12. Payback Period PPD | $100M Lost Chapters Audiobook

Welcome to The Game w/ Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned and will learn on his path from $100M to $1B in net worth. Wanna scale your business? Click here. Follow Alex Hormozi’s Socials: LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Hormozi?

  Payback period equals PBD. How fast do you make your money back? If you think of what a business is, it's a box where you get a much higher return than the stock market on far less money. What makes business valuable is they are able to get 5X, 10X, 20X returns in a matter of weeks or months compared to 10% returns over years. Payback period equals the time it takes to break even on what you spent to get a new customer. Example, you make $50 per month in gross profit from a customer. You pay $100 to acquire that customer. You get your first payment day one, so you get $50 to your original $100 back. Then you get your second payment on day 31 to get the remaining $50 to your $100 back. Therefore, your payback period is 31 days. I'll be using a hypothetical business, a lemonade stand, throughout this section to illustrate the concepts and frameworks and to make acquisition models fun and accessible.

• 0:46Alex Hormozi?

  Most importantly, I'm doing this to illustrate that these models work with all businesses, including yours, whatever that might be.

• 0:52Alex Hormozi?

  So let's start a lemonade stand. All right, here we are. We've got a fledgling lemonade business. We've got aspirations to become the citrus kings of a lemonade empire. But do we have the skills to do it yet? Let's say we start with a recurring lemonade model. And let's say for simplicity's sake that we charge $10 per month per customer. And let's say our average customer stays five months for a total of $50 of lifetime revenue. Note, add or remove zeros as desired. This could be a $10,000 per month and $50,000 of lifetime value, depending on the product, business, or prices you aspire to. The concepts remain the same. Now, let's say we run 80% gross profit margins. In this hypothetical business, we might pay $2 per month to fulfill these $10 per month lemonade shipments for us, which would be delivery costs, lemonade powder, filtered water, et cetera. So $10 minus $2 equals $8 in gross profit.

• 1:36Alex Hormozi?

  That's an 80% gross margin. That means of the $50 we make, 40 of that is gross profit, AKA it goes back towards paying our other costs, like paying off the quarter neighbor to use their lawn, keeping track of our accounting, and making a profit for us, the owners. In this example, as the average customer buys lemonade for five months, our LDGP is $250. Knowing only how much we make, LDGP, it would be impossible for us to know if our lemonade stand is likely to be a rocket ship or a dud. We also need to consider CAC and then payback period to help us fully figure out our growth potential. How much is the CAC for a customer that pays us $10 a month? That's the next piece of information we need. This includes all the costs that go into acquiring a customer. Advertising dollars, payroll to a media buyer, creative team, software that that team uses to make advertising,

• 2:20Alex Hormozi?

  sales commissions and salaries, et cetera. If you like pictures, I did my best to illustrate this above. The back of napkin math way I used to figure this out is by looking back at any time period in the past. So last three, six, nine, or 12 months. The equation. Take all marketing and sales team compensation, advertising and software, and then divide it by CAC. That equals the total number of customers required over that period. So the example would be if we spent $400,000 in total cost to acquire all customers for 12 months, divided by a $40 CAC equals 10,000 customers required in the business for 12 months. So how quickly does that lemonade stand pay back the CAC and start making money? AKA payback period. Payback period is important because it will increase the speed of cycles in which you can multiply your cash.

• 3:05Alex Hormozi?

  Doubling our money in one month versus three months may not seem like that big of a difference, but it is. We're talking about a 4X difference in growth potential. We could double our money in month one, 2X, then double our money in month two, 4X, and then finally quadruple amount in month three, 8X, for a total of 8X our original sum. The three-month example would only double in that same three-month period. So the first business we brought, 4X speed, 8X over 2X equals 4X, compounded quarterly. That is why payback period is so important. My most prized metric, 30-day cash. Getting you to understand customer finance acquisition is literally the objective of this section. What it is, how to achieve it, how to scale it. A key factor in this process is time. If you had unlimited time to pay back a debt,

• 3:48Alex Hormozi?

  your likelihood of repayment, assuming ethical behavior, approaches 100%. The shorter the window, the less likely. Mastering the timeline of cash flow unlocks truly limitless growth. It got me from $1,036 in my bank account to 100 million plus in sales in a few short years, using other people's money to fuel the growth. With that, what is 30-day cash? 30-day cash is the amount of gross profit I can extract from a new customer in the first 30 days. The reason 30 days is so critical for small businesses is that 30 days is typically the amount of time any business can get interest-free financing, credit cards being a prime example. If I can increase my 30-day cash above my CAC, then it means I can get free customers using other people's money. In other words, I max out a credit card with zero interest to acquire new customers. And by the time my first payment is due, 30 days,

• 4:32Alex Hormozi?

  I pay off the entire interest-free balance from the free gross profit my customers have brought me. At the end of the month, I now have a zero debt card, which I can max out again next month, new customers that paid for themselves, and hopefully some profit for myself. This is how you get free customers for life and get paid doing it. So let's walk through this in a hypothetical sequence. Day zero, we borrow $40 from a credit card company to acquire our first customer. Between day one and day 30, we make $50 in revenue. Our cost to fulfill is $10, so $40 of gross profit is left over. Day 30, we repay our original $40 debt with a $40 gross profit, so our balance is zero. So after 30 days, we have zero debt and a new customer that will continue to spit off more gross profit and keep paying us every month.

• 5:16Alex Hormozi?

  Then we reborrow that $40 again to acquire another customer. Between day 30 and 60, we make an additional $40 of gross profit from our first customer, which we then pocket for ourselves. Day 60, our second customer spits off another $40 in gross profit, which we use to repay our debt once more, returning our balance to zero. After this is all said and done, we now have two customers paying us $80 in gross profit per month and zero debt. Using this process, we can finance each customer using other customers' money, or as some people like to call it, OPM. The only money we need to get started is our first cost of acquisition. Author note: This process is intended for businesses to get financing from their clients rather than outside investors. If you apply the concepts, you will have no need for outside capital. There's always a clever way to get your customers to pay for your growth. You just have to look for it.

• 6:01Alex Hormozi?

  If you already have capital, then you can use these strategies to better allocate that money towards your product and your team rather than acquiring customers. Understanding these metrics, number one, lifetime gross profit. Number two, CAC, the cost of acquiring customer. And number three, payback period, are the key to understanding how to unlock acquisition. It is the basis upon which we will layer customer finance acquisition, the holy grail of customer acquisition.

• 6:22Alex Hormozi?

  Example of the problem: normal lemonade business. Let's say we learn how to market on a channel: door knocking, email, advertising, cold calling, etc. On this channel, we acquire customers for $20, and our payback period is two months. Customers from this channel will make us $40 in gross profit. Great, now we have three variables. Let's look at what running our business day to day would look like from a cash flow perspective. We have no customers, so we put our pennies together to spend $20 in marketing. After spending that $20, we can get one customer who pays us $10 a month. It costs us $2 per month to pay an employee to fill these products. So we make $8 back from our $20 spent on our first month. In our second month, we make an additional $8 back. And in our third month, we make $8 again, putting us $4 over our $20 cost of acquisition.

• 7:06Alex Hormozi?

  Then the customer stays for two more months. We make $8 each month, totaling $20 of gross profit. Hooray, we doubled our $20 investment in five months. Wait, not so fast. Here's how it breaks down conceptually. Day zero, we spend $20 in marketing, so we're at negative 20 bucks. Day 30, we make $10 back, $8 of gross profit, but it goes towards recouping CAC, so now we're at negative $12. Day 60, we make another $10, $8 again in gross profit, still going towards that CAC. Now we're at negative $4. Day 90, we make $10 yet again, and $8 in gross profit yet again, and we are finally making money. And so we are plus $4.

• 7:47Alex Hormozi?

  Day 120, we make $10 and then $8 in gross profit yet again, and now we're at $12 in the positive. And day 150, we make $10 of revenue with $8 in gross profit, and the client cancels, sad face, and we end up with an extra 20. The business still needs to pay fixed costs like rent, utilities, software expenses, et cetera. It also needs to, you know, actually pay us the owners, which is the point. Based on the above numbers, we're looking at a hard business to grow, but it is very, very common. Notice, we don't see our cash return until month three while still maintaining and running the business. Author note, how much money you make, how fast you make it, and what it costs you to make it, all factor into your ability to create a wonderful business. Example of the solution.

• 8:31Alex Hormozi?

  Wonderful lemonade business. Now, let's say you, being the smart entrepreneur that you are, come to me and say, "There has to be a better way." I agree. Then you go read the $100 million series. Then you read it again. That quickly, you become a master of acquisition. You figure out a way to acquire customers for less money and get paid back faster. Given your newfound skill, let's imagine our cost to acquire a customer is now $1, so CAC equals $1. And we're able to pay back that $1 in seven days, so payback period is seven days. With this new model, we put our money together and spend $1 on marketing with a new channel and method. For the purposes of keeping our life simple, we decided to keep our prices and margins the same. We would make the same $8 of gross profit back that first week and $8 per month of gross profit over the next four months, totaling $40. Here's where it gets wild.

• 9:15Alex Hormozi?

  Since our CAC is so low and our payback period is so fast, we could pay back our original $1 CAC almost immediately. Then we could reuse the $7 of gross profit left from the first transaction to go get ourselves seven more customers. And from those seven, seven more, and so forth. This would be a wonderful business to grow. It's hard to envision with words, so let's break it out visually again. Day zero, we spent $1 on marketing, so we're negative $1. Day seven, we acquire a customer who pays $10. We make $8 gross profit yet again, and then we cover our CAC of $1 and still have $7 left over. So now we're plus $7. Day eight, we spend that $7 in gross profit we just made on more marketing, and now we're back to $0, but that's okay.

• 9:59Alex Hormozi?

  Day 14, we acquire seven more customers at $1 each. Each pays $10 for a total of $70. We make $8 in gross profit each, so we're plus 56. Day 14, woo-hoo. Day 15, we now have enough money to get ourselves 49 new customers. But we decide we can't possibly handle that many more customers, so we just stick with acquiring another seven. So we spend $7 on marketing in the hopes of getting seven more customers, so our $56 minus $7 equals $49 left over. Day 22, seven days later. Success! We got seven more customers from our $7 on marketing, which makes us another 7 times $8 of gross profit and another $56 of gross profit.

• 10:44Alex Hormozi?

  This is starting to get crazy. We now have plus $105 in our bank account. Day 30, we take a breather.

• 10:52Alex Hormozi?

  Day 37. We keep breathing, but realize that our first customer renewal comes up and makes us another $8 of gross profit. We didn't even have to spend anything for this. Sweet. So our 105 turns into 113. Day 44. The next seven customers renew with $8 of gross profit each. That's plus another 56. Holy cow. So now our $113 turns into $169. Day 51. A week later, the next seven renew and generate yet another $56. Man, money printing is fun. So now we went from 169 to 225. Day 60. We decide to write a book on acquisition. Joking. The example above is gross profit, not revenue. So this is money in the bank after paying all the costs of filling the customer and the cost of acquisition.

• 11:37Alex Hormozi?

  The only place this money goes is to pay fixed costs, rent, software, et cetera, and to pay us. The point. Or the money could go to grow our team. So this month, we could handle 14 clients instead of seven. This is how businesses grow without taking outside capital. So how much money did we actually spend in our marketing during our wonderful lemonade scenario? Drumroll. The answer? $1. Wait. What? Yep. We only took that first dollar out of pocket and spent it on advertising. The rest of the time, we're playing with found money. It's like gambling at the casino with a dollar, making $8, paying yourself back the original $1 bet, and then playing the rest of the time with the $7 winnings. Another way of saying it is, we crowdfunded the growth of our business using customers and a clever acquisition system. I've been playing with the house's money for almost a decade now, and by the end of this book, you can too.