Why Small Business Owners Always Undercharge — Transcript

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1. 0:00gross margins. So, gross margins are
2. 0:03wildly misunderstood, which is
3. 0:04interesting. Um,
4. 0:08if you are if you are a business owner,
5. 0:10you you have to learn the language of
6. 0:12business. All right? It is it is for
7. 0:14sure. There there are different
8. 0:15languages, but there's there's not a
9. 0:17huge amount of words that you have to
10. 0:18know. You might need to know like a
11. 0:20hundred terms. And think about this as
12. 0:22like you were studying for a test,
13. 0:23right? Like learning a 100 terms, not
14. 0:26that hard to understand. And it almost
15. 0:27all of them are relationships between
16. 0:29two things. That's what almost all of
17. 0:31these terms are. So what is gross
18. 0:32margin? It's one word that's a
19. 0:34relationship between two things. How
20. 0:35much you charge and how much it costs
21. 0:37you to deliver the thing. And the
22. 0:39difference between those things is your
23. 0:41gross margin. To be clear, that's not
24. 0:42your net profit margin, which is a
25. 0:45different ratio, right? Between two, not
26. 0:47necessarily ratio, but the difference
27. 0:48between two different numbers, right?
28. 0:49But your gross margins are very
29. 0:51important because it is what dictates
30. 0:52everything else in the business. So what
31. 0:54do I mean by that?
32. 0:56If you like your net margins cannot
33. 0:59exceed your gross margins. Think about
34. 1:02that for a moment. If you have if you're
35. 1:04like, "Man, I'd love to run a 50% net
36. 1:06margin business." That's an amazing goal
37. 1:08and I love that goal for you. If your
38. 1:10gross margins are 50%, that means that
39. 1:12you can have literally no other cost
40. 1:14besides the thing you sell in the entire
41. 1:16business. You can't have any cost of
42. 1:17acquiring customers. You can't have any
43. 1:19fixed overhead. You can't have any
44. 1:21employees that are not specifically in
45. 1:22delivery. You can't have any admin, any
46. 1:24help. Of course, now the likelihood of
47. 1:26of you getting to a 50% margin when you
48. 1:29have 50% gross margins is basically
49. 1:31zero. And so this is why and and
50. 1:34traditionally small business owners will
51. 1:36undercharge because they sell out of
52. 1:37their own wallet, right? And they sell
53. 1:39out of their own wallet in two different
54. 1:40ways. They sell out of their own wallet
55. 1:42because they don't have that much money
56. 1:45and so they feel bad charging other
57. 1:47people when they don't have much money
58. 1:48because they're like, "Man, I get what
59. 1:49it's like to struggle." And I think
60. 1:50there's nothing wrong with that. is just
61. 1:51understand the business is not going to
62. 1:52grow and you're not going to help more
63. 1:53people. The other reason they sell to
64. 1:55their own wallet is that they believe
65. 1:57that the service they deliver is not
66. 2:00that valuable because they know how to
67. 2:01do it. So to quote the joker, right? My
68. 2:05father always told me when you're good
69. 2:07at something, never do it for free,
70. 2:09right? And so the idea is that like you
71. 2:13I like if you're good at fixing cars,
72. 2:16right, you're like well it comes
73. 2:17naturally. It's not that hard. You got
74. 2:18to know where the, you know, it's like
75. 2:19it's what we do is really
76. 2:20straightforward to you. To you. But to a
77. 2:24customer, we have to sell off the value
78. 2:27of what their life would be like if they
79. 2:28didn't have this problem solved. That is
80. 2:30what we have to charge off of. And when
81. 2:32we charge off of those prices, then we
82. 2:34create more opportunity for gross
83. 2:36margin. Now, here's why this is so
84. 2:38important. Let me give you a math
85. 2:40example that will blow your minds. And I
86. 2:42always, you know, everyone everyone gets
87. 2:44harpotations when I say math. So, let's
88. 2:46just say a money example. Okay. So,
89. 2:48let's give you a money example that'll
90. 2:50get you really happy. All right. So,
91. 2:52let's say that I've got some service
92. 2:54that I that I deliver, okay? And it
93. 2:56costs me a hundred bucks a month. Okay.
94. 2:58That's what it cost me in services and
95. 3:00whatever. All right. So, if I want to
96. 3:02have
97. 3:0480% gross margins, which I said these
98. 3:06are rules of thumb. My rule of thumb for
99. 3:08services is at least 80. Okay? So, I
100. 3:11want to show you two different scenarios
101. 3:13here. So at 80%
102. 3:17at 80% this $100 I have to have $500 has
103. 3:23to be my price. Okay. At 70%
104. 3:27and I have a $100 cost. Oh god. Can
105. 3:30someone do the math on this one?
106. 3:35Hold on.
107. 3:40Um
108. 3:41God I got to do this backwards. Let's
109. 3:43see.
110. 3:47There's a there's a C. Who can do this
111. 3:49math for me? 350ish. Thanks, Leo.
112. 3:51[laughter]
113. 3:53Yes, this is live. Obviously,
114. 3:56I think it's a little higher than that.
115. 3:57Is it 400 350? Is it now? Now, now it's
116. 4:01all up. Who's Who can do this
117. 4:03math for me?
118. 4:05All right, I got to do this. All right.
119. 4:08100 equals.7.
120. 4:10Julian, you were premed. Do it for me.
121. 4:14or I'll tell you what [laughter] I'll
122. 4:17tell you what 90% looks like
123. 4:21[laughter]
124. 4:24equals $1,000. [laughter]
125. 4:27All right, where is it? Where where we
126. 4:29at? Why you jackasses keep asking? Thank
127. 4:32you. Gross salons.
128. 4:34Is it 350? Is that it? We should We
129. 4:38should know this. I feel like as a
130. 4:39collective community we should be able
131. 4:41to figure out when uh 30% okay so it
132. 4:45should be 100 divided by.3 is what it
133. 4:46should be so 100 divided by.3 right
134. 4:51is 333 thank you so that would mean that
135. 4:54233 should be 70%. Um,
136. 4:58so 233 divided by 333,
137. 5:01correct? Thank you. Okay, so 333.
138. 5:06Okay, so look at how big of a difference
139. 5:08this is, right, between these between
140. 5:10these numbers. Um, really significant,
141. 5:13right? Like very materially different.
142. 5:16And so the reason, and I'm sure somebody
143. 5:17will correct this in post, but
144. 5:18fundamentally, look at how like when
145. 5:21people are like, "Oh, well my my margins
146. 5:22are at 60%, so I'm close to 80." It's
147. 5:25like, bro, we're not even like, you're
148. 5:26in a different stratosphere. Okay, so
149. 5:29let's take this to the natural end.
150. 5:32If you have a business, let's say that
151. 5:34runs 20% margins at net margins at the
152. 5:37end of the year, what you can pay
153. 5:38yourself, right? If we say, hey, is
154. 5:41there a way you think we could go from
155. 5:4270% to 90%. Well, that that sounds like
156. 5:45it's not that big of a deal. But when
157. 5:47you go from 70 to 90, what happens to
158. 5:49the actual margin?
159. 5:51You double. You make way more money.
160. 5:54And sometimes it means a lot more than
161. 5:56that because sometimes the incremental
162. 5:57margin is all margin whereas every
163. 5:58dollar of revenue up to that point
164. 6:00covered cost, right? And so what is our
165. 6:05we make $233 here, right? We make $400
166. 6:09here and we make $900 here per customer.
167. 6:13Big difference, right? And so when
168. 6:15people hear these numbers, because these
169. 6:17numbers look similar, they think that
170. 6:19these are going to be very similar and
171. 6:21they are not.
172. 6:22And so this is why I'm so adamant that
173. 6:2580% is my minimum. I target like that's
174. 6:28my baseline. And then from like I will
175. 6:30not get into a business with less than
176. 6:3180% gross margins. I won't do it because
177. 6:34I know that I then have to run
178. 6:36everything else off of this 80. Right?
179. 6:38So if I want to have a 50% net margin
180. 6:40business, I only have 30% left. I got
181. 6:4430% to cover everything else. I got to
182. 6:46cover rent. I got to cover admin. I got
183. 6:47to cover insurance. I got to cover um I
184. 6:50got to cover uh marketing. I cover
185. 6:51sales. I got to cover everything else
186. 6:53with just this 30% so I can have 50%
187. 6:55left over.
188. 6:58Is this is this ringing? Is this ringing
189. 6:59with you guys? Is this making sense?
190. 7:02Even if it's a service based business,
191. 7:04bro, this is for service- based
192. 7:05businesses, not DN Australia. This is
193. 7:08for service- based businesses.
194. 7:14And this may this is why like
195. 7:17so ideally I like to have I mean again
196. 7:20this is minimum and I know this is going
197. 7:22to blow your minds here like I like one
198. 7:25of the first things we did when we fixed
199. 7:27gyms is we made sure the pricing was at
200. 7:29least 80% gross margins.
201. 7:33That's a service business. Now some of
202. 7:37you are like well there that's not
203. 7:38possible. Of course it's possible. It's
204. 7:40not possible when you sell a commodity.
205. 7:43If a customer can look at your thing and
206. 7:45somebody down the street's thing and
207. 7:47say, "These are about the same. I'll buy
208. 7:49the cheaper one." You sell a
209. 7:50commoditized service just like you can
210. 7:52sell a commoditized product. And so you
211. 7:54might have salt and salt and you got FSG
212. 7:57salt and whatever, you know, pink
213. 7:58Himalayan. It's salt, right? And so how
214. 8:01do we make these two things different?
215. 8:03We have to brand. It's pink Himalayan
216. 8:05versus just normal salt, right? And they
217. 8:07charge a premium for that. And so you
218. 8:09have to figure out how to reconfigure.
219. 8:11If only there were a book written about
220. 8:13how to make an offer that's
221. 8:14decommoditized so that you could achieve
222. 8:1680% or higher gross margins, that would
223. 8:18be amazing, wouldn't it? And for those
224. 8:20of you who don't know, I wrote a book on
225. 8:21this. It's called $100 million offers.
226. 8:2327,000 five star reviews. You should
227. 8:25read it. But I I want to draw this
228. 8:26because this like if you're trying to
229. 8:29figure out what's wrong with your
230. 8:30business, it's usually because your
231. 8:31margins are off. You're mispriced. But
232. 8:34again, sometimes this is this is the
233. 8:36this is the fundamental mathematical
234. 8:38problem with the business. But this
235. 8:40might really be the symptom of the fact
236. 8:41that you have a commoditized offer. A B
237. 8:44you have a sales process that doesn't
238. 8:46function properly, right? Um, and so
239. 8:50that's the that's the big idea. So if
240. 8:51you want to run a high margin business,
241. 8:53then you have to run exceptionally high
242. 8:54gross margins for whatever it is that
243. 8:56you sell. Okay, cool. That math was
244. 8:58tough, wasn't it? All right, so let's do
245. 9:01rule number eight. Rule of thumb number
246. 9:03eight, if you will. Uh, 30-day cash
247. 9:05collected. So, this is a this is an
248. 9:08add-on to the the the 30-day payback
249. 9:11period. So,
250. 9:13what is the exact amount of money that I
251. 9:15want to have collected within that 30
252. 9:17days? It's going to be COG. So, the cost
253. 9:19of delivering cost of goods sold. I'll
254. 9:22just write out cost of goods
255. 9:25sold. Now, the goods sold can be
256. 9:27services too to be clear. So it's cost
257. 9:29of goods sold how much it cost you for
258. 9:30the stuff plus cost of getting
259. 9:37customer.
260. 9:39Okay. So if we have the cost of getting
261. 9:41the customer and the cost of whatever we
262. 9:43got them back, we want both those things
263. 9:46together.
264. 9:48We want whatever we collect to be
265. 9:50greater
266. 10:00We want the gross profit or the cash we
267. 10:02collect in that first 30 days to be
268. 10:03greater than this plus this.
269. 10:06The reason this is so magical is that
270. 10:08once this occurs,
271. 10:11customer comes in, you acquire that
272. 10:13customer and then you have to deliver on
273. 10:15that customer. And then that customer
274. 10:17pays you back all of that cost and then
275. 10:19what can you do?
276. 10:21Go get you another customer.
277. 10:23That is why it's so magical. And so that
278. 10:25is what the whole point of this 30-day
279. 10:27cash collect thing is. We want to pull
280. 10:28it forward.
281. 10:30Cool.
282. 10:32Great. Now, manufacturing study with
283. 10:34Zoro. No. Manufacturing, you're going to
284. 10:36have different margins because you have
285. 10:37cost of goods sold and that's going to
286. 10:38be a little different. Um I would to be
287. 10:40fair, I would still prefer to have a
288. 10:42business that has 80% gross margins. But
289. 10:44with services, for human services, um I
290. 10:47I have that as my rule of thumb is that
291. 10:49I always want 80% or higher gross
292. 10:51margins. Okay. If you like this video
293. 10:53and you're a business owner who wants to
294. 10:54break through your current revenue
295. 10:55ceiling, I distilled every lesson from
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297. 10:58and three businesses past 100 million
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301. 11:06click here and you can check it out.
302. 11:08Again, absolutely free. And since you're
303. 11:09a business owner, appreciate you and uh
304. 11:11enjoy.