You Can Take Action with Incomplete Data | Ep 945

0:01I don't know what I would do more of because I don't track anything that I'm currently doing. Well, then we have to get the metrics so that we can understand what to do more of so that we can do more of it. This does not mean that you cannot take action without having complete data. Because the nature of entrepreneurship is that you will always have incomplete data. There will always be things that you want to know that you do not know. And so probably the vast majority of your decisions will have to be directional or reason from first principles. of like, well, I know these things to be true.

0:28And so can I extrapolate that to my current situation? Can I generalize knowledge and apply it to a specific domain? There are some things that when you have what I would consider irreversible decisions or one-way doors, as Bezos says it, those are the ones that you want to gather a little bit more data around to make your next big bets.

0:48How's the morning? Good? Yes? Okay, fantastic. Hopefully it should make a little bit more sense in terms of why we structure the event the way we do, which is that, you know, the first day it's all theoretical framework driven. And the main, you know, thesis behind that is you're going to have this time with our team who are, you know, have seen, have seen businesses like yours at all different sizes. And you have these, the short period of time to ask the most meaningful and most impactful questions. And the last thing that I want anyone to do is fly out here, spend that time. And then when you get home, realize that you asked the wrong thing.

1:21Right. And so who here came in with an idea of what you thought your constraint was for your business. Okay. Who here of the hands I just raised, was it different than you came in with? Right. And so that's why we do the framers the first day. And then we do the application and the tactics today. So hopefully that was good. Beyond that, I've had the distinct pleasure of talking to a lot of different business owners about the things that are limiting the business. And so as we go through the Q and A's, I wanted to show you kind of the visual roadmap of how I think through this. And so it only took like 10 ,000 calls to figure this out.

2:01So here we go. So the fundamental question that we always have to ask ourselves as business owners or entrepreneurs, and I take myself through this exact same reasoning process, is why can't we do more? and the reason that I'm so you know addicted you could say to more is because if you think about let's imagine you had a hundred bricks right you can assemble those hundred bricks if you just hit random on a on like a space generator those random bricks will just keep reassembling it'll pretty much always just look like a mess right but there is one specific instruction of those bricks that becomes a building right or a structure of some kind and so if you think about your business today as a building of some kind, there might be some holes in there, but largely it stands, it has support, et cetera.

2:46Whenever we do something new or change, the likelihood that the one move you make is going to be one of the holes versus one of the infinite other possibilities that does not actually grow the business is actually really high. And so the smaller you are, the earlier in your stage of business you are, the more it makes sense to try new things because the likelihood that your change of it sucks and I changed it and now it sucks less is highly likely. When nothing is happening, you should do anything because it's better than nothing. But once you have a very good business or very large business, the likelihood that that change actually makes it worse because you've already had 100 changes in a row that have worked and 500 that didn't.

3:25The likelihood that next change, the reason it's the control versus the variant for any of those guys who do split tests and marketing, the control typically beats the variant. And that's because it's had so many iterations to get there. And so if you think about your entire business as a control versus a variant, that is why the changes need to be small. And we have to be very strategic about them because the best bet for almost every business is why can't we just do more of what's already working? And so is the highest risk adjusted return move that you can do as a business owner is more of what got me here.

3:53And so what's interesting about that question is that, um, it still requires creative thinking around it. Like you will, you'll get to this point where you say, okay, well, I can't really make more content. Why? I can't run more ads. Why? Well, over$2 ,000 a day, my row eyes drops. Okay. That becomes the problem to solve of why can't we do more? Now, when I asked this question, there are five kind of detours that occur that all begin with M conveniently for us from memory, um, that I'll walk you through. So if I say, Hey, why can't we do more? Sometimes people just say, well, I guess I didn't think about that.

4:29And it's like, great. You should do that. And so at any point in this kind of like little journey, if you're like, oh, I'll do that, that becomes the course of action. So if you can do more, do more. If you're like, I can't do more because I don't know what I would do more of because I don't track anything that I'm currently doing. Well, then we have to get the metrics so that we can understand what to do more of so that we can do more of it. And I'll put a little, a little segue on this, which is that this does not mean that you cannot take action without having complete data. Because the nature of entrepreneurship is that you will always have incomplete data.

5:04There will always be things that you want to know that you do not know. And so probably the vast majority of your decisions will have to be directional or reason from first principles of like, well, I knew these things to be true. And so can I extrapolate that to my current situation? Can I generalize knowledge and apply it to a specific domain? And so there are some things that when you have what I would consider irreversible decisions or one-way doors, as Bezos says it, those are the the ones that you want to gather a little bit more data around to make your next big bets. Now, let's say you're like, I can't do more.

5:33I have the metrics, but the reason I can't do more is because my market is too small.

5:42Some of you guys might've seen, I had a, I had a Hormuzi hotline of a, of a guy who had a lounge in, um, some weird, like commune thing. And he was trying to scale it. It was doing a thousand dollars a month. And I was like, well, how many people are in this commune? And he said 140. And I was like, so there's nothing for days. And then there's 140 people there. He said, yeah. I was like, bro, this is not going to scale. Like, he's like, well, should I do more marketing? I was like, you can text everyone. Like, what are we talking about? And so I use that as an extreme example of like, there are, there are realities that like, you could be limited by your market, but nine times out of 10 or 99 times out of a hundred, that's not the, that's not the condition.

6:24Most of you guys are not in a town of 140 people trying to scale the business. You're not in the Sahara desert looking for an AI coder. Probably not. But if you are brick and mortar and you're in a 20 ,000 person town, there might be some constraints to the business. Now, does that mean that we could open another location? For sure. But this can be one of those limitations. Now, the next thing that comes up is model. Now, this one is interesting because it's a little bit more strategic in nature, meaning, uh, and you guys might've heard this early thought this to yourself. I can't do more because I'm just like, not sure if this is the right vehicle for me.

7:02I'm not sure if the business model I have is really going to ultimately bring me the life that I want or accomplish the goals that I have. And that's one that's, that is real. Like if you're like, I want to be a trillionaire, that's your desire. Who's going to, I mean, who am I to stop you? Right. Um, but if you want to do that, dry cleaning is probably not going to get you there. right and so for most people if you have a hundred million dollar goal which i would say is like kind of a baseline um not that you have to have that but i'm saying just as a general line that will probably represent a lot of people here almost all businesses can become that uh a permutation of your business even a brick and mortar you just have more of them right um or there's a franchise model a licensing model there's there's versions of whatever you're already doing and that's in the more constrained ones if you're a national already you sell you know on the internet you can pretty much be a$100 million business.

7:48Now, why can't I do more? I have the numbers. My market is actually big enough. I'm not questioning my existence because of my model. The next reason that people say they can't do more is money. Now, money has several offshoots. Okay. The first reason is that your leads cost too much. Your leads are too expensive. Now, this is where between these four things, this is where pattern recognition becomes important. This is where the team can help. This is what we step in a lot of times with, which is, are your leads actually too much? Or do you make too little per customer? Or does your sales process suck and your lead cost is fine?

8:31And that's where the dynamic between these elements start to interplay. Because fundamentally, it just means it costs you too much money to make more money. But there's a lot of things that could be the reason for that. So that's where benchmarks across industries is helpful. Like if you were running, you know, a mass market webinar to consumers for weight loss, and you're spending$20 a lead, that's probably not good. That's too high. If you're spending$2 a lead and you're like, we're way out of whack. It's like, that's probably not the issue. It's probably something with the conversion process or the pricing that's associated with it.

9:00And so this is again, um, when we get into this stuff, this is, this is again, where experience helps. Um, The next one is, I kind of alluded to it already, sales or conversion are too low. You're not converting enough of the opportunities that you have. So that becomes the constraint of the business. That's what we need to fix. Let's say you're like, I'm getting enough leads. We're closing enough sales. But the issue is that our lifetime gross profit is too low. We don't make enough per customer. Everything else is fine. Lead costs, conversion rates fine. It's just, we're only selling a$100 thing or we're selling a$100 a month thing and people leave in three months, but our competitors, people leave in 12.

9:38Well, yeah, you're screwed. Everything else is fine. You got to fix that hole. Otherwise nothing's going to work. And then finally you have cashflow. Uh, any, any home services or construction type businesses here? Okay, cool. So this is super common for you guys where it's like, you know, we have some rough metrics, the market's fine. I don't plan on getting out of HVAC or plumbing or roofing or whatever your thing is. We have, you know, we know how to get leads. We know how to sell, you know, we, once, you know, once we close a deal, like there's profit there. The problem is they pay us in 120 days, right?

10:16They pay us net 90 or 180, right? And so you're always in this cash crunch. And so you're like, we could scale if I could just pull my AR forward from six months from now into today, and then I'd be able to scale, right? And so here we have to solve these with financing relationships, offer structure, and then ultimately figuring out different ways to pull the cash forward, which I promise are 100 % solvable in every one of those domains I just referenced. The last one is manpower. So you're going through this. Why can't I do more? I have the metrics. The market's big enough. My model's fine. All of this stuff makes sense.

10:45The problem is the phone's ringing. I just don't have any guys that I can put in trucks. Like I can't get the talent I need to work this deal or do this SEO or I'm concerned that my quality is going to drop because they're not trained up enough or whatever the thing is, right? here's the beauty of this model. What are we doing to attract manpower? Why can't we do more of that? Oh, we don't have metrics for how we attract people into our business. Great. So then we need to go get our metrics for how we attract talent. Okay. Once we have that, okay, well I have the metrics, but I'm in bumfuck Kentucky and there's only five people there, uh, that qualify for this.

11:20Okay. Well, can we give relocation bonuses? Can we do incentives outside? Can we cross-train somebody, like what kind of training is in place for something that's adjacent that there is supply for that we can translate over model perspective. This is more around the offer of like what we're charging, excuse me, uh, us fixing our model rather so that we can pay the people we need to. So I'll give you a common one that happens. Um, this happens for anything that has skill related services that you sell. This could happen in professional services, like accounting, legal doctors, healthcare, just as much as home services.

11:54You might have a three or four step constraint. So what that means is I can't bring new people in to service customers. As a result of that, I can't scale. So I can't bring people in because I can't pay above market to attract them. I can't pay above market to attract them because I'm priced as a commodity. I'm priced as a commodity because my offer and my sales motion are not correct or not optimized. And so in order to scale the business, we actually have to do like three things to unlock it. And then it, and then it scales. Does that follow that track? Okay, cool. So this is the thinking process.

12:31Hopefully, uh, you can lead yourself through this. I walk myself through this on a quarterly basis of like, what do I need to do more of? And what is preventing me from doing more? And so I'll give you one more thing. One thing also to be cognizant of is that every business has a shape. So if you think about like an e-commerce business or a physical products business, it usually looks something like this. That's the shape of the business, which basically means, uh, you get, this should be flat. Sorry. Uh, you get inventory and then you get distribution until your supply chain breaks. And then you have to keep fixing your supply chain issues, you get the supply chain issues fixed.

13:13And assuming you can now unlock more distribution, you go straight up until you hit an extra supply chain. So it's very stepwise. If you have a services business, it looks like this. It's not super fast, but you know, you can get people in and you continue to scale provided you do a good job. This is an information or a media business. So if you're a creator or you sell courses or you sell coaching, that kind of stuff. Very easy to make a lot of money fast. Very hard to, sorry, very easy to make a lot is relative. Very easy to make a few million dollars fast. Very hard to make tens and hundreds of millions of dollars.

13:56Who wants to get what that one is? Software. Really difficult to get started. Costs a ton of money. Takes a lot of time. But once you have product market fit, you can scale the thing to the moon. And so it's really picking where you want the difficulty to be when you're thinking about the shape of the business that you're in and making sure that the difficulty that you are facing right now is not a bug with the business. It is a feature of the business. It is part of the nature of how that business works. If you're in cleaning, you know, home cleaning, it's the constraint of the business is always going to be getting, you know, labor that's low skilled, that speaks English, doesn't steal, shows up on time and does a good job.

14:36That's going to to be the constraint of the business, which also means that if that's the same issue that everyone else in your space struggles with, that's where the alpha is. That's where the opportunity is that you have to double down on. Like, how am I going to have a unique way or my unique selling proposition isn't going to be a selling proposition. It's going to be a unique talent proposition. Why is it better to work for me than it is for my competitors? If I can do that, then I can drain the market of the best talent and then I'll have a competitive advantage more so than just saying, Hey, I can help you clean your house because that's not a very hard offer.

15:05Most people want people to clean their houses. On the other hand, if you're selling fitness memberships, nobody wants to work out except for the people that love working out and those people work for free. And so finding talent for a fitness business is unbelievably easy because people love doing it. It's like finding talent for music. Lots of people just love playing music or love singing, right? The issue is getting people to want to sign up who don't want to do this on their own. That's the challenge. And so being like, well, we have this amazing product here. It's a marketing and distribution business.

15:36It's a sales business. And so you have to know what business you're really in and the shape of what that business is going to look like as it scales.