Supply vs. Demand: Stop Focusing On The Wrong Problems | Ep 867

In this episode, Alex (@AlexHormozi) reveals why most business owners stay stuck. Not because they aren't working hard, but because they're solving the wrong problem. He explains how to diagnose whether you're supply- or demand-constrained and lays out proven strategies to fix each. 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 Mentioned in this episode: Get access to the free $100M Scaling Roadmap at www.acquisition.com/roadmap

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

• 0:02Alex Hormozi?

  There is an element where at some point, especially the more niche you are, especially the more higher end you are, the more you are going to be able to keep customers because your product's really good. But it's not going to necessarily grow the business. So if looking at the business from the constraints perspective, we'd be like, okay, let's pool some resources from continuing to invest in the product where we currently have no one churning. But the thing is, is that we want more people in. And so let's go get more customers. Let that dog lie. Reallocate some resources so you can let more people know about the stuff.

• 0:33Alex Hormozi?

  I'm going to show you how to grow your business so fast this year that it makes your accountant nervous. And maybe you're not growing as fast as you want right now. And it's probably because you're trying to fix a problem that might not actually exist. And so most businesses have one of two core problems, and they don't know which one they have. And so I'm going to show you how to identify which one of the two you have and how to fix it. I'm Alex Ramosi. I own acquisition.com, a portfolio of companies that generate north of 200-plus million a year as of 2024. To be clear, my results aren't typical. I'm not promising that you're going to have that experience, but I can probably help you see your business a little differently. So whenever I look at a business, I always want to understand this one triage question up front, which is, is this a business that is supply constrained? Or is this a business that's demand constrained? So here's the big idea. You can either have too few customers or too little capacity,

• 1:18Alex Hormozi?

  but never both at the same time. And so how do you know which problem you have? So a demand problem means that you have space, but not enough customers. So like a restaurant without empty tables or a calendar with open slots or, you know, products sitting on shelves. You built it, but people aren't coming, right? So a supply problem would be different. It means that you have customers, but not enough capacity. So you have waiting lists. You have to turn people away, or you can't make products fast enough, or you can't take on new clients. They're coming in, but you can't serve them all. And so how do you know which problem you have? And so here's the simple test. If you doubled your ad budget tomorrow, or you doubled your outreach, or you doubled your content, would you be able to double your sales? Or would you just create a mess that you couldn't even handle? So if you create a mess, then you have a supply problem. If it would double your sales, then you have a demand problem. It's the difference between businesses

• 2:03Alex Hormozi?

  that grow and those that don't isn't just the hard work, but it's working hard on the right problem. And so as Warren Buffett says, there's nothing worse. Than doing well with something that shouldn't be done at all. So I'm going to give you a number of businesses that are constrained and give you some examples. And then you need to figure out which category you think it's in, supply or demand. So maybe the first one. So think about a consultant who's completely booked. So full schedule, three months ahead, working 60 hours a week, always stressed out. Yet despite all the work, his or her income has stopped growing. Right. So what does he do with this little free time? Well, he makes more content, he runs more ads and he tries to get more leads. He's trying to fix a demand problem that he doesn't have. He has a supply problem that could also be a pricing problem. So which is it? We'll dive in. So you might think, wait, that's crazy.

• 2:48Alex Hormozi?

  I need more clients to make more money. That consultant might think, and this might be you too. But what if he tries something different? So he has three options. So number one is he can just raise his prices by a lot. And so most people, when they raise their prices, they're like, I might add. I literally had a phone call earlier today. Someone said they were going to add a quarter, like 25 cents to their shipping. And they were like, holding their breath. I'm like, bro, like add $3 and see what happens, right? Like it's just, just, most people are so afraid of raising prices because they're afraid they're going to lose their customers. But if you're in a supply constrained business, it is one of the primary paths to fixing it. So if you're going to do it, raise your prices by a lot. We're talking 50%, 100%. So singles, doubles, in terms of how much more you raise your prices. The second thing you do, and I'm going to explain how, how, how, how this kind of plays out in a second.

• 3:32Alex Hormozi?

  The second thing he could do is create basically a, change the service to delivery ratio. So instead of having just one-on-one services that are being rendered, he could do one to many or one to small group. Right. So he changes how many customers he can take on personally. Right. And the third is that he just hires and trains other consultants. Right. So he keeps the ratio the same, but he just adds more headcount to his business. And so there's basically the three things that he can do to solve the supply constraint. Now, he might be afraid to raise prices that much and he might be like, oh my God, I'm losing all my clients. But what's actually going to happen? So let's play it out. So let's say about 30% of his clients leave. Right. But if he doubled his prices and 30% of his clients left, he'd make more money while working with fewer people. And so here's the double, the double, double benefit of this is that number one,

• 4:16Alex Hormozi?

  he makes more and he services fewer. So he also frees up time. It literally hits, kills two birds with one stone. He literally makes more money and has more time, which is why if you want to supply constraint business, pricing was one of the strongest levers that you should consider pulling and usually a lot more than you think you should. All right. And now here's the secondary, here's the, or rather the tertiary benefit of doing that. Now that you have that extra time, guess what you can do? You actually have time to create even more capacity. And so if you need to have time to say, okay, you know what? I'm going to increase my service delivery ratio, right? I'm going to figure out what tech I need to do so that I can expand my, you know, how many people I can take on. Or I'm going to create a training system so that I can bring on new consultants and I can bring them on faster so that they can start taking on clients for me. In either of those situations, the net result would be he'd make more money per hour

• 5:01Alex Hormozi?

  and bringing this extra leverage in would multiply that. And so by doing this, he's fixing the real problem, which is supply, not demand. And so he could double his income, working 15 fewer hours a week and then double it again after he has brought in more consultants or expanded the ratio. And so the main lesson here is that sometimes the path to growth isn't more clients. It might be better clients. So if you have the opportunity, instead of trying to work harder, appropriately charge what the market is saying they want to pay you and you're the one getting in the way. So that was a simple one. Let's do, let's, let's ramp it up a little bit. So second example, think about a software company, right? So imagine a software company that's, that helps service businesses, schedule appointments. All right. So the CEO proudly shows off all the new features that they're building and they're like, our product's going to be the best.

• 5:44Alex Hormozi?

  And he's like, no one's can match us, but looking at their numbers shows something very different, right? So people who try their product, love it and customers stay a long time. The product works great, but they're still not growing. So what's the real problem? They spend only 5% of their money on marketing while their competitors spending 20 to 30%. And so they built a great product, but almost nobody knows it exists. They're fighting against irrelevance. And so they have a ding ding ding, demand problem, but they're putting all their money into the product. And now this can be tricky because of course you need to continue to improve the product. And if you keep improving the product, you might get to a point where the word of mouth alone can bring you in more customers. Now, the big, the big question mark on this one, and I want to make a clear point here, and this is something That it took me a long time to figure out is that I've been on both polar extremes here where I'm like, marketing is the only thing that matters. Everything else is irrelevant.

• 6:29Alex Hormozi?

  And on the other extreme, it's like product is the only thing that matters and the product is good enough, then you shouldn't need marketing. The asterisk is you need to have a product that the customers of that product have high surface area exposure to other people that could use that product. So let me explain. So if Facebook, for example, is for people. And so if you talk to other people, you have something that you can refer them to. But if you're in a super hyper, like if you're like, I do IT consulting for Fortune 100 companies. The likely that you're going to get like referrals from that, I mean, you can, but it's not like you're going to get viral growth. I mean, for sure, word of mouth is going to be a part of it, but you're probably going to have to go out and get business. And so there is an element where at some point, especially the more niche you are,

• 7:13Alex Hormozi?

  especially the more higher end you are, the more you are going to likely be able to keep customers because your product's really good, but it's not going to necessarily grow the business. So if looking at the business from the constraints perspective, we'd be like, okay, let's pool some resources, cash flow, talent, from continuing to invest in the product where we currently have no one churning. Right? So like, no one's leaving. Everyone loves it. But the thing is, is that we want more people in. And so let's go get more customers. Again, I'm not saying make your product bad. I'm saying let that dog lie and then reallocate some resources so you can let more people know about the stuff. Because if the product is that good, then you might be able to just double the customers in just a few months without even changing the product and people continue to stay and pay.

• 7:56Alex Hormozi?

  And fundamentally, we have this big misconception that the harder we work on something, the better it necessarily is. But oftentimes, products get way worse through addition. And so oftentimes, you can improve a product a lot by just deleting things. And from a service perspective, if you have a service business, just letting the team work. Right? Because the constant change oftentimes actually erodes the product quality and the service quality more than the incremental improvement you think this new change is going to create. And so some of the best years of of different businesses that I've owned have been when I'm like not super involved with it because of like, hey, I've already done the thing. Let them just keep getting better at sales. Let the team get better at onboarding. Get better at customer success and just don't mess with it. Just let the natural improvement of humans improve the performance of the business.

• 8:40Alex Hormozi?

  So in this particular business, the founder would likely take their free time and put all of it into getting more customers. And they'd have to just figure out, am I going to run ads? Am I going to do outbound? Am I going to do affiliates? Am I going to make content? Which of these strategies am I going to use in order to get more people in the door? So let's walk through example number three. Let's say you're a brick and mortar restaurant, you serve food. All right, so imagine, and we actually had a business house out here, two hour waits on Saturday, right? But they're empty on a Tuesday afternoon. Same business, different problems, depending on how you look at it. And more importantly, when you look at it. So let's imagine the steakhouse, let's just call it a steakhouse, loves marketing, right? And he keeps saying, we need more ads, we need more specials, we need more customers, right? And so he's spending thousands on ads every single month.

• 9:25Alex Hormozi?

  But this is the twist. On Saturday and Friday nights, people are waiting 90 plus minutes for a table. And they gotta turn people away at the door. And so more marketing would just mean more angry people who who got dressed up, pulled up to the to the restaurant they wanted to go to and can't get in. So here's three different ways that we could solve this potential supply issue that only happens on certain days. So number one is we could just raise prices on Friday and Saturday. So you give a different menu for weekends than you do during weekdays. And that extra increase could have a dramatic effect on the business. Restaurants typically run lower margins than most businesses. So let's just say they run 10% margins. A 20% price increase would triple the profit on those two days. But here's where it gets kind of nasty.

• 10:08Alex Hormozi?

  If those two days, Friday and Saturday, were half the revenue of the business is being generated, then you one and a half X the profit of the business just from increasing the prices in those two days. But what are some of the downstream effects that happen from that? Well, if people know that on the weekends, it's a little bit more, what happens to that demand? He's good at marketing. Some of them might not come, but a certain percentage would be like, I love this restaurant, but I don't want to pay extra for it. So all of a sudden, I'm going to spread during the week. And so what we do is we actually spread out the demand to meet the capacity. Now, what are some other things that the restaurant owner could do? They could let people pay extra to skip the line. This wouldn't necessarily solve the constraint. But it would make the business more money. Or they could just stay open later because they might find out they're like, hey, you know what? We close at nine, but we still have lines. It's like, all right, well, let's close at 11. Right?

• 10:51Alex Hormozi?

  And so the result is if you just did, I mean, shoot, if you did all three of those things, if you had an increase of price on weekends, you're literally going to make more if no one else came the rest of the week. But some of that demand is going to reroute and you'll also catch sales over here that you were otherwise turning away. Telling people they can pay to skip the line either through a membership or just literally just paying at the door in order to do so would even further because it's all margin. Right? All margin to the bottom line. And the third piece is that if they're staying later, this would even further allow them to capitalize on the demand that this really good marketing owner generated. Real quick, guys, I have a special, special gift for you for being loyal listeners of the podcast. Leila and I spent probably an entire quarter putting together our scaling roadmap.

• 11:36Alex Hormozi?

  It's breaking scaling into 10 stages and across all eight functions of the business. So you've got marketing, you've got sales, you've got product, you've got customer success, you've got IT, you've got recruiting, HR, you've got finance. We show the problems that emerge at every level of scale and how to graduate to the next level. It's all free and you can get it personalized to you. So it's about 30 ish pages for each of the stages. Once you enter the questions, it will tell you exactly where you're at and what you need to do to grow. It's about 14 hours of stuff, but it's narrowed down so that you only have to watch the part that's relevant to you, which will probably be about 90 minutes. And so if that's at all interesting, you can go to acquisition.com/roadmap. R O A D map, roadmap.

• 12:19Alex Hormozi?

  Right? And so we're talking like 100% increases in profit, sometimes more just from three small changes. And the real reason is that originally he was like, we need to market more because we're not busy during the week. And all he was doing is just keep jamming more into Fridays and Saturdays where he was capacity constrained. But by solving the right problem, he actually can unlock the growth in the business. And if you're in one of these positions, let me give you a little tip. People hate getting prices raised on them. Of course they do. But what can you do that actually has the same net effect to the business? Well, instead of saying weekends are 20% more, you can say weekdays are 20% less. People are happy to get a discount and then pay normal on Fridays and Saturdays. So it's all how you frame it.

• 13:02Alex Hormozi?

  And so if you're in one of those businesses and you're thinking about how you want to do it, think about it like that. All right, so let's do a different one. Let's do example four, so online business. So let's, uh, let's imagine this is an online fitness, uh, equipment store. All right, uh, during COVID. All right, so home workout boom, everybody, you know, all the stores are empty, right? And so overnight, overnight their sales go up 4X, right? It sounds amazing. Well, for anybody who's in, in some of these businesses that had disproportionate demand during that time, pain is pain. I'll just say it that way. You would prefer to sell out and have that pain than have no one buying. So if I had to pick, I'd rather be supply constrained than demand constrained, but both suck. All right, and so back to the example, they sell out of everything. Their suppliers can't keep up. But instead of focusing all their energy on getting, uh, more inventory and improving their supply, they keep running ads, right?

• 13:46Alex Hormozi?

  They keep marketing, they think, ah, we just need to ride this wave. Maybe we'll pre-sell, we'll keep selling more and more. Well, the result is that shipping times go from two weeks to eight weeks. Bad reviews start pouring in. Customer service gets swamped, angry emails. And all they end up doing is just making the problem worse with each new sale because they aren't fixing the real issue, obviously, which is supply. Now, once they realize this, if they were to actually tackle the problem, there's basically only two core things that this business owner could do. Number one is sell something different. Number two is going to be increase the supply of the business. So I'm going to break that down. So the sexy thing to do would be say, okay, we have all these customers that just bought our products from us. Is there something that's intangible that we can sell them that we're not going to run out of, uh, to immediately generate more cash flow?

• 14:28Alex Hormozi?

  And maybe that cash flow could help us pay our vendors more aggressively to put us at the front of the line. Now, somebody might hear this and be like, what? A vendor would, would skip a line? Lines are as old as time, right? They are the only fair system in the world. No, of course you can pay to get at the front of the line. You say, hey, if I paid you 20% more, do you think you could put my stuff first? Of course, right? Money talks. And so how would you generate this? So I'd be like, okay, I've got this fitness equipment. Maybe I go reach back out and Sell a warranty with it. Maybe I talk to a couple of fitness app developers. And I say, hey, you guys have a product. I have all these customers that just bought this thing. Do you think I could white label your thing or just do some sort of affiliate deal? Or I can sell your product to my audience. Right? In each of these situations, the affiliate deal, I'm tapping into somebody else's supply.

• 15:12Alex Hormozi?

  Right? And say, cool, you've already got supply. Well, let me sell through my distribution. Alternatively, I have my distribution. I could sell an insurance product, something like that. That doesn't really have, there's no supply associated with it. I could maybe sell some services on top, be like, hey, are there other things that you're looking at? Are you thinking about getting flooring? Are you thinking about how you want to design the gym? Do you want to decorate the gym? Like, these are all different things that we could sell to that existing base, rather than continue to bring more people in. Who, even if they had the money, we can't deliver on the core service. So in all of those situations, these are ways you could easily generate the cash to then have leverage with suppliers or reinvest in the supply chain so that you could get your stuff to you faster. And the nice thing is, is that this, this sounds obvious and yet no one does it. And if you look at some of the biggest e-commerce companies in the world, or just physical product businesses,

• 15:56Alex Hormozi?

  they have very dialed supply chain. They have multiple vendors. They have multiple kind of points of failure, or rather not, they have redundancies to eliminate single points of failure within the system. And I was, I was talking to a friend of mine who's looking at buying a very large supplement company that you've heard of. And one of the big things that he was able to do is like, one of his core competencies is that he bought, he has an amazing supply. And so he gets his raw materials and he buys better than just about anybody else. And so if you're like, oh, I've just, it's supply chain issues. It's like, that's the core of the business. Right? Like, if you're at a physical product business, supply chain is, it's the constraint. Oftentimes, as soon as, if you have a great product, it will become the constraint. Or if you're good at marketing, it will become the constraint. And if you want to succeed at product businesses that are physical, you gotta get good at both of those things. So this is the business you're really in. And I want to be really clear.

• 16:40Alex Hormozi?

  This is definitely not me advocating for you having women in the red dress. In this very hypothetical scenario of somebody is in COVID and they can't do anything else. They need to generate cash so that they can move things forward. I'm okay with what I would consider like one time or short-term options that you can generate cash in the business. It's the reality of business. Sometimes you gotta make those plays. Rather than saying, oh, we're gonna start another business. And that's why with each of those things, they're not like, oh, we're gonna, maybe the, maybe the decoration thing, that was a little bit much. But like, the insurance product or white labeling someone else's thing? Both of those things don't really require to do much more than just introduce it to your existing base. Sell them, take the split, take the cash, and then reinvest in the thing that actually is limiting the business. If you're hearing this, you're like, well, that's, that's nice for a consultant. That's nice for a restaurant. That's nice for an online store.

• 17:23Alex Hormozi?

  But my business is special. I'm a home services business. This couldn't possibly apply to me. So let's say you're a plumber, right? And you're running Google PBC and you're booking, you know, every slot out in your calendar. And your vans are always on the road, right? And technicians are, are working overtime. And even with the overtime, like because you gotta pay time and a half, or whatever your overtime rates are, profits are starting to compress. So it's like, wait a second. It's like, we're fully booked and we're just not that profitable. So this particular owner might think, oh, I need to get more customers or I need to get more technicians. But if we look under the hood a little bit, and this is common, it actually isn't either of those things. You're like, wait, what is it? Well, let's walk through it. So we might find out that their plumbers finish the jobs quickly,

• 18:07Alex Hormozi?

  but they rarely offer additional services or upgrades. They're not selling them into the membership on a long-term basis. They're not looking for a repair schedule that they're going to come back. They're not looking or asking for the other units in the house if they need, need to take a look at those two. And so the thing is, is that they have a supply problem with their sales skills, rather than how many jobs they can do. And so if the exact same number of customers could get sold twice the services, but they're already there, right? It only takes a little bit more time for them to do the delivery. It's, they could basically better utilize their existing supply to increase revenue and profit within the business. And so what we're actually diving deeper into is that there's basically this mondo decision tree

• 18:49Alex Hormozi?

  that ends up, if you've seen any of my Cash Guys episodes, or Mosey Tank, whatever I decide to call them. The first thing I typically look for is just the supplier demand. Once I'm, once I'm in the, okay, maybe it's a demand issue, or maybe it's a supply issue. We start diving deeper. It's like, okay, well, maybe they're mispriced, or maybe they don't have enough talent, or the existing talent there isn't selling enough per job, or per, you know, basically average cart value isn't high enough. And because of that, this particular owner can't spend to get more customers. He can't spend to get more technicians. So what do you do in that situation? I can't spend to get more of either because profits are thin. Well, we have to either raise the prices, but if they're competitive, then it's like, well, then maybe we just sell more work. And so fundamentally, this is how you dive through and start diagnosing some of the issues within a business. But the actual constraint, like what would this owner have to do?

• 19:32Alex Hormozi?

  Well, they would start teaching their plumbers simple sales skills and give them a two, three line script that says, once you finish this, ask them if they want this. Right? They'd role play back and forth every morning they'd meet. They see what percentage of people they upsell to a second job. And all of a sudden, they're like, wait. We're up selling 50% now to another job. Well, guess what happens to revenue? Goes up by 50%. Guess what else happens? If costs remain just about the same, a disproportionate amount of that revenue drops to the bottom line. And most businesses that run paper thin margins of what I would consider established industries are just missing a core part of the business. And so they're doing like step one and not step two. And because of that, step two is where all the profit is. So I'll give you a different example. So I had a business who came out that was doing some sort of enterprise software for like commercial buildings. So something cleaning and efficiency related.

• 20:16Alex Hormozi?

  I can't remember, but I do absolutely recall why the business was stuck. Now, this founder had been stuck at the same revenue level for years, like eight years. He could not crack the server level. And so what we did is we looked at basically all the metrics of the acquisition funnel. And so he had an outbound method because there's only, you know, he had lists of what, uh, what commercial buildings were in the area that he could service. And, you know, I went through it. I was like, okay, how many of these are, you know, reach outs you're sending a day? What's the messaging? And all that stuff sounded good. And it was like, okay. So how many demos are you doing, you know, per week of your, you know, product or service? And he was doing like 10 a week. And let me put this in context. He'd closed two new deals that year. I was like, wait, hold on. 10 demonstrations a week and you're closing two a year? And he was like, yeah.

• 21:01Alex Hormozi?

  Like, so you're closing two out of 500 demos. He's like, well, when you say it like that, it kind of sucks. I'm like, well, yeah, it kind of sucks, right? But the thing is, is that in this particular instance, they weren't really even demand constrained. They were basically, I mean, they are functionally demand constrained, but the issue was not actually the amount of people who said they were interested in the product or the number of reach outs they were doing, or even the scripting of the, of the, of the conversation they're having. They just couldn't close. And so the leaders were like, when, when they, when they came to talk to me, they were like, hey, I think we need to hire more salespeople. And the little, the plan was to double the sales team. Right? So they're going to double the sales team because they're like, hey, we listen to your stuff. Do more like we're double the sales team so we can double our sales. I was like, my God, let's not do that. Let's just figure out how we can get 500, 500 demonstrations turn into 100 deals instead of two. It's a 50X right there.

• 21:46Alex Hormozi?

  And this is an unbelievably valuable business. And the reason they've been able to stay at that, at that level is because they had like 98% revenue retention. I mean, like no one ever left the business because it was such a Complex thing that they were establishing and setting up. And so the thing is, is that right now, if you look at your process, you might find that you're like, oh, actually, we have plenty of leads and people are scheduling calls and they are showing up, but they're just not buying, or they are scheduling and they're not showing, or they're opting in, but they're not scheduling. And so you might have this massive leak in your existing demand process that creates the demand stream drain. And then people mistakenly think, oh, I think I'm going after the wrong market. Or, oh, I think my, my ads suck, or, oh, I think, um, you know, the targeting is off.

• 22:27Alex Hormozi?

  But if, if people are the right type of people that are opting in, we have a sales process problem. That's where the demand leak is happening. And so rather than say, oh, let's double our ad spend or let's double our sales team, like, we gotta fix the problem. So after I dug into the business a little bit more, I'll tell you where the actual real nugget was, was that they were presenting to the wrong people. So the way this particular business worked is that they had people who owned the buildings, who wanted to save money, and then they had building managers, the guys who actually like ran the buildings. And those were not the same person. And so they have something called the principal agent problem, which is basically the person who has to do the work for a person who makes the decision are two different people. And so all the owners were like, yeah, go save me money. But then when it got to that, the manager of the building, they were like, I don't want to do any more work.

• 23:10Alex Hormozi?

  Cause all this meant for them, they're not going to get paid more. And they had the decision-making power, even though the owners were the ones who were writing the check. And so basically what we did was we re-scripted the process to essentially elevate the status of the manager and make it all about them. And so basically it's like, just like, what, what business are you really in? It's what customer do you really serve? And so that was kind of the million, in this instance, probably $10 million plus question that we got to answer with that business. And so by simply redefining that sales process for that specific avatar, that is what unlocked growth. So let's go completely other direction. Let's say that you're an online course creator, you're a YouTuber, you sell some sort of digital product, all right?

• 23:56Alex Hormozi?

  And let's say that you've got students, you've got high completion rates and you get great results and people leave great reviews. Okay. Here's the problem. They're breaking even. How could this even happen? When you have a product that costs you nothing. This particular guy thinks, oh, the problem's marketing. So he keeps spending more on fancy funnels, paid ads. But every time like a new customer comes in, they barely make any profit after they recruit ad costs. So what's the real problem? Is that, well, there's a number of things. So let's break down each of them. So either he's priced too low, right? So oftentimes you'll find that you can double price and maybe, you know, sales might go down by 15%. If that happens, then it's like boom, we fix the business just with that one pricing issue. Sometimes it could just be the ads suck, which is a real one, right? The ads suck or the ads are good, but they're outdated because they're not making sufficient ads.

• 24:41Alex Hormozi?

  So it's either a quality of ads problem or a quantity of ads problem or both. You could also have a funnel issue, a conversion rate optimization problem, which is like the headlines and the way that the pages are actually laid out don't actually make sense to convert traffic. And so this actually, I had this with an HVAC company not that long ago. They were running their traffic to basically their homepage. And it worked kind of. But if we just ran it to a page that was dedicated to collecting information so that we could get people to get on the phone and then buy something. Like this is where you see like 3X, 5X, 7X increases in a business from one clear drop off point. So let's just play this out with this course creator. So if he tried raising his prices from let's say $1,000 to $3,000 for his main course, people around him might think he's crazy.

• 25:25Alex Hormozi?

  No one's going to pay that, you know, whatever, right? But what would actually happen? So sales might drop by 15 or 20%, which would mean his revenue nearly triples overnight. But then by creating a high end version for $10,000, which another 10% of the market might happily purchase, he might get another $1,000 per sale. So he goes from $1,000 to $4,000 total per sale. 10% times 10,000 is an extra 1,000. We had 3,000 is the new change. And that almost made up for the sales drop that he had in terms of number of units. And so same content, same marketing, very different results, all because he found and fixed the actual problem of the business. Now, let's say alternatively, in his special snowflake market, he can't raise the price. Fine. So in this instance, we say, okay, well, what UGC or what user generated content are you, you're currently putting out? He also makes his own content.

• 26:10Alex Hormozi?

  We're like, okay, well, what are your best performers? These ones. Okay, why are your ads not those? I just thought they had to be different. Take your best organic content out of five second CTA at the end, run it as a paid ad, especially if you know that some organic content has generated sales. Do more of that and put money behind it. At the very least, if you're looking at your process of how people are getting into your business, for the love of God, make sure that when you're sending traffic to a page, it's actually structured to convert the traffic. Like you sending people to a beautiful homepage, have the beautiful homepage, but that's not the first thing they're gonna see. Get their information and then give them the thing they want and then they can go and, you know, peck around the site, look around. The thing is, is that they'll have time to look at it later.

• 26:55Alex Hormozi?

  But right now, we need to convert because people have very large motivation for very short periods of time when they see marketing. And in that very short windows, we need it to maximize. So it's a supplier demand constraint. Well, we're talking about raising his prices, but isn't raising prices what we do when we have supply constraints? Right? Cause you raise the prices, then fewer people buy, you create space and you also create profit. Well then, why would we raise the prices when we have a demand constraint? Because we can't afford to get more customers. And so we need to raise the prices so that we can spend more money in ads, so that we can get more customers. Because fundamentally, could he, if we're answering the question, could he 2X the number of customers you're handling? Well, yeah, it's a course. It's very easy to get a login. The delivery is not the constraint of this, of this particular problem. And so even though we have a demand constraint, we might have a similar solution to a supply constrained business.

• 27:39Alex Hormozi?

  So I'll give you, I'll give you guys a little, a little insight. My website, acquisition.com, I think is hideous. And I get people DMing me every day, be like, I redesigned your site for you. And I'm like, thanks for that. And the thing is, is that could my site be improved? Yes. The resources required to redo the site, it's gonna be such a pain in the ass because every single apartment's gonna have their own two cents of what they think it should look like. They wanna, you know, we have to approve, we have to make, we're gonna have to make hundreds of decisions on something that I then say, okay, with all of these decisions and all of these resources, is there something else we could do that would grow the business more? And oftentimes, the answer is yes. And so for me, I've had notoriously ugly home, homepages. Because at the end of the day, they typically convert fine.

• 28:23Alex Hormozi?

  And even though I'm like, oh my God, this is so ugly. I just deal with it because at the end of the day, it's not the constraint. And so I would say more times than not, and like you hear this and it seems obvious when you're looking at someone else's business. But when you look at your own, what you end up doing is you spend all your time doing the stuff you love. Because you love it, but the business might not need it. And so you spend all your time solving problems that don't need to be solved. And investing resources, the very limited resources you have as a small business owner, towards problems that simply increase capacity, towards problems that simply increase potential, but not throughput. Let's say you've got four lanes, one lane, and then four lanes, right, on a highway. Okay, well, if I take this one from four lanes to five lanes, is the traffic going to go faster?

• 29:04Alex Hormozi?

  No, but this is what happens when you improve your website for no, and you don't get any increase in throughput in terms of your, uh, your, your, your front end optimization. Like, you don't have a higher conversion rate because of that. You can't handle more customers because of that. And so all you did was you just spent time and money to increase potential. So with this business, is it a supply or demand constraint? Well, this one is a demand constraint, but less so that they don't have strong enough marketing, they didn't have strong enough sales. So the process itself, and more specifically, they're almost like avatar constrained. They were trying to sell to the wrong person. They were convincing the business owners all day long, but the problem was the business owners weren't the ones making the decision. The guy, the foreman of the factory, the guy on the floor was the one who was making the call. So he's the real customer, which means chunked all the way up? Yes, it's a demand constraint. So let's do the next example.

• 29:49Alex Hormozi?

  Let's say that you can vibe code because of Cursor that came out. You're like, I can make an app in two seconds, right? And so this made up mobile app company shows, you know, if you build it, they will come, right? It's the most dangerous myth in business, right? And so imagine that company has built an incredible product that's easy to use, all right? It's the tech team is world-class, the app's fast, it's beautiful, it does all the good stuff, right? But user growth is painfully slow. So they would only have a few thousand users when they really need millions in order to make this business model work. Now, you might be like, thousands and millions, oh my God, I would just want my first 10 customers. Everything that I'm talking about right now applies, just add or remove zeros, but the same concepts apply, all right? So let's say the founders are blaming the product. They're like, maybe we need more features, right? Maybe it's too hard to get started. And so they're fixing the wrong stuff. And so the app isn't the issue, awareness is the problem, right?

• 30:34Alex Hormozi?

  They're spending almost nothing on marketing and relying instead on word of mouth. And so they have this serious demand problem, but they're putting all their effort into product. And so they've shifted that focus to the right part of everything could change. So let's, let's walk through what they might consider. So number one is they could probably optimize their App Store listing. So if you convert a higher percentage of traffic, then a couple of things happen. One is that you get ranked higher because your sales velocity goes up. But also, Apple also push you more traffic, right? Because they get a percentage. So they want the highest converting products to be on the store in the highest and most prevalent positions so that they make the most money, too. That's just organically. On top of that, they could pay for user acquisition. They could take some of that extra talent that they're focusing on the backend and say, "Okay, well, how do we maximize downloads and activation?" Right? They could go for an affiliate play and say,

• 31:19Alex Hormozi?

  "Okay, what apps already exist that serve this exact market? Is there a way we could run a banner ad on somebody else's product?" Which absolutely exists. You could run into, there's tons of app platform marketplaces where you can buy those types of ads. Right? On top, they could just build this really strong referral program, depending on the nature of the product. And so in each of these ways, these would be things that they could do to capture more demand on the front end, rather than be like, "Okay, well, no one's leaving, and everyone loves the product we get reviews, but it's still not growing fast enough." And so, within a year, if you just shifted all that effort there, the user base could grow 20x larger, right? Or 100x larger, whatever. Because the product was good enough. They just needed to solve their real problem, which at the time is demand. Now, let's wrap this together. Is it always a supply or demand constraint issue?

• 32:04Alex Hormozi?

  The answer is yes. But it's not always going to be the same one at the same time. Meaning, as soon as you solve a demand constraint, guess what happens next? You have a supply constraint, right? And then you'll solve your supply constraint and be like, "Okay, finally, we got all of our inventory back in place. The warehouses are full. We're not running any ads. Oh, my God, now that the fitness equipment is back in place, it's like, oh, my God, we gotta spin this up. Now that we just hired four more accountants, now we can take on more clients. Oh, wait, we don't have any more clients. Now we gotta go get them." And so, it's this accordion, this back and forth that happens. It's the natural flow of business. But when people get stuck, it's because they stayed working on the demand constraint after the demand constraint went away and it became a supply constraint.

• 32:48Alex Hormozi?

  This ping ponging, this back and forth, and the lack of awareness of the founder realizing that the constraint has moved in the business is why businesses will get stuck for years. And so, if you have been stuck for a long time, it's not that you're an idiot. It's not that you're doing something wrong. It's likely that you started solving a constraint. You solved it, and you solved it so well, you created another one, but you didn't switch where your attention was being allocated. And so, if you're like, "Okay, well, where am I at today?" Here's an easy battery list that you can kind of walk through. So, first, answer these questions honestly. If more customers showed up tomorrow, could you serve them? Well, at the, at the standard that you want. Yes or no? Two, are you turning away business or putting people on waiting lists? Yes or no? Are your most profitable time slots or products always sold out?

• 33:34Alex Hormozi?

  Yes or no? Do you run out of inventory or have, or have long shipping delays if you're in physical products? Yes or no? If you answered yes to any of those, you likely have a supply problem. And so if that's you, this is what you focus on. The easiest one first is raising prices, right? It's the fastest fix for a supply problem. The second thing is that you could add capacity. Right? The next is that you could just clean up operations. This means you get leverage for the existing people. So it's like, how do I get my one person to be able to deliver for three people instead of one on one? Right? This then creates tech systems behind that. Now, there's three ways you can solve the constraint on a service business outside of pricing. Number one is technology, as in this tech allows one person to do five times the work. Great. The second is training.

• 34:16Alex Hormozi?

  So I got this person who's a level B talent to become level A talent and they can now do five times the work. The third is that you then just bring somebody else on at the same B talent and you just have twice the Bs. Right? In each of these situations, beyond pricing, these are the doors that we would knock on to feel like, okay, which of these is right for our business right now? Now, once you do that, let's say you solve that supply constraint. So you know what? I, I got my, my, my onboarding and training system for getting, you know, new, new people up to speed. And now I can do twice as much per account rep. So whoops, now we have a demand issue. And so if you answered no to those questions that I have, the things that you'd be focusing on, obviously fixing the acquisition channel. So it'd be like, either I have to do some sort of outreach, some sort of affiliates, some sort of ads

• 35:01Alex Hormozi?

  that you're going to have to run, or some sort of content strategy or combination of those that then generates the first level of demand. But you still have to convert that demand. If you're getting those people, but you're not turning them into sales, you have a sales constraint. Right? This is all demand side, but you have to look at your own business and be like, which one of these is it? Now, you are getting on those sales calls. It's either like, you don't know how, like, like fundamentally, you're going to have a people problem. The people suck and they're not following the process you have. You have a process problem, which is the process itself sucks and is selling to the wrong person, the wrong thing at the wrong time. You have an offer issue, which is like, you're getting in front of the right people. And you're getting front of the right time, but the offer you give them is not compelling. Or price doubles on both of these constraints. You might be doing everything right, but you're just not charging enough. And because you're not charging enough, you can't spend enough on marketing to get their people in so you can be profitable.

• 35:46Alex Hormozi?

  And to double click into the advertising and sales side, there's the advertising of like how you're generating the demand. And then there's the technical component of like, how are we capturing leads? Right? Now, the way you capture leads, and this sounds like a very small thing, is huge. Because the way you lay out your landing page, the headlines you use, the images you use, the copy you use, the lead magnet. If you have a lead magnet that you give away, something free, the assessment, the call, whatever it is that you're giving away, the benefit for them taking the next action. That might just not be good enough to convert a higher percentage of the traffic. So here's the trap. If you fix the wrong problem, it actually not only wastes money and time, it often makes it worse. And this is why so many business owners are like working their faces off and in so much pain. Is that the constraint switched? You didn't switch what you were doing.

• 36:28Alex Hormozi?

  And by succeeding really well at the thing that's no longer the constraint, you're actually further straining the system. And this is really hard, and this is me personally, I've almost always been able to out advertise any business I've ever had. I've almost always had supply constraints my whole life. And so the problem is like, sometimes, and I've had to learn this as an entrepreneur, sometimes I just have to take a step back and be like, we're just going to let less marketing or mediocre marketing or mediocre conversion continue? Because even if I fix it, it will literally make my business worse. And even though it breaks my heart to have leads not get followed up with sometimes. It's just like, we can't even take them on if we could. And that's ultimately going to hurt my reputation more than not following up with a lead. So if you have a supply problem, more marketing creates chaos and unhappy customers. If you have a demand problem, better operations isn't going to help much when there's no one to serve.

• 37:13Alex Hormozi?

  Right? And so the most successful businesses I've ever worked with, I've invested in, keep finding and breaking through their current problem, their current constraint, and then moving on to the next one. Because this is not a one-time fix, it's a way of thinking.