Transcription
Gross margins. So, gross margins are wildly misunderstood, which is interesting. Um, if you are a business owner, you have to learn the language of business. All right? It is for sure. There are different languages, but there's not a huge amount of words that you have to know. You might need to know like a hundred terms. And think about this as like you were studying for a test, right? Like learning a hundred terms, not that hard to understand. And almost all of them are relationships between two things. That's what almost all of these terms are.
So what is gross margin? It's one word that's a relationship between two things. How much you charge and how much it costs you to deliver the thing. And the difference between those things is your gross margin. To be clear, that's not your net profit margin, which is a different ratio, right? Between two, not necessarily ratio, but the difference between two different numbers, right? But your gross margins are very important because it is what dictates everything else in the business.
So what do I mean by that? If you like your net margins cannot exceed your gross margins. Think about that for a moment. If you have if you're like, "Man, I'd love to run a 50% net margin business." That's an amazing goal and I love that goal for you. If your gross margins are 50%, that means that you can have literally no other cost besides the thing you sell in the entire business. You can't have any cost of acquiring customers. You can't have any fixed overhead. You can't have any employees that are not specifically in delivery. You can't have any admin, any help, of course. Now, the likelihood of you getting to a 50% margin when you have 50% gross margins is basically zero.
And so this is why and traditionally small business owners will undercharge because they sell out of their own wallet, right? And they sell out of their own wallet in two different ways. They sell out of their own wallet because they don't have that much money and so they feel bad charging other people when they don't have much money because they're like, "Man, I get what it's like to struggle." And I think there's nothing wrong with that. It's just understand the business is not going to grow and you're not going to help more people.
The other reason they sell to their own wallet is that they believe that the service they deliver is not that valuable because they know how to do it. So to quote the joker, right, my father always told me when you're good at something, never do it for free, right? And so the idea is that like you, I like if you're good at fixing cars, right, you're like, well, it comes naturally. It's not that hard. You got to know where the, you know, it's like it's what we do is really straightforward to you. To you, but to a customer, we have to sell off the value of what their life would be like if they didn't have this problem solved. That is what we have to charge off of. And when we charge off of those prices, then we create more opportunity for gross margin.
Now, here's why this is so important. Let me give you a math example that will blow your minds. And I always, you know, everyone gets harpations when I say math. So, let's just say a money example. Okay? So, let's give you a money example that'll get you really happy. All right? So, let's say that I've got some service that I deliver, okay? And it costs me a hundred bucks a month, okay? That's what it costs me in services and whatever. All right? So, if I want to have 80% gross margins, which I said these are rules of thumb. My rule of thumb for services is at least 80. Okay? So, I want to show you two different scenarios here. So at 80%, at 80%, this $100 I have to have $500 has to be my price. Okay. At 70% and I have a $100 cost. Oh god. Can someone do the math on this one? Hold on. Um, God, I got to do this backwards. Let's see. There's a, who can do this math for me? 350ish. Thanks, Leo. [laughter] Yes, this is live. Obviously, I think it's a little higher than that. Is it 400? 350? Is it now? Now, now it's all up. Hold. Who's, who can do this math for me? All right, I got to do this. All right. 100 equals .7. Julian, you were premed. Do it for me. Or I'll tell you what, I'll tell you what 90% looks like. [laughter] equals $1,000. [laughter] All right, where is it? Where, where we at? Why you jackasses keep asking? Thank you, G Salons. Is it 350? Is that it? We should, we should know this. I feel like as a collective community we should be able to figure out when, uh, 30% okay, so it should be 100 divided by .3 is what it should be. So 100 divided by .3, right? Is 333. Thank you. So that would mean that 233 should be 70%. Um, so 233 divided by 333, correct? Thank you. Okay, so 333. Okay, so look at how big of a difference this is, right, between these, between these numbers. Um, really significant, right? Like very materially different. And so the reason, and I'm sure somebody will correct this in post, but fundamentally look at how like when people are like, "Oh, well my my margins are at 60%, so I'm close to 80." It's like, bro, we're not even like, you're in a different stratosphere.
Okay, so let's take this to the natural end. If you have a business, let's say that runs 20% margins at net margins at the end of the year, what you can pay yourself, right? If we say, hey, is there a way you think we could go from 70% to 90%? Well, that that sounds like it's not that big of a deal. But when you go from 70 to 90, what happens to the actual margin? You double. You make way more money. And sometimes it means a lot more than that because sometimes the incremental margin is all margin whereas every dollar revenue up to that point covered cost, right? And so what is our, we make $233 here, right? We make $400 here and we make $900 here per customer. Big difference, right? And so when people hear these numbers, because these numbers look similar, they think that these are going to be very similar and they are not. And so this is why I'm so adamant that 80% is my minimum. I target, like that's my baseline. And then from like, I will not get into a business with less than 80% gross margins. I won't do it because I know that I then have to run everything else off of this 80. Right? So if I want to have a 50% net margin business, I only have 30% left. I got 30% to cover everything else. I got to cover rent. I got to cover admin. I got to cover insurance. I got to cover, um, I got to cover, uh, marketing. I cover sales. I got to cover everything else with just this 30% so I can have 50% left over. Is this, is this ringing? Is this ringing with you guys? Is this making sense? Even if it's a service-based business, bro, this is for service-based businesses, not D in Australia. This is for service-based businesses. And this may, this is why like so ideally I like to have, I mean again, this is minimum and I know this is going to blow your minds here, like I like one of the first things we did when we fixed gyms is we made sure the pricing was at least 80% gross margins. That's a service business. Now, some of you are like, well, there, that's not possible. Of course, it's possible. It's not possible when you sell a commodity. If a customer can look at your thing and somebody down the street's thing and say, "These are about the same. I'll buy the cheaper one." You sell a commoditized service just like you can sell a commoditized product. And so you might have salt and salt and you got FSG salt and whatever, you know, pink Himalayan. It's salt, right? And so how do we make these two things different? We have to brand it's pink Himalayan versus just normal salt, right? And they charge a premium for that. And so you have to figure out how to reconfigure. If only there were a book written about how to make an offer that's decommoditized so that you could achieve 80% or higher gross margins, that would be amazing, wouldn't it? And for those of you who don't know, I wrote a book on this. It's called $100 Million Offers. 27,000 five-star reviews. You should read it. But I, I want to draw this because this, like if you're trying to figure out what's wrong with your business, it's usually because your margins are off. You're mispriced. But again, sometimes this is, this is the, this is the fundamental mathematical problem with the business. But this might really be the symptom of the fact that you have a commoditized offer. A B, you have a sales process that doesn't function properly, right? Um, and so that's the, that's the big idea. So if you want to run a high margin business, then you have to run exceptionally high gross margins for whatever it is that you sell. Okay, cool. That math was tough, wasn't it?
All right, so let's do rule number eight. Rule of thumb, number eight, if you will. 30-day cash collected. So, this is an add-on to the the 30-day payback period. So, what is the exact amount of money that I want to have collected within that 30 days? It's going to be COG. So, the cost of delivering cost of goods sold. I'll just write out cost of goods sold. Now, the goods sold can be services too, to be clear. So it's cost of goods sold, how much it costs you for the stuff plus cost of getting customer. Okay, so if we have the cost of getting the customer and the cost of whatever we got them back, we want both those things together. We want whatever we collect to be greater. We want the gross profit or the cash we collect in that first 30 days to be greater than this plus this. The reason this is so magical is that once this occurs, customer comes in, you acquire that customer and then you have to deliver on that customer. And then that customer pays you back all of that cost and then what can you do? Go get you another customer. That is why it's so magical. And so that is what the whole point of this 30-day cash collected thing is. We want to pull it forward. Cool. Great. Now, manufacturing study with Zoro, no manufacturing, you're going to have different margins because you have cost of good sold and that's going to be a little different. Um, I would, to be fair, I would still prefer to have a business that has 80% gross margins. But with services, for human services, um, I, I have that as my rule of thumb is that I always want 80% or higher gross margins.
Okay, real quick. I'm going to show you the exact 10-stage roadmap from zero to 100 million plus that less than 1% of companies finish. I've now done multiple times. And so I can say with a lot of confidence that these are the stages as headcount increases that you need to get through. And I broke each of these down by eight different functions of the business, what the constraint feels like, like what are the symptoms of it when you're going through it. And then what steps we actually took to graduate. And we've done this across software, physical products, uh, service businesses, brick-and-mortar, all of this. And it works. And it's my gift to you. It's absolutely free. And so the link's in the description, but you just go acquisition.com/roadmap. Just enter your info and it'll spit it right back to you. Offer it.