar businesses where owners attempt to open new locations while their first is underperforming [13:24:00]. This happens when the focus is on a revenue goal (an output) rather than optimizing the core inputs that drive quality [13:50:00].
Quality Over Growth
Revenue is a consequence, not a goal. [14:12:00] If you make growth the goal, bloat occurs. If you make quality the goal, growth occurs as a result [16:40:00]. The fastest way to a $100 million business is often slower to $10 million, but faster from $50 million to $100 million because the foundation is solid [15:23:00].
Overexpansion often results from selling to too many people too fast before adequately hiring and training competent staff [15:54:00]. This leads to a cycle of selling more to cover overhead, while reputation declines due to inability to deliver [17:04:00]. Again, the solution involves adjusting your lifestyle to absorb short-term financial hits, having difficult conversations, and working extra hours to fix the underlying issues [17:15:00]. This “growing pain” of temporarily reduced profit leads to long-term stability, higher success rates, and referrals [18:17:00].
4. Cultivating Focus
Focus is critical because entrepreneurs are rewarded for taking leaps of faith and trying new things [19:57:00]. This reinforces a loop where, when things get hard, the instinct is to jump to a new opportunity [20:31:00]. However, new opportunities often come with hidden challenges [22:09:00].
Commitment
Commitment is the elimination of alternatives [22:48:00]. The word “decision” comes from the Latin “decidere,” meaning “to cut off” or “to kill off” [24:00:00].
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 [24:41:00]. Success isn’t about finding the perfect thing, but about your commitment to the thing you’re doing [24:52:00]. Focus is measured by the number and quality of things you say no to [25:54:00]. It’s difficult to imagine an entrepreneur who dedicates 50 years to one business, consistently seeks to improve, and avoids repeating mistakes, failing to achieve unbelievable success [26:18:00].
While it might seem like switching businesses (e.g., from gyms to turnaround businesses, as in the speaker’s personal story) can lead to success [27:57:00], often sticking with the original venture could have yielded similar or even greater results due to accumulated expertise [28:18:00]. The “fallacy of success” is believing that because something worked, it was the only or best path [28:32:00]. Straddling multiple opportunities guarantees stagnation [28:46:00].
5. Transforming a Product into a Business (Bonus Problem)
The fifth major problem is having “a product and you don’t have a business” [29:40:00]. This refers to selling a single widget, one time, to one person, without a backend, upsell, or recurring revenue [29:42:00]. While technically making money, it’s not a valuable, self-sustaining asset; it’s an amplified job that dies when you stop putting in effort [30:02:00].
To build a sustainable business, aim for repeat purchases, a recurring model, or an extra/better version of your offering [30:48:00]. If your product doesn’t naturally lend itself to this, study successful businesses in your space that have achieved scale [31:11:00].
The core entrepreneurial question is: “Do I push or do I pivot?” [31:40:00] Nine times out of ten, you should push. Pivoting is usually only necessary if the market fundamentally rejects your offering, not just if you face a problem you haven’t solved yet [31:47:00].
Entrepreneurial Mindset
Businesses don’t die; entrepreneurs fade [32:36:00]. Stay in love with your business by embracing continuous learning and personal development [32:42:00]. Instead of saying “this business won’t work because…”, reframe it as “I don’t know how to…” [33:28:00]. This shifts blame to accountability, identifying skill deficiencies that can be learned and improved [33:52:00].
Just as a car needs all its components (engine, wheels, chassis) to function, a business requires all its core pieces to move from zero to one [35:07:00]. From one to “N,” it’s about emphasizing and improving these components [35:37:00].
Any business, with love and dedication, can be grown to $100 million annually [36:21:00]. At the highest level, scaling any business means managing a handful of intelligent people who work with high leverage [36:36:00]. If you don’t like your current business, you’ll likely reach the same managerial structure in a different one [36:54:00]. Therefore, push through the pain, confront mistakes, and undo them, even if it hurts in the short term, to achieve long-term growth [37:43:00].