My Biggest Mindset Shift I Made As An Entrepreneur | Ep 794

0:00What one thing, if it were true, about my business would change everything? Of all of these other things that are on my to-do list, if I were able to accomplish all of them, would it be as big as me just doing that one thing? Welcome back to The Game. Today, I have a special fun episode about making more money. So that's a common theme on The Game. And so today, I want to talk about the difference between optimization and orders of magnitude, aka A, step function increases in a business. I think that this may be one of the most impactful shifts in thinking that I've had as an entrepreneur and one that I would at least encourage adopting.

0:43First off, what is the difference between these two things? Before I even get into that, real quick, why does this matter? If we think about the function of every entrepreneur as the person who prioritizes the resources of the business, then you are the person who's saying, what gets invested in, what are we allocating time towards so that we can get the best return. And I talk a lot about the difference between doing more, doing better, doing new. And so fundamentally, whatever you're going to do is going to fall within one of those three buckets. Are we going to do something better? Are we doing what we're currently doing a little better, little optimizations?

1:18Are we going to just straight up do more of it? Or are we going to do something new? You might think that this whole optimization versus step function is going to be new versus better. And that's actually not the direction this is going to go in. I bring this up because I see business owners come out to our headquarters. This is companies that are either just coming to a workshop that we have or companies that we're looking at investing in or both. When I talk to the founders, the perennial question is like, what do I need to do to scale? Or what's the next thing that I've got to look at? What's so interesting about that question is that there's unlimited potential options that you can take in order to grow a business, right?

1:53Like if If I, no matter who you are, if I increase your lead conversion rate by 10%, then pretty much everything grows, right? Obviously, notwithstanding some sort of constraint on delivery, which would then prevent you from capitalizing on that 10 % increase in lead flow, or you don't have enough sales guys to handle it. So yes, the theory of constraints still reigns supreme. But under the assumption that you can fix those downstream impacts, you would be able to see that improvement increase throughput. So for example, if you had excess capacity, or let's say your sales guys were not at 100 % utilization, they're at 70.

2:22A 10 % increase in leads would be swallowed up by the sales guys, and they would make more sales. And provided you had enough delivery capacity, and you're not at 100 % on your call it customer success, then you'd be able to swallow up or realize that increase as well. And so it would follow. I want to be clear, I'm a big fan of conversion rate optimization in general. That means split testing headlines and offers and price points, like all of these things are things that we regularly do. I'll briefly explain the kind of like the mathematical structure between the two in terms of making the decision, but then I'll transition into the optimization versus order of magnitude component.

2:58I think it's good to have this as kind of the foundation for that next piece. If we think about more as the lowest risk adjuster return thing to do, because you already know it works, so simply adding more will typically just also do more for you. The problem is that it's not fun, it's very boring, but it is also the reality of a lot of businesses. Once something works, Let's say you try 20 things to get something to work. You trying something new as your 21st thing has a likelihood of failing that's about the same as the 19 out of 20 that you did before. And I'll give you a real world example of this.

3:28So at school, we run split tests on the sales page that converts free trials pretty regularly. And so from the first version of the test, the first version we launched with, to beat that control, we ran 16 different split tests. Here's the funny thing. 14 of them failed as in like the control beating right and the thing is is that the better things get the more a change from that thing that works the more likely it is that that thing will not be an improvement and so i just find that as a very interesting and also to be fair there's typically a decreasing incremental return for the improvements right you can only go to 100 right hypothetically back to more versus better there is an actual way to figure out whether you should do more versus better and then i'll get into optimization versus orders of magnitude The simple example I like to use is if you have one sales guy in your business and that's it, and let's say that person has some level of control over demand gen, just keeping the example simple.

4:25Then if you double the sales team, which is going from one to two, then you would figuratively double the revenue of the business, assuming there's no other constraints, right? Okay, that's straightforward. If you have two things that you could consider doing, like you could take effort to train that one guy that you have better, that guy might get a 10 % or 20 % increase in conversion rate based on his ability to close better, right? When you have that straight up example difference of like, okay, I can hire somebody, onboard and train them and double my revenue, which would be a more solution, or I can take the one guy I have and get him to increase his close rate by 20%, a better solution, which also includes training.

5:05Which of these yields me the best return for my time? Well, it makes sense in this instance to do the more. It makes sense to go from one to two. You double your throughput. Even if the next guy is 50 % as good as the existing sales guy, you'll still get a 50 % increase in absolute return. So this is just basic brass tacks. So I'm going here. And if you're like, man, but what about this situation? That's not the point of this example. Now, when you have 20 sales guys, if I do that optimization of training all these guys and I get a 20 % lift, it would be the equivalent of hiring four more people onto my sales team.

5:38We go from 20 to 24. The question then follows, okay, is the effort of getting a 20 % improvement in sales equal to the effort of recruiting, hiring, training, onboarding for more new guys? It may or may not be. But this is fundamentally the paradigm, or at least the decision-making framework that you can use to say, okay, should I do more? Should I do better? If your sales team in general is a little bit low because you have, let's say, a bunch of new guys on the team, then it would make sense to just let's prune the tree. Let's squeeze what we have. Let's increase, you know, let's, let's get it more concentrated instead of diluting down.

6:10And then let's focus on better. But the thing is, is that what appears to be these like random flip a coin decisions really aren't, you should be able to think, okay. And there's this lovely framework around this. I can't remember if I've said this in a podcast lately, but there's a framework in the, in the product world. That's rice, which is reach impact, confidence, and expense, which is fundamentally, how many people does this affect? How much does it affect them? What's the confidence of that? And then how much does it cost me? And so fundamentally, what this really teases at is risk adjusted return.

6:38What we put in here is how much do I expect to increase my sales team? And how likely is that? And how much will it cost me? I mean, fundamentally, those are the questions that we're asking. And so let's say your sales team is crushing it and they're at 50 % conversion, the likelihood of going from 50 to 60 to get a 20 % lift is probably low. Now, if the team is at 10%, then the likelihood of going from 10 to 20 or 10 to 30 even would be pretty high. So you might be able to triple your sales with the existing team by going from 10 to 30, whereas tripling the headcount of the team might be significantly more effort.

7:10And so the risk adjusted return would say, yes, let's do more of the better, not to be confusing, do the better solution rather than do the more solution right now. Okay. So that's kind of the basis of this foundation of what I'm talking about between more better. Okay. Now, where does optimization versus orders of magnitude come into play? I remember hearing this years ago, and a guy that is very wealthy said this thing. And I remember thinking about it a lot. And then I was like, I understand where he's coming from. And he said, CRO is a scam. So conversion optimization is a scam. And so obviously, I'm somebody who really loves, you know, I'm very data driven.

7:45And I love to just see throughput through funnels and things like that. And so I thought to myself, well, that doesn't make a lot of sense, because I have, generated tremendous amounts of profits and revenue as a result of conversion optimization. So I thought a bit more because that guy is very successful. So I thought a bit more and I was like, hmm. His point was, hey, why don't we ask the question, what would it take to 100x the amount of people who see the page rather than how do we get 10 % more out of the page we have? And I think that's really what I wanted to hit on today, which is a lot of times I see smaller businesses, sometimes even middle-sized businesses, get obsessed.

8:22And it's less with the big ones. And I think it's because of this shift in thinking, which is why I'm making this podcast. In the beginning, everyone wants to be incredibly efficient. And that's good. It's good to want to be efficient. But what happens is we start to get obsessed with squeezing every last dropout rather than thinking, why don't we just get more fruit to squeeze juice out of? And so I'll see people just spend, honestly, sometimes like a year. I had a guy recently say, hey, I think I should optimize the front end that I have for my business. He was getting 17 to one. Were there things that he could probably do to improve it?

8:55Yeah, there actually were. He just found a cool niche and it's working out really well for him. But the thing is, that was not the constraint of the business. The point is, he probably would have been better served by just being like, cool, how do I get four times more traffic to this page or five times more traffic to this page? And the reason I bring this up is that oftentimes, beyond a certain point, there are diminishing incremental returns, meaning you get less every single improvement you get, again, because you have a hypothetical extreme of 100%, right? And that's the thing with optimization is that there's only 100%.

9:24You can't get above that. But you can 100x traffic. You cannot 100x conversion unless your conversion is at 1%. In reality, if you have a Shopify page, for example, selling e-commerce products, you're not going to go from 2 % conversion on your page to 50%. It's just not going to happen. You're not going to get a 25x improvement in conversion. But you can, and here's the cool part, you can get 100x increase or 25x increase in traffic. Because listen, at the end of the day, you can spend all of your time trying to optimize your tax situation and get your taxes down to 0%, making$40 ,000 a year.

10:06But sometimes it just makes more sense to ask the question, what would it take for me to make$40 million a year? And solve that instead and say, the hell with it. And I just had an entrepreneur friend actually reach out to me saying, hey, you were right. And I was like, about what? I probably haven't spoken to him in a year. He's like, about the tax thing. And I was like, what do you mean? He said, well, I just spent the last like six months deep diving in all this tax stuff. And I realized that if I spent that same amount of time and attention just growing the business, I would have made more money than I'm going to save in taxes.

10:34And I was like, yeah, duh. And so this is, again, one of those little optimization versus order of magnitude changes. What would make my tax bill irrelevant to me? I'm upset that I pay 30 % on my$100 ,000 a year, so I keep 70 and I have to pay 30. Okay, well then, what would it take for me to make$1 million a year or$10 million a year? And then solving that, you might be like, I wouldn't even care about paying 37 % on$10 million if I could make 10. The questions that we ask, we have to be so careful because we will actually solve them. Oftentimes, we spend a lot of our lives solving questions that aren't worth answering.

11:10This is really what I wanted to hit on. My thinking around decisions when it comes to where do I want to invest the team's time, effort, etc., has more often been, what's that one thing that I can do? That if I accomplish that one thing, it's so significant that the remainder of my objectives become irrelevant. They shrink into irrelevance. If I got 100 times the traffic to acquisition.com, I wouldn't care about CRO because I would have more than I could already handle, kind of already do. To be fair, it's because of kind of this thinking process, which is like if I... And the thing is, is that within every business, there is that one thing.

11:49There is always that one thing. The tricky part is that sometimes that one thing isn't on your to-do list. And that's why I think in my opinion, strategy is such a valuable thing to have, which is sometimes the best move is one that's not on the board, is one that's not on your to-do list right now. And so when you struggle to prioritize things within your to-do list, it might just be that all of them are wrong. Because not wrong in that they won't grow the business. It's just that none of them is an order of magnitude change. And to be clear, I'm not saying you have to do something new in order to get that.

12:18Now, that is more common that if you're going to get an order of magnitude that comes from a new thing. But I would say, where do I want my order of magnitude bets to be. Order of magnitude bets are typically, for me, not going to be something that's done what I would call in funnel. Meaning like once we have a click from wherever the source is going to be, whether it's an email that's outbound or DM or an ad or content, you have some click, you have some engagement that occurs, right? Everything from that point going forward is all conversion optimization. Putting something brand, brand new in there, unless you of like, it's unlikely that the change, which will have a guaranteed cost, will net a big improvement on an existing control, meaning something that already works.

13:02And so I more often than not save my order of magnitude changes for things that are, I would say, media driven or product driven. Okay, so I'll zoom out here. Media driven, meaning if I take a big bet, there's a possibility that I can 10x clicks. That's something that's doable. It's achievable. And there's tons of demonstrations of that. Product. If you have, let's say, a$1 ,000 thing, and then you decide to charge$100 ,000 for something, and you have obviously the ability to deliver on something like that, you can have a 20x increase in revenue. Absolutely. Where you need the conversion and optimization is to unlock more media that can create a stepwise function increase.

13:46It was like, okay, well, how do you thread the needle here? If I have, let's say, an e-commerce store, for me to CRO this thing to get a 5x improvement, unlikely. Now, in reality, I might be able to get a double by improving, you know, four or five steps that occur in the process, having better follow-up, maybe a call team that, you know, calls all the abandoned cards, some sort of scarcity or great bonus or seasonal thing that I do on a regular basis. Like all of these things that add together, a bunch of split tests on the landing page, whatever, you know, add payment options, all of these things will add points.

14:16But that unlocking of LTV, of lifetime value might be the thing that might allow me to 5X my advertising. And this is where it's like, wait, I thought you said, well, yes, welcome to business. There's many variables and therefore many variables must be studied. But the point is, is that when I look at a lot of businesses, especially if your growth has been, I would call it slow-ish. And if you're in a small business, I would say anything below 20 % is slow-ish. And again, I just tend to be aggressive when it comes to growth. But if you're in that, you might not benefit from trying to do more optimization.

14:52You might benefit from just finding some big thing, big move, big brand association, big giveaway. This is where offer changes, by the way, the purple book that I have$100 million offers, that is, I would say, more of a step function. That is an order of magnitude change that occurs in many businesses. And it is strategic in that it will force you to prioritize against all resources in the business because it will affect all functions, right? It's going to affect pricing. It's going to affect... So it affects finance. It affects delivery. It affects advertising. It affects sales. It affects everything, the offer itself, right?

15:32If we're thinking about this list of unlimited things that we can do in the business, and you are in a position where you have not grown much lately, unless your ability to spend money to get customers has been the limitation of the business, in which case, maybe having conversion rate optimization to look at, three or six month period where you just aggressively test, you know, three or four things at a time per week to get to kind of squeak out a lot of these improvements. Once you get to a certain level, you really need to ship because the thing is, is this is where one of those, what got you here is not going to get to there, which I don't really like as general sayings, but in this instance, it would apply, which is that maybe you have already done a lot of testing on the process, the landing pages, the copy, et cetera, follow up.

16:14And so you might just need to be like, what's that big thing that's going to make 10 times more people or 50 times more people see my stuff? Or what's that one thing that's 50 times more expensive or has 50 times the LTV that I can sell to a large percentage of my customers. Typically within the box, within the pipeline of the business, you will have the little optimizations. But the big orders of magnitude usually come at the front or the back. It's either something that's very big in media or it's product driven service, you know, a new service line, new product line that you roll out that then creates these kind of step function increases in the business, which then obviously circles back to the front, allows you to spend more, and then you can scale, right?

16:56And I feel like this varies some weight because I probably, I tend to be the type of person who, I love optimization. Like, you know, it's just a, like, I just love seeing these little improvements. Like, got a little 10 % there. We've got a little 6 % there. We got a little, we got a little 25 % there. That was a big one, right? I love seeing those because it's these nice fast wins, these fast feedback cycles. But what's interesting is that we get addicted to these fast feedback cycles. And sometimes that makes us blind to that one big change that makes all of those, those little improvements irrelevant.

17:25If Mr. Beast, for example, decides to launch another product, is it the one thing that matters most, which is his massive audience and brand that will dictate the success or how optimized the page is? Probably just the big brand and audience and media that he has command of that he can generate towards that. This is my one takeaway for anyone who's listening to this. And this is the question that I would ask. What one thing, if it were true about my business, would change everything? Really think about it. And sometimes think about it from a product perspective. Think about it from a media perspective.

17:58Sometimes it's technology perspective. But typically, it's going to be media or product. After answering that question, what one thing, if it were true, would change everything about my business? Or take my business to make it 10 times bigger? Or make it 100 times bigger? If you like to be more specific. And so then, the follow-up question to that, once you have that answer, of all of these other things that are on my to-do list, if I were able to accomplish all of them, would it be as big as me just doing that one thing? And if the answer is no, then it would be logical, although contrarian, to allocate zero more attention towards that big bucket of list of things that you could potentially do that would give you that incremental improvement, that optimization improvement, and put all of your effort and focus on getting that one thing to become reality.

18:44The more I have thought this way in my entrepreneurial career, the more step function increases in wealth I've been able to experience for myself and obviously across the portfolio companies that we own. And so this is yet again, a strategy conversation. But the reason I talk about this so much, and to be fair, this is probably because this is where a lot of my day is spent, is trying to think of the highest leverage decision or move that we can make within a business where we're going to bet all of our resources. And where this gets very interesting is that if you have, say, a big list of things that you could potentially consider doing, right?

19:18There are resources that are required to do all of those things. The big mistake is the fallacy of thinking that you can accomplish all of these concurrently. You can't. You just can't. You think you can. But it's been very well documented switching tasks, going back and forth between things kills productivity. And for some reason, we think that in a company, because there's more people, that that doesn't apply. But the resources of the entire company can still be dedicated towards one thing. And so this is kind of like human systems versus machine systems. And so if a business by and large still is, to this day at least, very comprised of humans, let's say that there's five things that would change the game for us.

19:57One of those five is more important than the others. And if you can't figure that out, then you're not doing your job. There is one thing that's more important or has a higher likelihood of success that has a bigger impact. If that thing is number one, then it would follow to say, hey, let's direct all of our resources towards accomplishing this one thing. And then as a fun bonus, once we accomplish that thing, we can go on to the next thing. Now, this then gets confusing because some of these other things might be screaming hot problems. But if we have a how much this is going to impact the business, then if that screaming hot problem is really, you know, threading the existential, the existence of the business, then that becomes number one.

20:35And then once you do that, then you can do the fun thing, right? And so what happens is when you put these things in sequence, what I have found happens is that the level of urgency that the entire team takes to accomplish that one thing goes up tenfold. And so you can, in a very real way, do five things sequentially faster than you can do five things at once, which seems obvious when you think about it for yourself. But for some reason, when we think about our companies, we don't think that way. And so this has, again, been a change in thinking for me in terms of how we get things done at acquisition.com and how we can move quickly.

21:06and also obviously how that translates in terms of banking priorities for the portfolio companies. I feel like this is a, I want to say, I don't know if mistake is the right word, but like it's an inefficient utilization of resources that I see that's very common, especially amongst low and mid-size founders. And to give you context here, I'd say low and mid-size. I'd say like low would be, you know, sub 3 million and then mid-size would be like maybe sub 20 million. Just to give context, maybe 50. This is just one of those things that it seemed important enough to make a specific podcast about.

21:39And so I will repeat the final question one more time, which is what one thing, if it were true, would change everything about our business? And then what resources are required to just make that one thing occur? And if we use those resources to do all the smaller tasks, if those do not amount to as much as that one big thing, then it is logical, although controversial, to just put all of your resources on that one thing to make it true. So with that being said, I hope this at least gives you something to ponder on your way to work or while you're at the gym about your business. And if you work for a business, then I would say it's a really good exercise to walk through and also demonstrate to leadership how you think strategically.

22:16Or you can also think about this also within the function of the business. Like what one thing, if it were true, would change the finance department? What one thing, if it were true, would change the IT department? What one thing, if it were true, would change our people strategy in terms of attracting talent? What one thing, if it were true, would change our product or our marketing? You get the idea. With that being said, have an amazing day, amazing week. Keep rocking and rolling and accomplishing your dreams. Bye!