Transcription
The next principle is arguably one of the most important, if not the most important, to scaling your business. It's figuring out how to solve your main constraint.
You can think about constraint from a quantitative perspective as the area in the business where you will get the highest returns on effort or improvement. If you think about it from a manufacturing perspective, it's going to be the bottleneck. So, if I've got a four-lane highway that goes into a one lane and then to four lane, what's the limit of the business or the rate of cars going? It will be a one lane highway. So, I could make four lanes into five lanes. It's still not going to change the total throughput in the system. And so the idea is we have to focus on that bottleneck.
And the thing is, and the reason the theory of constraints is so powerful is that every business has just one constraint. But the reality is that most business owners are not working on that constraint. They're working on something they believe to be the constraint. Or even more commonly, they're just working all day long, not even thinking about the constraint, is hoping the business will grow.
So I'm going to share a six-part framework for thinking about constraints to help you identify any constraint that you have in your business. This is a a newer framework um that has only come from doing like 10,000 Q&As's um was thinking through like what is the actual decision tree that that I go through in order to do this and it turns out there is one um and I'll walk you through it but basically this is the deconstraining meta framework that we use as a company um that you can apply to your business over and over and over again. And I I walk through this for me. So if I'm like what should I do next? I like I'll just go through this.
So the fundamental question that we always have to answer is why can't we do more? Right? And the answer to that question or like the if I say okay who here would like to grow their business um everyone probably raised their hands and I would say great um so why don't you do more of the thing that you're currently doing now 10 20% of the time? They're like, "Oh, I I just didn't really think about that." And I'm like, "Great, well do that first." [laughter] And the reason more is is is almost always the best um action to take is because it's the highest risk-adjusted return move because it already is working. And so the likelihood that more of the thing that already works will also work is super super likely. Whereas um if you think about how many times you tried before you actually got this thing to work, whatever your thing is, how many failures you had, it's like there's an unlimited amount of ways that something doesn't work. There's a finite amount of ways that it does. And so you taking experimentation is a very high likelihood path of things not working. Like new almost never works. It's something worth like new almost never works. And so that is why more is a significantly better return on assets if you look at risk adjusted.
Now there's going to be reasons that someone says, "Well, I can't do more because..." And then there's going to be five reasons that someone does not like can't do more. And so, um, the the first common one is I can't do more because of my market. I can't. I'll write them all and then I'll we'll go through them. Um, I can't do more because of my market. I can't do more because of metrics. I can't do more because of my model. They're all We call these the Mosy 6 because they're all M's. There we go. Um, I can't do more because of money and I can't do more because of manpower.
So, [sighs] I can't do more because um I'm in a you know, some of you guys might have seen that clip where the guy was like, "Hey, I want to make my lounge make more money." And I'm like, "Okay, well, where's your lounge?" And he said, "In the middle of the Sahara Desert." And I was like, "Okay, well, that's probably not a good idea." And he's like, "So, I should advertise more?" I was like, "No, that's that's just a terrible idea in general, right?" Like, he's like, "So, I shouldn't be in the Sahara Desert." I was like, "Dear God." Okay. Um, I'm kidding. Uh, he was a champ about it. But this is a real constraint rarely. Like, if you actually live in Kentucky, and 100% of the the customers you service are in Kentucky, then yes, you will be limited by it. It will absolutely limit you. But you could also like do more of that in another market, right? So it's like sometimes it just takes a one-degree shift of thinking of like, okay, well, I could just duplicate this somewhere else, right? Um, this is a you'll see how cool this model is in a second um but we're just talking about from the customer's perspective. So, uh, it's likely that you are not contra I I service chiropractors and we're B2B. Okay, great. How many customers do you have? 100. Okay, well, there's 50,000 chiropractors. So do you feel like you're really limited by your market? Do you really feel like you've saturated the market of chiropractors? No. Just no one knows you exist, right? And so we need to advertise more and then we go back to that. Right?
The next issue is, "I can't do more because I don't even know what more is because I don't have any metrics." Okay. So we have a data constraint. So we have to figure out what you're currently doing before we can do more of it. So that should be kind of some common sense. So let's get data. But then that becomes the constraint. Okay, great. Once as soon as we have data, then we can go do more.
The next issue um that'll come up of like why can't I do more? It's like, "Well, I'm just not sure my current model is really what I want to be doing long term or like if this is the best opportunity vehicle for the skills that I have." And there's a lot of like this like, "What do I do with my life?" that, right? And the the model issue really comes down to like one of the most common things that that I'll end up responding with is features versus bugs. Is that like so Suzanne Shifflet, who was my CFO um at Gym Launch, phenomenal lady, phenomenal CFO um, she used to say, "Alex, I've been doing this 38 years and all businesses have..." She was from the deep South um, she was awesome. And the point was that like every business has something that's hard about it. And so we often want to switch opportunities because the thing that's hard about this business, another business doesn't have that thing that's hard. It just has another thing that, right now, you didn't realize is easy for you because that's not a component of the business. So, said taken differently, like at one extreme, if you do if you're in the cleaning business, cleaning homes, finding people to clean houses for is really not hard. People are very happy to not clean and pay someone else to do it. On the other hand, finding talent who want to clean houses and are competent and show up on time and don't steal and speak English and are honest and blah blah blah blah blah, right? Really hard. Now, flip that the other way. Finding people who want to talk about fitness and want you talking about this morning, right? Who want to talk about fitness, who want to talk about helping people, tons of people will do it and they'll do it for free. The problem is no one wants to sign up for fitness services because no one wants to wake their ass up in the middle of the morning and go to the gym, right? And so like all businesses have components of the business that are difficult. There's going to be some businesses that are more supply constraints, some that are more demand constraints, but they're all going to have constraints. Otherwise, if there were a business that had truly no constraints, then every business would just that of that industry would all just be gazillion-dollar businesses. But they're not because sometimes for short periods that is true. And then what happens? Lots of competition emerge and then you have a constraint. Now we have pricing pressure, etc. And so the idea that like you're going to find the perfect business and it's just like one degree separated from your current one is probably not true. It's just that the hard problem that you have in front of you is the thing that you get compensated for solving. Like that's the game. And so the way that I frame this is like if I solve this problem, if I have my cleaning business and I figure out how to have a recruiting engine and a training engine that can take somebody who's low-skill talent and get them to be proficient in a way that's more efficient than my competitors, then I have an extra 10 or 20 or $50 million of enterprise value that gets added to my business. All of a sudden, that feels like a much more desirable problem to solve if I know I have a $50 million pot of gold on the other side. And so rather than just saying like, "Oh, this sucks." It's like, "Well, for $50 million, I'd be willing to solve it." [laughter] And so, for some reason, that just tends to perk me up a little bit. Okay. Um, but fundamentally, all all businesses have All businesses suck to a degree. And almost all businesses, if you stick in them for a long period of time, you can become exceptionally wealthy. Like the guy who owns the building that I live in, he's my neighbor. He owns Panda Express. If you were in this room and he says, "Hey," he got up and said, "Hey, I um I own a fast-casual Chinese restaurant. We sell Kung Pao chicken and General Tso's chicken and spicy pineapple, you know, sweet sweet, you know, you know that new one, the one that they came out with like five, six years ago." Anyways, um and you know, chicken teriyaki and you know, we've got five locations and you know, each location does $3 million a year topline. Um, we run 27% margins. Some people in this room would give that guy advice. "You should teach other people how to how to sell chicken." And that would be terrible advice for him because what he should do is keep doing it for 45 years and then do $3.7 billion a year in chicken sales with 27% net margins and take home a billion a year in cash every year and do it tax-free because he owns all the dirt and the real estate. It just took him 45 years. And so I say this because like most of the goals that you have are probably attainable, just not on the timeline that you gave yourself. And so like even something like think about how shitty of a shitty right of a business model that is. Who wants to scale brick-and-mortar fast-casual low-skilled labor business? Most people like, "I don't want to do that." Right? Cane's, Chick-fil-A, billionaire owns them all. So like [snorts] is it a super I don't think you can scale that. Yeah, you can with work and skill and time. And so I think that's the piece that like everyone is so concerned about getting really rich in the next 36 months that almost all vehicles can get you super rich in the next 36 years and many many orders of wealth along the way. Um, we just don't think in those time horizons and I think that is maybe one of the bigger things that I can give you around model. So why can't you do more? "I don't know if my chicken shop is uh, you know, the be best opportunity vehicle." Well, if you keep doing it for 10 years, you'll probably be better than most people who do chicken shops and if you keep leveling up in the game of business, the people we compete against. So, if you are in a low opportunity vehicle market, here's the advantage. Your competitors typically not that sophisticated. If you want to go after AI, whatever, then you're competing against the best capitalized, smartest human beings on the earth. Depends where you want to play, [laughter] right? All businesses have.
Okay, the next one is like, "Why can't I do more?" "I can't afford to." Now, this is where it gets a little bit hairier. Harrier in that there's more splinters underneath. So, you can't do more because leads cost too much. You can't uh do more because you sell too few. You can't do more um because your LTV is too low, right? LTV is too low, sales is too low, or leads are too low. Now, this is where it takes more question answering and kind of pattern recognition to figure out which of the problems is because all you know right now is "I can't afford it," but you might not be able to afford it because you don't make enough per customer rather than it being inherently some marketing problem. This happens common where you have a business that has a front end but no back end and they're like, "Man, I'm making sales but I have no," they don't know that they don't have a back end. They just know that they're not profitable um as a business. But it's like, "Oh, dude, you have a you have a break-even or slightly break-even acquisition process. Now sell the thing to all those people." Oh, and now this is amazing business. It's just like you're just missing a piece of it. That's an LTV issue. Or maybe it's a churn problem. It's like, "Hey, we're acquiring customers. I think it costs us too much to get customers." It's like, "No, dude. You churn out in three months. It doesn't like it doesn't matter what the cost of acquisition is. Like you need to fix churn." Um, which then has lots of hair on it. Is it a messaging issue? Avatar issue? An onboarding issue? Like there's things underneath of that. If it's um "I can't afford to to to advertise more to get more people" um because my leads are too expensive. It's like, "Well, are they too expensive?" Now there are instances where like we have good like let's say you're in insurance, right? And so it's like, "Okay, our LTVs are already almost given to us by the insurance companies. Uh, we close 30% of people you get on the phone with. It's just like our leads just cost too much." Okay, in that instance, like their leads cost too much. So then there it's like, "All right, we have to increase quality, quality of creative, increase quantity of creative. We have to look at um CRO within the funnel. All of these. We have to see if we can have a better lead magnet from an offer perspective to generate the lead." It's like, "Okay, all of a sudden all those things can drive down the lead cost and all of a sudden this business prints and then you have the the middle of the sandwich there. The lead costs are fine. We're making enough per customer. We just can't close a barn door if it had if it had a handle on it, right?" And so then we have to look at messaging. We have to look at scripting. We have to look at um price points if we have to. We have to look at the follow-up process. We have to look at the training process. We have to look at the onboarding compensation for the sales guys or or if it's a webinar, whatever it is, right? What's the messaging that we're telling to get someone to take their wallet out and give us money? But each of these things, so if we say, okay, if I solve all of those things, so let's say you're like, "I can't do more. Not because I have enough people in my market. I have the metrics to know that like what I'm doing is working. I'm fine being a plumber. I have [snorts] like the lead costs are fine. We closed the amount that we're supposed to. Our LTV is good. I just don't have enough technicians to go and do the HVAC services or do the plumbing or I don't have enough coaches to do my backend or I don't have enough whatevers." Right? Then you have a manpower constraint.
Here's the cool part about this model. And by the way, I did the order wrong. These should be like this. Metrics should be first, then market. It's a cycle. It goes back to the top. So, I don't have enough manpower. Great. What do you do to get manpower? Okay, why don't you do more of that? Well, I can't do more of that because I don't have metrics around how I recruit talent. Okay, great. So, let's say we solve the metrics. All right. Well, there's not enough talent in my specific market for HVAC whatevers. Okay, fine. But maybe there is. Okay. Well, um I'm not sure if the offer that I have for the guys is compelling enough. Okay. I can't afford to. Okay. Well, how much do you make per HVAC rep or per per coach or per whatever? Well, I make this. Okay. Well, then do we have a issue that we need to change in terms of the business uh to fix our acquisition of talent or the acquisition of talent's fine because the business works? Okay, great. And so this whole thing, you just repeat it again on the other side. So, this is just how you deconstrain anything, whether it's supply or demand.
So, I want to dive a bit deeper into the last M that I talked about, which is manpower. Making the right hires and be able to train them is one of the highest leverage things that you can do as a business owner. Now, one of the most common pushbacks I'll get is, "Well, they can't do what I can do." So, if you want someone to do something and they're not doing it, I want to share a framework that might help. And I call this the management diamond. Now, I'll give you the little management diamond um that I do for employees, which is a really good framework for having hard conversations. But if you want someone to do something and they're not doing it, you have like four or five reasons that they're not doing it, right? The first is they just didn't know that you wanted them to do it. Most common. "Hey, did you do that thing?" And they're like, "What thing?" You're like, "Damn it, I didn't write it down, did I?" Okay, so we have to write it down. We have to we have to put a deadline on it. Fantastic. So now I say, "Why didn't you do that thing?" They say, "Well, I didn't know how to do it." Okay, well, fine. So they didn't know how to do it. Now let's say we train them. So, I told you that you needed to do it. You know how to do it, but um you didn't know when I was going to do it by. "Oh, I need to do that tomorrow." Okay. So, I knew that you needed to do it. You knew how to do it. You knew when to do it. The next is you have something that's blocking you. So, "I knew that. I knew how. I knew you wanted to do it tomorrow, but you also told me to do three other things. Which one did you want me to do?" And then finally you get into this, which is that I didn't want to do it, which in my experience is the first place that we go to as entrepreneurs and typically the last one that's reality. Most people I have found when they have a job prefer to keep it. And I've also found that most people prefer to feel like they're doing a good job at their job. And so it's usually one of these other issues. And so this provides a really good framework for having those conversations.
Now, the reason I bring this up is because we can also have these conversations with ourselves. "I know I need to do more. Why am I not doing more?" Did I not know that I needed to do more? Well, now I do. Okay. Do I not know how to do more? Oh, I don't know how to do more. Great. Well, now I have something to attack. That becomes my to-do. If I don't know how to do it, I know what to do, which is to figure out how to do it, right? Um, is it not urgent enough? Right? Or is there something blocking me? "I would go recruit more people for my HVAC company, but right now [snorts] 80% of my time is dealt with these customer service issues that are coming up onesie twosies all day." Okay, great. How much does it cost to replace the onesie twosie thing? Cost me $60,000 a year. I have $400,000 in profit. Am I willing to go from $400,000 to $304,000 in profit in order to get 80% of my time back? Yes. But that means I'm going to make less money. Yes, today. But then I'm going to get 80% of my time back so that I can then focus on how to figure out how to do more. And so it's just it's taking second and third order consequences down to their natural end and then ultimately being like, "Okay, this is what I need to do." I literally went through this process. So post-launch for me, I was like, "Okay, I have this bandwidth back. What's the next constraint of the business?" And for me, it was six questions down for me to be like, "That's what the issue is and that's what I'm focused on." And so right now 80% of my time is dealing with that constraint, which is I'm heavily recruiting executives right now. That's what I'm doing with my time. Yesterday at four executive meetings and I have follow-up notes and and connections afterwards that I have to do. That's what my time's right now because that's the constraint of the business. And then once that finishes, because those people get onboarded and they do a good job, I'll go through this.