From: alexhormozi
To create a highly valuable and enduring business, it is crucial to focus on product value and customer retention. Many businesses incorrectly prioritize new acquisition strategies over optimizing their core offering and ensuring existing customers remain engaged [00:33:59].
The Importance of Product Quality and Customer Advocacy
Product quality is paramount for sustainable growth. A business’s inability to grow often stems from a fundamental flaw in its core offering, rather than a lack of marketing [00:30:45]. If a product or service is mediocre, investing heavily in marketing will only amplify its flaws [00:33:42].
Key concepts:
- The “Sandwich Sucks” Analogy: This analogy highlights that if the core product (“sandwich”) is subpar, no amount of marketing will fix the underlying issue. A gym, for example, might prioritize new marketing “tricks” when its actual services (onboarding, trainers, cleanliness) are terrible [00:33:23]. The fundamental offering must be excellent before scaling marketing efforts [00:34:40].
- Compounding Vehicle: Successful businesses embed a “compounding vehicle” that allows customers to market for them [00:32:10]. This means the product is so exceptional that customers naturally refer others, leading to exponential growth without significant marketing spend [00:31:14]. The 100 Million Offers book, for instance, sells more copies each month than the last, purely through word-of-mouth [00:31:32].
- Delaying Gratification: Investing time and effort upfront to build an “incredible” product that customers will market for you (more work upfront, less work long-term) is a highly valuable skill. This contrasts with quickly launching a mediocre product that requires constant promotion [00:32:35].
Strategies for Improving Customer Retention
Customer retention is directly linked to the value provided. Businesses with high churn rates indicate a problem with their product or service delivery [00:34:26].
Key strategies:
- Focus on High-Value Customers: An analysis of a company found that 85% of customers churned within 2-3 months, while 15% paid the most and stayed the longest [00:04:32]. By discontinuing services for the high-churn group and catering exclusively to the high-value 15%, the company was able to 10x its price and increase units sold, ultimately 10x’ing the company [00:05:33]. This demonstrates the power of niching down and focusing on the most profitable segments.
- Maximize Lifetime Value (LTV): Lifetime Value (LTV) is a critical metric, especially for brick-and-mortar businesses [00:34:36]. Businesses with higher LTV can afford to spend more on customer acquisition, leading to a competitive advantage [00:34:49].
- Address Churn Directly: If customers are not staying, that is the primary constraint to growth [00:34:30]. This often involves improving the actual product experience, such as the greeting process, training for teams, and overall simplicity of the model [00:34:07]. Once churn is minimized, new customer acquisition becomes much more effective [00:34:21].
Overcoming Business Constraints
Every business has a constraint that limits its growth [00:08:30]. If a business isn’t growing despite significant effort, it means the effort is misdirected, and the true constraint has not been identified [00:08:44].
Identifying and Solving Constraints:
- The “Why Can’t We 10x This Business?” Question: Asking this question helps to uncover the core problems. Often, the answer reveals a need for more strategic hires or systemic changes, not just more activity [00:10:42].
- Product/Market Fit vs. Marketing: A common misconception is that more marketing solves all problems. For a media company with 40 million subscribers, the constraint was not their media production (which was excellent) but their lack of a sellable product [00:09:50]. Improving their product from 0 to 20 would have generated 10 times more revenue than improving their media from 97 to 99 [00:10:03].
- Operational Efficiency and Profit Margins: For a franchisor with 20 locations, the problem was not marketing their franchise better but the poor profit margins and high operational drag of each location [00:50:28]. The solution was to optimize operations, simplify the menu, and negotiate better vendor deals to improve margins by just 1% each month, which would triple profits and make the business scalable over a year [00:51:10]. This demonstrates eliminating business inefficiencies as a key to increasing value.
Prioritizing Growth Objectives
When planning business growth, all activities should map to one of three core objectives:
- Get More Customers: Increase the volume of new customers.
- Increase Customer Value (LTV): Make existing customers worth more over time.
- Decrease Risk: Reduce the likelihood of the business failing or losing value, thereby increasing its overall enterprise value [00:11:33].
The strategic planning process also involves a “more, better, new” framework:
- More: Can we simply do more of what is already working? This is often the easiest and most reliable path to growth [00:23:54].
- Better: Can we improve existing processes or offerings without investing new resources? For example, reducing lead call times [00:24:04].
- New: Only after “more” and “better” opportunities are exhausted should new initiatives be pursued [00:24:15]. Many small business owners prematurely jump to “new shiny things” without maximizing their current efforts, hindering growth [00:24:39].
Valuing a Business Beyond Income
A business’s true value isn’t just its current income, but its salability as an asset [00:13:29]. A business that generates income but is entirely dependent on the owner is worth far less than one with a strong, independent team and systems [00:12:49]. Building a competent team that can run the business without the owner’s constant involvement significantly increases its enterprise value [00:13:03]. This is a core aspect of increasing business value.