5 Things I Just Learned After 14 Years of Business | Ep 873

0:00Five business lessons that I just learned crossing$250 million in 2024. for. So the first one was the cost of change. It was the first time that I've actually quantified how much does changing something in the business actually cost. So if you would imagine a straight line, right? And saying, okay, this is normal business activity, right? Straight line is going across. Now let's imagine we want to change something, right? So that's like our normal revenue. But then we decide, you know what, I'm going to change something in the business. So what ends up happening is this little line kind of dips down.

0:30And I've estimated just for from my kind of like, this again, there's no science behind this, just my estimate, that I get about a 20 % decrease in effectiveness across any function that I'm going to change, especially if it's manual. Now if you split test a headline, that's different, but if you're like, hey, we're changing our onboarding process or we're changing our sales process, we're changing our outbound process, or we're changing our something that people are involved with, we tend to get a decrease immediately of 20 % in performance, all right, which is pretty significant. And so as soon as I realized that we had almost this guaranteed cost of change, which is about 20%, I was able to quantify what things were worth doing.

1:07Because if you're anything like me, I have like this big list of stuff where I'm like, man, we should need to improve this. We need to improve this. We need to improve this. And I have all these ideas of things that I think that'll improve it. But when I actually am honest with myself and I think, huh, how much is number one going to actually improve the business? If I say, well, I think I'd maybe get us a 5 % improvement. Well, if I have a guaranteed 20 % decrease or decrement in performance and I have a 5 % incremental increase in performance, do I want to take a 20 % guaranteed loss to have a potential for a 5 % gain?

1:38Probably not. And so what's ended up happening is that there's all these little 5%, 5 % little improvements that I think could happen, but there's only like one or two, 20, 30, 50 % plus improvements I think we can do in the business. And so what happens is some of these things I just choose to never do. And I'll try not to stay explicit here, but some sh** stays f*****ed. You just have to accept that the business will not be perfect, but your chase of perfection will actually make your current business worse because you're constantly changing things. But let me spell this out one more level. So let's say you have your 20 % loss, right?

2:13Now, let's say you do something that is good, right? And it's, you know, you start going up, right? It's 20 % loss. It starts going back up. But what happens if you, at the same time, say, oh, well, now I'm going to start changing something else, right? And so basically you incur this permanent 20 % decrease because you're always changing something. So you're always 20 % below where you should be in the business. 20 % is a lot. Oftentimes in the business, my business has done exceptionally well and I just let them breathe because here's the other part that no one tells you. If you change nothing, you get about a 5 % guaranteed improvement.

2:46Think about how crazy that is. If you change nothing, you just 5%, up, up, up, up, up, up, up, up, up, up, 5%. You can book it. Think about GDP. Partially, some people are like, oh, that must be, you know, that could be in relation to education, which in the US it certainly isn't. It could be in relation to technology in terms of GDP improvement, or it could be an increase because of population, which in the US there's no population increase, not really. For me, I just kind of see that across all businesses that if you just let people do stuff, they just get better at it, right? People get more efficient at it.

3:12I'll leave you one tactical framework that you can kind of use to think through this, which is, this is actually from the investing world that I borrowed as an entrepreneur, which is called ICE. All right? And so it's an acronym. I stands for impact, which is like how big? That's that 20%. That's that 50%. How big of an impact do I think this is going to make on the business, right? If I had to make, like if this works, it's going to do this. The second is, well, how confident am I that it's going to work? That's the C, which is what's my confidence level? So I've got this big thing with low confidence or this medium thing with high confidence.

3:44I'll probably take medium with high confidence, right? And then the third is ease, which is going to come into a combination of how many resources are we going to have to deploy to do this and also what's the timeline that we're going to have to do this on. Impact, confidence, ease. And so we actually do this. Like I have this massive sheet that it's called GROWTH and I have it in all caps and this is how I get my ADD out is I put it all on this list, which would probably be the second big tactic, is that I have every big idea that I want to try and I have to like get it out and spell it out and say all the things that I want to do, and I just put it somewhere.

4:18Because the team can't handle the amount of ideas that I have, and probably your team can't either. You have to just like scratch that itch in some way. I do it by documenting so I don't forget it, and then whenever the team has more bandwidth, I go back to that list, and I'm like, all right, let's order this. Which one has the highest impact? Which one do we think is going to work? Which one's going to be the easiest? We tabulate those together, and we're like, okay, this is the one that we're going to try. This one we know has a 30 % shot or a 50 % chance increase. That's basically thing number one and it has I've tried to teach this down our portfolio and also what we do at acquisition.com is that You just need to be willing To leave some things not perfect so that the business can occur as few Guaranteed cost of change and when you are gonna make a change make sure it's worth it So so far number one we cover the cost of change, right?

5:06So this is making sure that you are only taking bets that have 20 % or higher upside to be worth the guaranteed cost that you're going to incur. And the framework that I use is ICE Impact Confidence Ease. All right, so that's number one. So the second thing is I used to have this idea about the virality of products. So I've talked a lot about referrals, talked a lot about word of mouth, and I still obviously believe in that. But I would say that I've had this big pendulum swing in the very beginning of my career, you know, and especially if you're, you know, sub a million, you just got to promote, right?

5:38You just got to let people know about your stuff. No one knows who exists. You got to advertise, right? You got to learn how to sell. Cool. That's zero to a million, no questions asked, that's what it is. Now, to expand beyond that, I was like, okay, we kind of pendulum swing back to like, we got to make it super viral, right? Word of mouth is, you know, the best way to grow a business. But I've thought more and more about this, and I think that it's an it depends answer. Now, there are some products that you want for sure to have people who buy and then buy again, that you want them to, you know, reoccur with you, as in like, if I buy a Coca-Cola product, I might buy, you know, a can today, and I might buy a can at a restaurant later this week.

6:13And so it's like, am I on a subscription? No, but I buy again and again and again, right? Or you have, you know, your internet, which you just never cancel out of, right? Either of those are things that are recurring, they have high revenue retention. But that is different than virality, right? That's very different. So on one level, you have, does it stick? On the other level, you have, do people share it with other people? This is the nuance of understanding that's kind of shifted for me this year, which is that some companies, like especially B2B, there's sometimes disincentives for a customer to bring in a competitor of theirs, right?

6:45If you serve as two types of similar businesses, they have literally a disincentive to tell people about it. Like they don't want anyone to know how you're helping them in whatever way, right? So that's kind of like thing number one. You have like a negative pressure on word of mouth. The second issue is that not, even if you didn't have negative of pressure, order of mouth, there has to be some sort of density in terms of the frequency of communication that your customers have with other potential customers. So if I've got a guy who runs a metal shop that specializes in aerotech, for that guy to have very frequent communication with other aerotech companies that might use my software, my internal tech, or whatever it is that I help them with, why is he going to be talking to competitors?

7:26And if he is talking to competitors, why would he want to share all my stuff? You can understand why sometimes it's not about word of mouth. And this is just a nuance of understanding that I would think is kind of my belief set is broken. Because I was very hardcore on like everything can grow on word of mouth, period. But that's just not always the case. The gold standard should absolutely be revenue retention. Bar none, full stop. And I can say that with absolute confidence, no matter what business you're in, if you're B2B, you're B2C, you want to be able to get recurring or reoccurring revenue.

7:55But the virality typically is going to be more on the consumer side. So if you have a really good soda, you as a customer is not like, oh, I don't want to tell my friend that this soda is really good. I've got this shirt. It finally fits me. Cool. Well, do I know other guys who are built more like me? Yes. Do I have high frequency of communication with them, at least digitally? Yes. Okay, cool. So I'm going to have, there's some viral kind of coefficient there that goes in. And that applies to also consumer brands that are not tech. I want to be really clear about that. Like for those of you who have, you know, the drop shipping, e-commerce, retail products, it's like you still absolutely need to have word of mouth that grows the business.

8:26There are just some businesses that are just never going to have that and for everybody you want to retain So that was lesson number two from a tactical perspective for that lesson The big thing I would just want to measure is what percentage of customers that I have at the beginning of this year That 12 months later are still buying for me. That's the metric that we look at We have a hundred customers at the beginning of the year and at the end of the year 50 of those people are still buying So this is you know day zero or you know Jan 1 whatever Jan 1 and then December 31 one, how many of them are still buying?

8:57If I have 50 versus the 100, then I have 50 % revenue retention. Now, you can have logo retention, which is a second nuance of this. Logo retention is of the 100 customers, do I have 50 customers or did I go from 100 customers to 25 customers, but those 25 customers really like me and they now spend twice as much. So that's the difference between revenue retention and logo retention. For me, we look at revenue retention because that's what we care about. It's like, okay, if we just know that these 50, now that they're in, are just going to keep paying and potentially even growing between 50 to 100 next year, this is a monster business.

9:30This is what we look at and we obsess over in any business that we invest in. Now, no matter what, you might not have a viral product for word of mouth, but if you want seven different ways that you can generate word of mouth, inside of the$100 million leads book, I've got a whole chapter on referrals, and I took out the things that were the actual best ways that I have seen from a tactical perspective. So I'd say I have six kind of thematic things. These are things that you can do to your product to improve stick, to improve activation, to improve the number of customers who actually want to stay and continue to pay with you.

9:58And then on the other side, I have basically the tactics that I have seen work best for me and our businesses. And so these are things that actually drew in referrals. So I have this whole section on one side of referrals, two side of referrals, how to ask for them at the right time. So timing is a huge component of it, how to run referral events, how to have ongoing referral programs, unlockable referral bonuses, seven different tactics that I've used work inside of the$100 Million Leads book. You can grab them somewhere on my site or on Amazon. Number two is making sure that the highest priority for the business is going to be revenue retention, not necessarily virality because not all products are meant to be viral.

10:33But if you are in a business that is consumer focused or something that doesn't have, one, a disincentive to share and a high frequency of interactions between your customers with one another, people who have basically high overlap, so they talk to lots of people who could potentially buy your product. If these two things are, you have a high disincentive and you have low frequency, then you're just not going to have virality in the product and you don't have to worry about it. But if you do, then obviously you want to have both. Number three, I've been very obsessed with the concept of LTV to CAC.

11:03I've talked about it a lot, which is basically how much does it cost you to a customer versus how much money you get from that customer over the lifespan, specifically in gross profit, not lifetime revenue. Now, the reason I like to always delineate this, and I say LTGP, which is a mouthful, is because most of the literature that exists on LTV, so lifetime value for a customer, how much they pay you in gross profit over time, is typically written in the software world. And software tends to be virtually 100 % gross margins in most businesses. Many businesses look at that literature and then say, oh, well, let me just say someone stays with me for 10 months, they pay$100 a month, therefore my lifetime value is$1 ,000.

11:38Well, that's only true if you sell information, media, or software, something that has zero incremental cost. But a lot of businesses don't have that. If you sell chocolate chip cookies, and the cookies cost you $20 for each of those$100 shipments. I mean, these are expensive cookies, but let's just go with it. So this costs you$20 for every$100 shipment. Your lifetime value is not$1 ,000. So we have our$100, right, times 10 months. That's the revenue. What we're looking at is$80, because we have to take out the$20 in cost, times the 10 months, which actually equals$800, which is our real lifetime gross profit, which in the business world sometimes people refer to as CLV or LTV.

12:22They all more or less mean the same thing, which is how much money you're going to get from the customer. Now, I put this as a frame for the big lesson that I had, which is in the software world, the big rule of thumb is three to one. Real quick, guys, I have a special, special gift for you for being loyal listeners of the podcast. Layla and I spent probably an entire quarter putting together our Scaling Roadmap. It's breaking scaling into 10 stages and across all eight functions of the business. So you've got marketing, you've got sales, you've got product, you've got customer success, you've got IT, you've got recruiting, you've got HR, you've got finance.

12:58and we show the problems that emerge at every level of scale and how to graduate to the next level. It's all free and you can get it personalized to you. So it's about 30-ish pages for each of the stages. Once you answer the questions, it will tell you exactly where you're at and what you need to do to grow. It's about 14 hours of stuff, but it's narrowed down so that you only have to watch the part that's relevant to you, which will probably be about 90 minutes. And so if that's at all interesting, you can go to acquisition.com forward slash roadmap, R-O-A-D map, roadmap. That's the big rule of thumb.

13:31I actually, now having worked with a lot of different businesses and invested in different businesses, I think there's nuance to it. So let me explain. This is actually pretty cool. So there's three components to a business that I think influence that number. So you have the attraction component, which is the advertising. How are we advertising? How are we getting people in? How are we letting them know? How are we generating leads? Then we have the conversion, whatever your sales motion is, right? Sales. And then finally, you've got delivery, right? or fulfillment. How are we going to get people whatever they chose to pay for, right?

14:01So if we have these kind of three functions, the extent to which you need to have high LTV to CAC is predicated on how manual each of these processes is. So let me explain. If you have paid ads, which I would consider very high leverage and very like one person could run a gazillion dollars of paid ads, high leverage. Cool. That's number one. If If we had a conversion process that's through a checkout page, so it's automated, then that's going to be something else that's going to give us leverage. Okay? And then third is let's say that we have software as our back end that has unlimited, like we have no supply limitations.

14:36There's no logistics limitations. And pretty much it just works. If you're in one of those businesses, then you absolutely can be at 3 to 1 LTV to CAC over the long haul. Fine. You can even be at 1.5 to 1. I mean, it wouldn't be ideal, but depending on the size and scale, you could still make money doing it. You put$100 in, get$150 back, do it over and over again. If that's only true for them, what is it for a construction business? What is it for a plumbing company? What is it for an e-commerce business? The other extreme, and so I'm going to just paint the extremes and you can kind of understand the middle.

15:06If I had, instead of paid ads, I had manual outbound. So outreach or whatever you want to call it. Outreach, reaching out to people one-on-one with a team. And then from a conversion process, I've got one-on-one sales. and then from a delivery process, I've got, call it, you know, concierge, one-on-one, or even many-to-one services, then I'm going to want an LTV to CAC ratio that's going to reflect that. For me, if I had a business like this, and this is going to shock some of you, but just bear with me, I'm going to want this thing to be like 20 to 1 or more. Now, some of you guys are like, there's no way, it's impossible.

15:46I would say I've made the material, the vast majority of the material wealth in my life at 30 to 1 or higher. And I've done it multiple times. And during those periods of time is when a lot of the, basically the wealth that I've accumulated has come in. But in the times in between, instead of trying to scale something that's at, you know, 5 to 1 or 8 to 1, I'm just going to continue to tinker. I'm going to start, I'm going to stick with my one location. I'm going to keep working on the model and just keep tinkering with it until eventually we get the economics that we need in order to scale. What if I'm doing paid ads, but we do one-on-one sales and we sell media or information or something like that?

16:21Then it's like then you're gonna be somewhere in between. But I have this as my rule of thumb is that the three to one only matters at the companies that have a hundred percent scale, a hundred percent leverage across all three components here. If you have manual cost all three, you're gonna be it. I would at least want to be at 20 to one. I shoot for 30 plus. A lot of people can't even believe that. Fine. So you know fit it to whatever your goals are. I really do believe that you can just keep tinkering with the business, keep tinkering the offer, and find a way to get it so that you can have a huge discrepancy between these two numbers.

16:50Because that's what allows you to scale. If you want to scale a business that's more manual, which some of you guys are listing, 78 % of businesses in America are service-based businesses, so this applies to you. As you go into colder and colder markets, you will convert a smaller percentage of customers. These are customers who are less likely to purchase from you, but you have a bigger pool of people. So that's kind of the trade-off. But when you go to those colder and colder markets, smaller percentage convert, meaning it costs you more to get those customers. Basically, you sell more people.

17:15You're going to have more infrastructure that has to get built into the business. So you have layers of management that will start costing you and not necessarily always be alpha. There can be value additive. With these two things that are working against you, you have to have this very large discrepancy between what it costs you to get a customer and what you're going to make from that customer in order to weather that storm and allow you to kind of grow into that. You can almost like grow into your LWD CAC, which is kind of how I think about it. So if you're thinking about this for you, number one, know what your true LTV2CAC is and make sure you're doing off gross profit, not off of revenue.

17:45And then number two, if you want to scale, make sure that your LTV2CAC ratio is appropriate for the level of leverage that you have within your existing business across all three functions. So you might be wondering, why doesn't the ratio still cover it for a super manual business versus a business that's entirely automated? The main reason is lumpiness. You have to bring people in for outbound that are not going to be proficient. So you're going to have to incur the cost of new SDRs that either aren't going to work out at all or aren't going to work out in the beginning and then eventually going to work out.

18:14So you have to incur that cost. But imagine incurring that cost and then also incurring the cost of new salespeople who are actually going to be trying to convert those prospects. And they're going to suck and they're going to lose opportunities. And you're going to be paying them while they literally close fewer sales for you. So you lose twice. And then also sometimes you spend all this money and time to get them hopefully to be proficient and then they aren't. So they just lost you money three different ways. The third component of this is the delivery piece, which is like, okay, I'm going to have to onboard and hire all of these other people.

18:43And if you have anything that's like higher expertise, then forget about it. It's going to take even longer for you to both find these people and then also to train these people up. But again, recruiting itself can be a super expensive task. There's recruiting firms. And if you want to recruit a high-level person, it usually costs you 25%, sometimes 30 % of their first-year pay. And if you're paying someone$300 ,000 a year, it's like you're going to pay$80 ,000 just to get somebody, let alone hope that they're proficient, and you still have all this onboarding. So you have this lumpiness of people that aren't going to be effective, and if you're at 3 to 1, boom, you're done.

19:15Like that 3 to 1 disappears real fast. It's like you have this lumpiness of like, okay, boom, we got these new SDRs in. Okay, like now this is coming back up, but then this starts growing down. So now we start at 20 to 1 or 30 to 1, but it's more like a wave. It undulates with the efficiency of the business and how stable it is as you're scaling. And the faster you're scaling, the more inefficient it's going to be. So that's why you need to have as much as you can in terms of LTV to CAC. It's padding. The third piece here is that we just went over it, LTV to CAC. One, we want to make sure that we're doing this off of gross profit, not revenue.

19:49And secondarily, we want to make sure that if we are highly leveraged, then we can be at 3 to 1. But if we're low leveraged, we want to be at 20 plus, you know, 21 or higher. And again, this sounds crazy and unrealistic for a lot of people. I get it. Fine. At the very least, be at 15 to 1. Please, for the love of God, I promise you it's possible. You just have to work on it longer than you expect. Which brings us to number four. Let's dive into it. Number four. I've said a lot about this, which is that the 1 to 3 million area is a huge swamp, right? We call it the swamp, at least at acquisitions.com.

20:23And why is 1 to 3 million so hard? Now, we've noticed that it's hard, but we were like, why is that range hard? Now, for those of you who were like, this is not real for me. I'm just trying to make my first$10 ,000 a month. Just keep listening because believe it or not, some of these things will apply to you. So if you're at$1 to$3 million, why is this one of the hardest periods? Because usually from zero to a million, you can usually do it with like you and two, three people. It's not that hard for you to keep track of the team. You can usually run very high margins, especially if you're a sole proprietor.

20:52You're basically just selling your time, which is fine, right? You don't need to obsess about your passive income before you max out your active income. Good idea. By the way, a lot of billionaires, very high active income, FYI. Anyways, as you're scaling up, that first, you know, 500, 800, sometimes a million dollars a year is actually in some ways somewhere more profitable than the next 2, 3, 4 million because you have to install this level of infrastructure because you're like, I just can't do it anymore. Now, you can always just keep jacking prices and that's fine and I'm a big advocate of that.

21:19But if you're like, no, I think this is the price that I want to service at and I want to do more volume, then you're going to have to put in more infrastructure. But this is the math that I just realized is why it's so hard. So let's say you've got a$2 million business. You're right in the middle of the swamp, okay? And you probably noticed anecdotally, for those of you who are kind of like in this business world, there's a lot of people in the$1 to$3 million range, like a ton, a ton of businesses. To be fair, does that mean they're making$1 to$3 million in profit? Which means they're doing$1 to$3 million in revenue.