I’m in grad school for accounting rn and I’m kind of upset because idk about you but I feel like we just learn how to calculate these figures robotically. They don’t teach it conceptually aswell to understand how that truly benefits the CEO/company
@@AZANlA I was in the accelerated grad program called the MSA. It makes you eligible to sit for the CPA exam and also get your master's and bachelor's degree at the same time. LOL, update; I withdrew from the program, it isn't really in line with what I truly want to do and focus on.
Takes a simple concept like margins, simplifies it for any non-finance majors, but also presents it in a tangible way that can make a significant difference for people…bravo
@@anitha6249I’m sure you know now bc it’s been 7 months, but just incase: The increase to 26% net margin was possible because he was able to increase his gross margin 14%, and that directly translated into his net margin.
@@AlexHormozi I’m a private self defense trainer. I’m not sure how I calculate my cost of what I do? I charge all my students in series of 10sessions every time. I charge $3000/10. Would the cost of gas/travel be my cost? Thank you in advance
In the last example he gives, there are 2 ways of increasing Gross Margin Ratio from 75% to 80% 1- Increase the COGS-Cost of Goods Sold- Monthly cost of the program from $400 to $500. Wich is a 25% increase in price to the customer. or 2- Decrease the salary of the coaches from $4,000/mo to $3,200/mo. Of these 2 options, decreasing the salary of the existing coaches or hire new coaches at a lower salary might compromise the quality of the product, on the other hand, increasing the perceived value of the product and therefore justifying the 25% increase in price might be easier. Great stuff! I was thinking about pursuing an MBA but the experience of running a business in addition to studying these videos and implementing the knowledge will help me advance a lot more.
Sorry this is incorrect, the first option he is increasing the price per month per customer $20 so the three month package would be $1260. Which would then result in 25% increase of net profit margins
Yeah but lets keep in mind that also increasing the margin wether by increasing profit or decreasing the cost comes with ether losing clients or employees so it’s not always that easy
It depends on what you are selling. Some things people will pay more for even if you keep increasing the price. It’s called pricing power. Luxury purses could go up 20% in price and women would still buy them. I don’t agree in cutting an employees pay though.
Alex, it's a 33% increase. Teacher is testing to see if we're paying attention ;) My products have great margin and I've never considered the true take home value that a slight increase in this way (likely for all the same reasons your clients give you). Thanks for the enlightenment, amigo! 💚
Love these old videos where you dove into the nitty gritty details Alex! So appreciate you breaking down the concepts and making them accessible for all entrepreneurs. Any chance Caleb might work some of these “boring work” videos into the RU-vid strategy going forward? I know they’re not popular topics that are going to get the same sort of views and reach as the newer stuff, but they are so so valuable.
I now have 3 employees in my bed bug heat treatment company and this really summed up how to set my goals and expectations with sales targets. I appreciate your content man, glad I found you
In your scenario, is the COGS, cost of good solds simply the manhour you pay to your employees? I a having trouble to understand this term in a service based model.
Did I understand this wrong or does increasing the monthly price from 400 --> 420 not get you to 80%? 420*40 = 16.8k, 16.8k-4k = 12800 and then to find the % you do 12.8k/16.8k = 76.2%. So if we went with what he said above we would need to charge each client an extra 100 / month ==> 500*40 = 20K, 20K-4K = 16K, Then to finally get your margin 16k/20k = 80%. Just wanted to make sure I understoodd this correctly! Thank you so much for sharing this informations for free!
@@DavideDileoofficial One way is in microsoft excel: goal seek analysis. Build a table and tell the spreadsheet you want the 75% to change to 80% by changing this or that value
Alex,We want you to deep dive more on this topic, more examples of models for people starting to grow a team, along with suggestions of how your would build for hiring first 1-3 coaches in a organization
I'm an investor. I have always maintained that people who know business make the best investors. Alex clearly knows his stuff. He did not read this yesterday in a book, he clearly KNOWS it and lives it. I'm sure he enjoys developing businesses, but the shift to making a good investor is very small.
Most business owners I talk to are at 20-45%. I think 25-35% is very healthy and attainable for most businesses. I can’t seem to push past 22% in my service business
This is clearly focused towards service-based businesses (Really helpful though), would like to see another version where you focus on product-based businesses instead
This man is the truth. I'm proud of his continued success. Humble beginnings shows thru out his demeanor. Can't help but root for a guy like that. Godspeed
Love ya Alex! But 20% is a 33% (+5 percent) increase from 15. Still awesome though! My accountancy professor never actually explained this stuff well, out here you sharing gold!
This can reduce quality of service , best option here is to increase the price. $4k for 40 clients is already a low wage so can’t really lower it. More clients & higher price
It’s so great that both your heart is gold and your material is gold. kudos to you for helping us all out man. Super helpful and inspiring material. I started with your new stuff and am working my way backwards. Your production has improved in the newer stuff, but your energy and value brought seems to have always been there! Thank you.
It’s one of those works in theory videos. Try selling something for 100 when everybody else is selling it for 60 to 80. And that’s where reality comes in
lmao no it does not. Ur course is made for people that want to fix their life not for high value people. + u dont pay rent and all these things ur margin is already big
Thanks man! I think this is also important for people when trying to negotiate their salary. It's always important how much someone will make off of you so you can get compensated properly... I'm running my own business and your content is super helpful! I've read your $100M offers book, loved it! Looking forward for more content!
Cogs is basically labor and any materials you use while delivering a service. That's it. I hate when people have to be pretentious when the concept is so simple.
Good idea! Then he gets the $800 extra needed without dropping the coach's pay or having to raise the monthly fee to $500 per month to get 80% although if he did sell for $500 per month that 80% margin would equate to $16000 total rather than $400 per month at $12800 total, might be a hard sell though.
well technically, improving efficiency is the same thing as reducing cost, as by improving output while maintaining the same costs results in lower costs per unit. But you are right, thats another solution.
Love this video, Alex! I’m going to have to keep track of my margins going forward. Btw the bottom right calculation toward the end is a 33% increase, not 25%. Even better!
@@tapfilms6806 because it’s 5% increase from 15%. So 5/15 is 0.33 which is 33% of an increase from 15%. If you were making $15 and now making $5 more that is a 33% increase in your profit.
Interesting and thought provoking stuff, Alex! Coming from an engineering background I am enjoying learning about the business world, and so your channel has been awesome to delve into. I must say though, you should check your math before hand because you undersold your own punchline at the end there! Strictly speaking, going from 15% to 20% net margin is a staggering 33.3 percent increase (not 25%) which is even more impressive! Point taken though, and well done.
This is wonderful. I really appreciate this content. I own a Plumbing company - we run a gross margin of around 60 percent, and that is on the higher end of our market. I wish more contractors watched videos like this and raised their prices - so we could all be closer to 80 percent margin.
Is there any way to give bigger value than your competitors that does not elevate your expenses in long-term? Like this you could up your prices and get there
Lol no. We’d be living in a world where services are even more expensive than they are right now. You are a businessman, but don’t forget you’re also a consumer. If what you suggested actually came to fruition, you’d be paying a lot more for every single thing you buy/consume… and that would effectively decrease your salary significantly.
not really sure how I ended up watching this video but well presented. One note in the example at the end - it's actually even more than 25% increase it's a 33% increase because your original basis is only 15% so an addition 5 is 5/15 = 1/3
Raising $20 only makes it to 76% the only one that works is paying $3200 you would have to raise price by almost $150 per month per client to get to 80%. What were not doing is assuming that the trainer would quit if he got an $800 a month pay cut and the clients would quit if you raised it by $550. Would take years longer to raise that margin without losing more than half clients putting your revenue under
I got to say… When this info started popping up on my feed I was super skeptical! It’s a pretty successful person who runs a number of businesses I find the stuff on the Internet complete crap. Alex‘s stuff however is unbelievably valuable! I’m all in on this stuff!
BRO you just opened my eyes. Ive been wrongly priced at the cost of my life savings for so long. Ive been trying to run at 6% yearl margins for. Holy crap
At c.4 mins, how did you get from 66%/12% to 80%/25%? While it's good to get people thinking about the levers they have to grow their business, not explaining relationship between gross to net or showing a real calculation demonstrates just how shallow your advice is. It basically boils down to increase the sale price or decrease costs to increase your margin so you have more profit left over to pay yourself. Also, while I'm here, the percentage increase from 15 to 20 is 33.33%
You don't need to be 80+ in margins to the profitable or do well. This is how industries monopolize the value of goods. You know it cost slim to make but you can't find it cheaper anywhere because the industry normalized and set the value
love this dude for real...wish so bad he would help my business out...we're a film production company from germany that really stands out in quality, but our sales and marketing aint good :) - hormozi will change! im learning
easy to say on the board in reality being in actual business doesn't really work that way cause you still have to consider consumer purchasing power economic and inflation, also if you are selling economies of scale is also a factor
WOW! I had no idea i could make more money by cutting my expenses and charging more! I am now an expert business man. I can definitely see how this guy became a $100mil CEO. This is not a scam at all!
Alex, I love your content but your math is wrong at the very end. You would have to charge $1500 (instead of $1200) for the 3 months making it an extra 100/mo (not 20/ mo) to the customer. They would still see a 1% increase to their margin and a 4% increase to their NOI with adding 20/mo.
The way margins play out for products and services are very different... It would've helped if you could go into the definition of net margin and show how net margins are different for products vs services... Additionally retail stores have a different calculation to margins today, as retail businesses get complex the margins get complex...
Every increase in Gross Margin is an exponential increase on the net margin. Lower cost Increase price Increase gross margin to minimum 80%, better 90%.
This video underscores how critical it is to select/define your market in a way that allows you to achieve high gross margins. It's easier to accomplish this with Software and Learning products than with physical products. If you have a physical product, usually, the only way you can achieve reasonable gross margins is to "wrap it" in some service with recurring revenue.
Good vid, just a small error. In your example at the end the, net margin increase from 15% to 20% is actually a 33.3% increase, not 25% increase. Just an FYI for anyone reading, your core/initial number is what relative change is based on. For 15 to go to 20 that's an increase of 5 which 5/15 = 1/3 = 33.3%. You used 20 as your core number which is why you are seeing 25%. That would be the case if we went from 20 down to 15. That would be 5/20 = 25% decrease in net margin. Also when you increase by 20 per client you get 40×420=16800, 16800-4000=12800, 12800/16800=76.2% which isn't 80% the increase you suggest per client doesn't increase gross margin by 5%.
You have great advice. Quick tip to take your videos to the next level: look at the camera instead of your notes or script. Makes it more personal and therefore believable.
Love this. Obviously this translates to any type of business, but is there a particular target gross margin for a business that has physical products, like a supplement or ecommerce biz? Or is it just a goal of as high as humanly possible?
Well done. I have a salesforce that is very limited on their mindset to grow their margins. We actually have team members who thinks 25% gross margin is too much. You can’t catch your cost to profitability. We have to justify our margins.
I could be wrong, but the way he defined COGS sounded more like Variable Cost (VC). There are two different ways to account for these: Rev-COGS=Gross Margin Rev-VC=Contribution Margin These two are VERY different things.
This is awesome and learned a lot! Thank-you! Is there any way you can briefly go over how you got the at the end of the year margins like 15%, 20% and 25%. Thanks again!
@TheBoringCandleCo the 15% to 20% net margin is actually a 33,33% increase in net margin, right? Not a 25% increase. Or am I missing something? 15 x 1,3333 = 20
Pricing guilt to earn a profit and maintain a profitable business is a deadly mindset. Most service companies could triple their bottom line (and value) by using their costs to derive their prices.
Good explanation on margin although I would argue, using your example, that 66% ($40) gross margin with a 12% ($7.40) net margin would put your operating overhead (operating leverage) at nearly 55%. As an accountant (CPA) and owner operator of my current business, this number seems very high. We could lower operating leverage by selling more at the same price. ie each additional unit sold would only cost $20. Am I thinking of this wrong? Good video.
Also take this into consideration. Profit is profit. I own a brick and mortar and will get cash heavy at times. I will purchase an item that will make me 15% profit over sitting on cash. The cost of employees, and all other expenses remain the same as it would if I didnt aquire a item that gives me 15% margin. Finding things that are a lock and SECURE profit is the biggest hurdle.
