Rich People Buy Differently (So Price Like It) | Ep 949

0:00You aren't making as much money as you want because you don't know how to get it from the people who've got it. My name is Alex Hormozi. I run a portfolio of companies at acquisition.com that earn over 250 million dollars per year. I did a book launch 12 weeks ago that did 106 million dollars in sales in a weekend. It broke a Guinness World Record for the fastest selling nonfiction book of all time. In this video, I'm going to explain a core shift in my understanding of how getting money actually works and why the rich do in fact get richer. And I'm going to show you the math behind it and most importantly, how you can gain access to it.

0:27The first reason that you aren't making as much as you want is because you're selling to people who don't have the money to give you. So think about it like this, and this is really important. Imagine this pyramid as a representation of earning in the United States. What percentage of the people do you think earn 40 % of the income? The top 10 % earn 40 % of the income in the entire U.S. Now that's income, and that's pretty extreme. but it's not even close to the difference when you look at wealth. So U.S. household net worth, okay, this is the value of their assets. Last year was$163 trillion.

1:11And you're like, man, how am I going to pay rent? I'm like, let's get some of that$163 trillion. So this is going to blow your mind. So I want you to imagine that you had$100. Okay, so I'm going to equate this $163 trillion is now$100. Okay, and we're going to spread it out relative to how it actually is spread within the United States. So this is 100 people to represent 100 percentiles in terms of net worth in the United States. This$163 trillion, what would they have if there was 100 people to represent this$100? They would have$2.50. I'm just going to use bills because I don't feel like haven't changed.

1:47So$2 out of that$100, the bottom 50. So the next 40%, what do you think they would have? They're going to have$20,$25,$28. That's the next 40. Remember, we got$100 to distribute here. So the next 9%, so now we're getting the top 10, the top decile of net worth the United States. How much do you think they got? They got 20. They got 30. They got 35. Got 38. All right. $38 in just this 9%. Now, you ready for the drum roll? How much do you think the top 1 % has? I mean, it's one-tenth, right? So like, it can't be more than the other nine. right? I mean, you'd think that. The top one, just the one guy would have$32.

2:46One guy. Now, this means that this one guy has more than the bottom 90 % combined. This is very important because it has implications for how you do business. So when you hear me say sell to the rich, they pay better. It's not some pithy statement. It's reality. And it takes people a very long time to learn this. And people often take years before they actually start to figure this out. Usually there's belief issues. They're like, no one else could do this. And part of the reason is because everyone they know is poor. And they're like, there's no way I could sell something for that price. And so they make stuff against all the other small businesses to compete for these$2.

3:26Think about that for a second. You're putting all the resources because you see all these people. They're the ones that you're brushing shoulders with. They're the ones that you see in the street every single day. And you're trying to compete and slice these$2 a hundred different ways, right? If you want to make money, go where the money is. So let's put this concept on steroids now and actually apply this to doing business. This is how big companies get big. They go where the money's at. And this is a breakdown of something called Pareto's principle. You might've heard of it, 80-20. It's one of the most powerful concepts in business and most people still don't understand how to actually apply it.

4:04All right, so I want you to freeze this idea in your head. Just look at the money here. $2 here, 28 bucks here, 38 here. Now we're in the top 10%, right? And we have another 32 here. So I said earlier that this one guy is more than the bottom 90, but 69 % of all the wealth is just in these 10 people.

4:26If this doesn't change how you do business, you are missing the plot. So the idea of 80-20 is that Freddo, who was an Italian economist, realized that there was this, you know, 20 % of customers created 80 % of the revenue. And you just noticed this 80-20, you know, kind of issue that continued to occur within all different types of data sets. And so that became his principle. Now, here's where this gets really interesting. So within business, it totally reigns true, where 20 % of your customers will be responsible for 80 % of your profits. And then here's where people miss the next point, is that within this 80%, 64 % of the aggregate profit comes from just 4 % of the people in there, for customers if you had 100.

5:14And then of this 64, 51 % of the profit comes from just the top 1%. Now, doesn't that all of a sudden start to make sense when you look at how the wealth is distributed? That the wealth is distributed in a way that also makes sense that the business would gain its profits in that way. And so we repeat this process and this is kind of power law within business. This is how you do less and make more. Profit takes into account the fact that a single person, even with more service, often doesn't cost that much more to handle than the other 99. So it's more work, but significantly more profitable. Now, this is only true under one very important condition, that you actually have a business model that allows them to pay more, right?

6:01If you just only charge$10 for your thing, like this is one of my favorite sayings is, the only thing worse than offering a$1 ,000 thing to somebody who's got a$100 budget is offering a$100 thing to somebody who's got a$1 ,000 budget. In the first scenario, you lose$100. In the second, you lose$900. Big difference. And so here's the important thing. If you have a model that allows for that, you have to understand that 99 out of 100 people are not the top 1%, right? If we're pulling back here, all these people are not the top 1%. So you should expect them to say no to your expensive products and services.

6:37But when that whale comes, you should want to Captain Ahab that bitch and get it done. Real quick, I'm going to show you the exact 10-stage roadmap from zero to 100 million plus that less than 1 % of companies finish. I've now done multiple times. And so I can say with a lot of confidence that these are the stages as headcount increases that you need to get through. And I broke each of these down by eight different functions of the business, what the constraint feels like, like what are the symptoms of it when you're going through it, and then what steps we actually took to graduate. And we've done this across software, physical products, service businesses, brick and mortar, all of this, and it works.

7:13And it's my gift to you. It's absolutely free. And so the link's in the description, but you just go acquisition.com forward slash roadmap, just enter info, and it'll spit it right back to you all free. And so the reason that I talk about selling to the top 1 % is that one of the most effective ways to build a business is from the top down. So what do I mean by that? Like, think about like Tesla, right? We started with a$250 ,000 Roadster, and he had a very limited production. Very few people, more profitability per. What then happens? Well, then he was able to make the Model S, and that was the next car.

7:46And then he made the Model 3 or Model Y, whatever. So he kept working his way down. But what's interesting about this is that when you anchor high, it makes sense. Think about it from a branding narrative perspective. If I say, hey, I've got this really expensive car. It's amazing. It's super fast. And then I say, hey, guys, many of you couldn't afford this, so I made another car that's similar, but more affordable for you. That brand narrative works because you anchor it high. Now, think about the reverse. Hey, I'm a budget discounter, and I'm going to now sell a really expensive car. It doesn't hit the same, right?

8:17And so I love the top-down approach because you have a brand reinforcer, but also from an operational perspective, being able to ship the amount of cars he has to ship for the Model 3 compared to the amount that he had to do for the Roadster, it made more sense to start here because you can handle the volume, right? You might not have the operations to handle the amount of work that it requires to serve the masses. Like for sure, there is money, right? At the bottom, there is. But you have to be doing it at very small, raised within margins with extraordinary volume. And unless you have the capital to create something that truly scales to that mass, you will probably just end up trying to squeeze the$2 for more than what they're worth.

8:54And so how do we actually translate this into pricing our products and services. This is super important. So here's my rule of thumb for upsells, taking to account that 20 % of customers have far more spending power than the ones below. Now remember, we had$2 here and the next level at$28. So it was 14 times more wealth between just the bottom 50 and the next 40. But just using the Pareto principle in terms of how we can apply this to pricing, like you not understanding this is why your business is not making as much profit as you want, all right? So my rule of thumb is that for every new tier is that you want to 5 to 10x your price and expect 20 % of people to take it.

9:35Okay? So here's how it works. So let's say that you sell 10 customers. Okay, so you sell 10 customers. Let's do it again. Okay? Now, if you have eight of these customers at$10 per month and you've got two of them at$50 per month, how much am I making on these guys? I'm making$80 per month in total on the bottom 80. And then I'm making$100 per month on my top 20 % or my top two. And so by serving these two customers differently, we doubled the revenue of the business, which by the way, again, is my rule of thumb. I want each tier to bring me another double, like another full amount of revenue. Otherwise, I'm like, I don't know if it's worth creating the actual extra constraint of operations, right?

10:23But here's where it gets even nastier. Let's say that this covers the majority of our overhead. That means that this extra$100 might contribute 10 to 1 compared to this to our bottom line. And so sometimes when you make a move like this, if you were here and you had$80 and you were living your life on this 80, right? It's like, well, maybe your cost is 70 or you're taking 10 home. If you add this$100 in and maybe the cost on this is$20, you've got$80 left over, we 5X the profit. So let's say our profit before this was$10 a month. And then we added this in and we had$80 a month in profit from this$100.

11:00Look at the difference in profit. We go from$10 to$90 just by adding this tier. And so the reason your business is not making this money and you're not making as much money as you want is because you're not priced appropriately for the people who actually have the money to give you. And so this is what everyone messes up. They say, hey, this is going to be my three pricing tiers, right? I'm going to have a$100 a month thing, and I'm going to have a$129 a month thing, and I'm going to have a$139 a month thing. Okay, great. This is all the same price. It's a lot for a normie and just not a lot for everyone in the top 10%.

11:43And so to maximize revenue, you can think of it with four tiers of pricing. And to be clear, you don't need to serve everyone. And the first product you have may not be your base tier. All right, so you might start here. I don't know yet. I don't know your business. But this is what you can walk through in terms of thinking through the pricing for your products and services. So let's assume that we have 1 ,000 customers. All right. So on our base tier, all right, so this is the lowest,$10 per month. and let's say we've got 800 customers at this level, okay? Now, our second tier, we might have it$100 per month, so 10 times that price with 20 % taking it, all right?

12:21So that means we're going to get somewhere in the neighborhood of 200-ish people who would qualify for this tier, okay? And the next tier, we still have to follow our rule, 5 to 10x. So that means we're going to be at 500 to 1 ,000 a month for this next tier. Just to keep it simple, I'm going to just do 10x because it's nice and clean, all right? And so here we're going to have maybe around 40. Now you're like, wait, I thought we had a thousand customers. This would be 160. I'll redo the math at the end so you can see it. All right. Now our next year might be, again, five to 10 times this. And so we might be somewhere in this five to$10 ,000 a month.

12:56All right. And so if you're looking at this, you're like, holy cow, those are very big differences in price. Yes. But they reflect how different the spending power that exists within customers is. All right. And so the main takeaway from this is that if you're going to have an upsell, a very small percentage of people are going to take it. And so you have to make it worth it. And so people will have these, I'll go$100 and$129. It's like it's the same pitch. It's the same price. The willingness to pay for that customer is the same. Let me show you how I've actually translated this into my own business.

13:28All right. Well, this, and you can ignore the actual numbers of customers, but what do we have here? Ah, we have school. And then at$100 a month, what else do we have? We have school. This is our hobby plan. This is our pro plan. And so for me, the next number is$5 ,000, which is L1. And what's the next number after that? $35 ,000. Huh. Almost like it's between five to 10 times the price, which is L2. And then what do we have after that? We have something that's$135 ,000. So that's four times the price, right? And this is L3. And what do I have underneath of that? No money because it's a portfolio company.

14:11And so the thing is, is it may take some time to build out this entire thing. I didn't start with school. I started building, you know, our brand. This is, to be clear, just our advisory practice that we have at acquisition.com. And so I'm just saying, like, knowing this doesn't mean you need to do all of this at once. It takes years and it does take operational chops to pull this off, right? You want to add tiers one at a time. My tip though is to start as high up as you can on this ladder for a few reasons, right? So the Tesla example I gave earlier, the branding from top down versus bottom up is much stronger.

14:43Like Honda making a better car is tough versus Rolls Royce making a Rolls Royce light. It would be easier play for them from brand position. The next reason is that I prefer to start with the unscalable. Why? Because it's easier to operationalize serving these people because one, they actually, believe it or not, as a percentage of net worth, this is actually lower than what this is for somebody who's poor, right? If you have$10 million,$100 ,000 is 1 % of what you've got. If you've got$1 ,000, $100 is 10 % of what you got. And so for you, you will actually be more demanding for that 10 % or that$100, reasonably so, than somebody who's giving 1%.

15:23But from a business perspective, the$100 versus the$100 ,000, it's a gigantic difference. So you have an easier customer to deal with that has lower demandingness, but it requires, and to be clear, to get that$100 to equal$100 ,000, you've got to get 1 ,000 of those people. So is serving the one customer for$100 ,000 easier than serving 1 ,000 at 100 as somebody who used to sell$100 gym memberships? For sure. And if we were to look at this from a profit contribution perspective, like what is actually drop into the bottom line, it would look like this. All the profit is here, just like all the wealth is at the top.

15:59So you have to do more and charge more for it to people who can afford it. And the amount you do for a few people is almost always worth it for the far greater price for those people who are willing to pay it. Now, you might ask, well, wait a second. I thought you said sell the rich. Like, why do you have this$10, this$100 a month thing? The only way to serve the poor masses, right? And I say this to be a little bit more like, you know, jarring, but to serve people with lower budgets is to have tons of money and then find a way to serve them in an automated manner at a low price. And if you do that, you can also make a lot of money, but via volume.

16:34But it takes a lot of money. It takes a lot of time. And the reason that Tesla has almost gone bankrupt multiple times is because it's incredibly hard. The reason most software companies like Netflix and Spotify and some of these big consumer companies who charge$13 to give you, think about how hard that is. Think about how hard that business is. They have to make world-class entertainment for all the different genres that someone might like just to earn their$13, right? Just to earn the equivalent of like a Chipotle bowl. And again, I bring this up because some people come in saying, oh, I'm gonna do that.

17:08It's like, you're gonna do that bootstrapped? No, these companies that you're looking to model literally got artificially inflated with outside capital to prop the business up until it would get to the point where it actually could make money. So to do something like this costs a fortune. And so the way that I'm trying to walk you through this is that 80 % of businesses in the US or 78 are service-based businesses. And so you don't have an automated way to serve these masses. You likely don't. And so if you don't have an automated way, then you want to go in the complete other direction, which is I want to serve the best customer at the highest possible price, but people misprice their products and services.

17:44They say, okay, my current core thing is$1 ,000. I'll make the next thing$1 ,500. It doesn't work that way. That's not how the buyer works. The buyer is at 5K, 10K from the 1K thing. That's the next tier. That's the next rung on the ladder. All right. And so this hopefully should shift your perspective in terms of how pricing really works. A disproportionate amount of profit is here. We have to make gigantic jumps with the assumption that very small percentages are going to take it, but still be okay with it because even a small number of people at a gigantic price is still a lot of money. So how do you actually translate this and put this into practice?

18:18Number one, stop selling from your own wallet, especially if you're one of the people who, you know, you're in that$2 category, right? You're that bottom 50 % right now. I get it. I've been there. You have to forever imagine, this is a gift, forever imagine that everyone is rich. So here's the reality that will shock you. That top 10%, top 10 % of Americans have a million dollar plus net worth? One in 10 people, one in 10 people, million dollar net worth. They've got the money. You just aren't selling them something that they want. And you might even be, and this happens a lot, especially for newer business owners, you might even be too cheap for them to even believe that you're good.

18:54Like we had a company that was in the health space a while back and looking at all the research, it was a doctor and all this stuff. And I just fundamentally believed that they were mispriced. And so what I did was I raised, I wanted to raise the price by double. You fought me back and forth forever. And I was able to finally get a 50 % price race through. But guess what happened? We raised the price by 50%. That's a lot. What do you think it did to the close rates? They went up. They were so cheap compared to the promise and what they were delivering that people didn't even believe that it worked.

19:31And so some of you guys are so cheap because you're selling out of your own wallet. You're selling based on what your friends and family who might also be in that$2 bottom 50 % are telling you. But why would you listen to people who don't have money on how to get money? They don't know where it is. They don't know how to get it. And more specifically, they don't know how to serve the people who've got it. So that's the first thing. The second thing is that if you're going to do this, listen to me on this. Whatever your upsell is, 5 to 10x the price. And then just make sure it's something that you'd be happy to deliver for five to 10 times the price.

20:05Sometimes I'll get pushback from people who are like, oh, that would be so much work. And I'm like, cool. We have value and we have price. Move one of them. Either do less or charge more. I would encourage you to just charge more, right? And so if I were to say, hey, I want you to 10 times the current price of your upsell, what would you do that would absolutely blow people away? How much does that actually cost you? When you look at the cost compared to that 10 times bigger price with a zero on the end of whatever your core offer is, you might find it's like, actually, it's only like, you know, 5 % of that price.

20:37It's like, right, really high margin. So as long as you're happy making more money, serving fewer people, go do that. The third one is that you should expect only one in five or one in 10 people to say yes. Expect more no's. And this is the sweet spot of making money, right? The sweet spot isn't the most yeses. It's the most money. And that is never with the most yeses. So if you pitch your 10 times bigger price to this bottom 50%, none of them are going to say yes. And you're going to mistakenly believe that this is a bad idea. But the reality is that you're just not talking to the people who have the money.

21:13And so you should expect that if you have a representative amount of people that you speak with, one in 10, maybe even one in 100, is the person who is the correct avatar. And for that person, you might also find they'll just say like, yeah, that sounds good. And you'll be like, oh my God. And I only say this as somebody who's had it happen for the first time. I'm like, I can't even believe this is possible. I can't believe this person would give me this much money. It's because to them, it's not that much money. It's only that much money to you because you still live here. If you sell to rich people long enough, they will make you one of them.

21:44And so with your upsell, make it crazy. And this is called an anchor for a reason, right? If no one buys it, no big deal. Or most don't, no big deal. But the good news is that it'll still help you sell the rest of everyone else at a higher percentage and even at a higher rate because it'll look like a good deal in comparison. And I said this before, but I'll say this again. The next reason is the only thing worse than selling a$1 ,000 thing to a$100 buyer is selling a$100 thing to a$1 ,000 buyer. In the first, you lose$100. In the second, you lose$900. And not only that, that$900 is probably disproportionately profit.

22:20And this is what no one understands. This is why most businesses don't make money. They just try and sell to these people who are the biggest pain in the butt. And the thing is, is you see so many of them that you're like, oh, this must be how it works. No, it's not how it works. It's just how you're working. This is how the average business works, which is why the average business doesn't make money. They don't go to where the money's at. The next reason is you have to think about absolute profit rather than relative profit, and you'll be blown away. So a single person paying$10 ,000 for something that costs$2 ,000, a single person, right, one, right, buying a$10 ,000 thing that costs$2 ,000 is the same as 400 people buying a$50 thing that costs$25.

23:12These are the same. So do not underestimate the power of large prices in small quantities. And so the reason that entrepreneurship is such almost like a spiritual journey is that you earn the right to charge more because you no longer think the smaller amount of money is worth your time. The reason that rich people get richer is less because there's some magic behind anything, but there's only two real forces, in my opinion, that make the rich get richer. The first is math, which is that compounding is a thing. When you have a billion dollars, next year it's 1.1 billion if you do nothing. $100 million is made because the assets went up.

23:47Very difficult to outwork compounding over a longer period of time. That's a reality. And as that capital aggregates, which it does in capitalism, which is a system for allocating capital, that's the point of capitalism, is that it will always shift to the people who are the best at allocating it. And so in time, if everybody starts at even, on enough generations, eventually the capital pools. It's how all capitalism has worked out since the dawn of time. And so that's what creates this great divide. The second thing, which you can do something about, which is why I'm making videos like this, is that there are beliefs that people who have money have, which translate to behaviors, that poor people don't have and translate to different behaviors.

24:27So what does that mean? A rich kid will choose not to pursue a lower leverage opportunity because it's not worth their time because they were taught it wasn't worth their time. The career paths that they'll have to choose from will be significantly skewed towards things where they'll get disproportionate returns. And a lot of that is just knowledge about it, not even knowledge how to do it. I remember when I first found out, I'd never heard of management consulting. I'd never heard of private equity. I'd never heard of investment banking. I'd never heard of any of this stuff when I went to college because where I was from in Baltimore, a rich person was a doctor.