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It becomes very dissatisfying because your team gets burnt out because they're like,

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I feel like all we're doing is onboarding.

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The customer is all the time and they're just walking out the back door between three

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and four months later.

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And if you're listening to this and you're like, oh my god, this is my life.

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It's probably because the model you have, the services you deliver and the prices that

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you charge do not match the avatar that you are selling to.

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Does your model match your avatar?

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That's what I want to talk about on today's episode of the game.

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I have been doing these deep dives into kind of like growth sins.

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And obviously I talk to a lot of business owners on a regular basis.

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And there are very common themes that come up for why there might be, let's call it, structural

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difficulties to growing the business.

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And there are a lot of different forms of this.

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But today I want to talk about this one because I think it affects a lot of small businesses,

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which is the business has trouble scaling because you sell the wrong type of service

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to the wrong type of avatar.

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And this often comes up when you want to do everything for everyone.

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And this isn't a, you know, you need to be narrowly avatar, which I cover at length

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and in other podcasts.

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But this is more a difficulty with how you deliver times how you price, times how many

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people you have to do it for.

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All right.

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So let me explain.

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So if you have a low end customer, so let's call it prosumers or small business owners

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as a customer, for example, that's going to be a VSMV, so very small business.

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And the problem with VSMV is that they have inherent volatility, meaning because they

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are small, they will go up and down on a regular basis.

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They have good months and bad months.

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And on bad months, they will take a real hard look at their expenses, sometimes including

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your business and decide to cut right.

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And the same thing happens on the business consumer business.

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But the issue is that most of these businesses who sell to these customers would be significantly

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better served, basically, there's a fork in the road, right?

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So either you sell more templatized, higher volume, more scalable products and services,

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or you go up market in pricing and avatar to sell more customized solutions.

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The problem is most people kind of end up somewhere in the middle.

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And this is the very painful romance land where these customers, because you offered

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customization, but you don't have scalability built into it, end up getting upset with

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you that they're paying $20 and don't have an entirely custom, whatever it is that you

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deliver.

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Right.

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And so it's like they have unrealistic expectations.

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And since you didn't start with, I'll call it a tech first approach.

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It just makes it a very painful business to run.

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And every year, the difficulty is that it's very easy to acquire these customers because

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these customers, there's a lot, you know, boatloads of them.

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The problem is that they're very hard to keep.

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And so you end up getting into this kind of hamster wheel of getting lots and lots of customers,

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but then falling out the other side.

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And you bang your head against the wall because you're like, I'm needed to look at these

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turn tactics.

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I need to look at these revenue retention, you know, metrics and activation points.

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The thing is, is all that stuff is the correct thing to do, but you might just be missing

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the big obvious one, which is that these people aren't going to stay.

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And as tough as that is to hear, it's just the reality of it.

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And so I'm going to give you two very different examples of done the right way, and then I'll

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give you some examples that done the wrong way.

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One of the best pro-sumer businesses or, you know, VSMB businesses out there is Shopify,

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right?

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They're considered, you know, gold standard for providing a great, you know, product

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for small business centers.

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But they keep on average like 50% at month 12 out of the double check, but it's between

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50 and 60% which is considered best in class.

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So that means that they lose half of their new customers every year.

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Now, after that point, they get people to stick and then it becomes really valuable, right?

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But the first year, they lose like half of the customers you sign up for brand new.

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But they're able to build an entire business around this because it doesn't really cost

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them that much to add another customer.

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And this is kind of the problem.

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So let me give you a services example of this.

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I'll say an acquaintance of mine had a very large agency, right?

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So this is, you know, your standard high-touch, or I'll put high-touching quotes here, high-touch

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services business, which would be agency work for small businesses which sounds like a complete

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nightmare.

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But here's the thing that he did that was really clever.

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He figured out that he had to be really low priced or talking like $200, $300 a month

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for services.

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Now most of you might hear that and be like, well, that's impossible to deliver any kind

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of service there.

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Aha.

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And this is where it gets interesting.

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So what he did was he just looked at what most business owners think they need to do,

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which is, you know, think mainstream.

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So they have to optimize their, you know, their Google reviews.

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They have to, you know, do a little bit of management, responding DMs, things like that.

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It's what I consider a nuisance business, right?

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It's stuff that a business owner knows they should do, but aren't doing.

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And you can absolutely sell them on $1,500 a month for that same thing.

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The problem is they turn out.

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And so the question is, how can you deliver or how did he end up delivering those same

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services for last?

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Well he built his entire business around cost so that he could charge a very small amount

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of money to these businesses.

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And because of that, they're like, yeah, I mean, if I get one customer a year or two

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customers a year, this thing pays for itself, right?

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So you want to have such an easy ROI argument that it would be stupid for them to cancel.

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And so his average stick was like 38 months.

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That means that call it $300 times 38 months, I don't know what that math is, but 9,000

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plus, plus 2400, so 11, four, right?

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So $11,400.

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Now, if you could sell something for $200 a month, you could sell a lot of people at $200

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a month.

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And if you know that you're making $11,000 plus on each one of these customers, that's

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a pretty interesting business.

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I think about like this, if I wanted to guesstimate how high that business could grow, the question

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is just how many $200 a month business owners could I sell?

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Probably a lot, right?

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Like hundreds and hundreds, thousands per month.

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And so if you sold 1,000 of those small business owners per month and you had a $11,000

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at LTV, you'd be looking at $11 million a month, $100 million plus business, right?

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And just from doing this, but that'd be easy to do.

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That's not hard.

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Now, the vast majority of business owners though that sell to SMBs are typically in that

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$1,000 to $3,500 a month range, and it's because you can sell them there.

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You just can't keep them there.

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That's the issue.

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And so when I said at the beginning, you have basically a fork in the road, right?

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So either you say, you know what, we're going to do services.

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We're going to do real work.

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And if you do that, then you've got to go up market to an avatar that their volatility

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does not preclude them from affording your services.

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You have to price to their worst months.

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And that can be really hard for you from a margins perspective, which means if you want

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them to stay, you either got to go down market and then make your price so cheap, which

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then means your services need to be absolutely templatized and built for volume and scale

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with high amounts of tech and huge amounts of operating leverage, meaning one rep can

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manage 300 accounts, 500 accounts, a thousand accounts, or you say, you know what, we're

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going to have one rep can manage five accounts.

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And in that instance, we need to go to businesses that if they have a bad month, they're not

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immediately looking at their bill and saying, hey, we're going to cancel, right?

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And so either you go custom and you go up market or you go templatized and you go smaller,

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low market, but you still have, and here's the key point is you still have high gross

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margins on that low ticket.

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And so that's okay.

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That's fine.

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Let's say it costs you 10 bucks a month and you charge 300 good business model.

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It's just that these small businesses typically cannot sustain high prices on a continuous

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basis.

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So you end up just creating this churn factory that becomes very dissatisfying because

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your team gets burnt out because they're like, I feel like all we're doing is onboarding

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your customers all the time.

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And they're just walking out the back door between three and four months later.

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And if you're listening to this and you're like, oh, my God, this is my life.

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It's probably because the model you have, the services you deliver and the prices that

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you charge do not match the avatar that you are selling to.

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And it's just one of the most common mistakes that I see, especially in services businesses

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because you have less operating leverage because you have people that you have to train

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up in order to deliver whatever you, whatever you sell.

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I might make a series out of these kind of like little growth sins, but this is one

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of the big ones.

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The thing is as you can fix it, you just have to decide, am I going to change my services

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and price or am I going to change my avatar and maybe also your price and go up, right?

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Do I go up market charge more and do it custom or do I go down market, which you might

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already be selling to, which means you're keeping the same customers charge less, but maintain

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higher gross margins as in percentage of dollars kept of dollars made by scaling back

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my deliverables and you're able to do that with a smaller price tag.

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So a lot of people will see a business that charges $100 a month and let's say has 80%

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gross margins, meaning it costs you 20 bucks to deliver the thing that you charge $100

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for.

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Okay, which by the way, Alex's rule of thumb for services is it must be at least 80%

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gross margins for me to be interested personally, at least I prefer to be at 90 or 95.

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Now when you hear at 80 versus 90, you might think, well, that's just a 10% difference.

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That's twice the operating leverage.

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So think of the different differently is that my cost basis is 20% versus 10%.

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So it's half, which means double the leverage.

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And so again, also the difference between 90 and 95% is another double.

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So if you're like, okay, well, I'm looking at a business and it's got 95% gross margins

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versus 80, the 95% gross margin business has four times the operating leverage.

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And so this might seem like a small, a relevant thing, but it can very well make the difference

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between you having an unbelievably scalable business that can print money versus one that

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just you always get stuck in this hamster wheel of, you know, the revolving door of customers

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in customers out, you know, team getting frustrated, you feeling like you're always having

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to think about your next marketing campaign, rather than just knowing that you have this

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bolus, this, this, this stacking of customers that are either coming back on a monthly basis

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or on some sort of membership subscription that just keeps building, right?

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And so this is just one of the big sins that I see in growth, which is just that you grow

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quickly in the beginning because you can sell customers easily in this space.

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But churn catches up real fast because they walk out the other side.

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And then you just think, okay, well, I could just keep increasing advertising, which is

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what a lot of people do.

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But then the difficulty is that your cost of acquisition starts going up, your gross

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margin starts shrinking because because gas is increasing, right?

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And you start hiring this team and all to sustain the new customers that are coming in,

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but they're costing more, they're more of a pain in the butt.

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They know you less because you're going to colder and colder markets, right?

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And because of that, you have more volatility in your acquisition.

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So you have, you know, when you're selling 10 customers a month, if you, you know,

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have a down month of call it 20% and you sell eight, it's probably not going to make

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a big difference in the business.

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But when you're selling, I don't know, 100 customers a month and there's 20 fewer.

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All of a sudden you've got like four reps or three reps that would have had customers

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that they need to be serviced or onboarding, they're just sitting there, twiddling their

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thumbs, right?

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And God forbid you have a 40% decrease.

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And now, all of a sudden, instead of 100, you sell 60, right?

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But if you go from 10 to six, not a big deal, when you go from 100 to 60, a very massive

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deal, especially if that's basically how you make your money and you're living paycheck

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to paycheck because you need to sell every single month to keep the lights on and pay this

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massive team that you scaled up because you didn't, you, you, you scaled too fast the

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wrong way to the wrong customer.

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Anyways, this is just one of the major growth issues.

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It is fixable though.

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So I don't want you to, you know, lose faith if this is you or you're like nodding your

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pet up and down and be like, oh my God, this is, this, you know, this guy's explaining

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my life story.

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I get it.

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And it's solvable.

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We have to make a few strategic decisions about which direction you go to depending on

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the market that you're in and how to recombine the services offering so that it is even more

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compelling at a different price to the right customer.

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And so anyways, this was top of mind for me because I talked to a couple of businesses

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last week that was suffering from the exact same issue.

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And so I figured I would make a quick pod for you guys.

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And yeah, you guys rock, appreciate you.

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If you feel like having us take a look under the hood, you can always come out to one of

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our, one of our events here at our headquarters where we kind of look under the hood.

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My whole team does.

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I check the businesses out as well.

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And we help you scale.

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Hopefully.

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That's kind of, that's kind of the jam.

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So anyways, I think it's acq.com where I should go.

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I think you can, I think you can go there and then you can, you can grab a time.

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That's interesting.

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Otherwise, keep enjoying your day and I'll see you next week.