we're going to get into the next stage, which is to look at the edge training,
getting so many of you talked about more revenue.
If we need more revenue, we need more revenue streams.
We were rethinking our economic model.
And so, you know, we we know that we always start upstairs.
Right. So when the father
partners with you in your work or in your job, for that matter,
the difference, of course, being your work pays the bills,
your your work is your is workmanship created in Christ.
So the father, the son, the Holy Spirit, the three and you,
you know, you get you get caught in that beautiful relationship with them.
We call it first love.
Right before man was created, there was this intense love
between the father, the son, the Holy Spirit.
And now that you are included in Christ, you get the full first.
You get the full first love.
And so what I wanted to share with you today is a little bit about
some real practical things as you're asking the Lord.
You know, where is it?
Where is my money? Father, show me.
It's like in World War two.
There was an advanced team and they would go ahead in the desert,
especially in North Africa, and they would go ahead.
The Allied forces and they would dig holes and they would bury water,
food and diesel, and they would and then they would cover it, hide it
and then make maps and send the maps back to the commanders
like X marks the spot. Dig here.
And for some of you, I think you're in that mode of Lord, where do I dig?
X marks the spot.
And what tools can you use to quickly process what the Lord is saying?
Because downstairs he's giving he's not going to give you a poor economic model
and say, trust me, you know, he's going to give you a great economic model
that goes with the call and will fund the call that you have.
So as we get into that for a second and we look at this concept
of black box modeling, I put a couple of just a few slides together.
Help us visualize.
I know some of you love visualizing things.
So we've done a couple of things to help that along.
But fundamentally, there are three ways to look at an economic model.
The one is to look at it as an employee.
You know, how much do I get paid?
Even if you're a solopreneur, you're still working for a boss yourself
and, you know, you're working to have,
you know, a salary and income, which is fine.
I mean, it's a great everybody starts there if that's where you're at.
But that's one way of thinking.
A better way of thinking is to think as an employer and an employer
now thinks of whose time can I buy to better serve the people
God's entrusted to me.
So, you know, God isn't asking you to serve the world.
He's asking you to serve your world.
And that world usually starts fairly small and then he expands it out.
And the reason it starts small is because in his kindness,
he's teaching you what the economic model is and he's teaching you
how your partnership with him works, because he's remember,
he's not just involved in the upstairs.
He's involved in everything downstairs, upstairs.
And often when we transition from when our vision upgraded,
many of you, you know, have shared that you in this transition point,
you were in one place, you're now economically in a less place than you were.
It's because you're discovering a new economic model.
And and we have to start thinking in different ways
and open our minds up.
And so there's a third way you can think.
So employee, employer, and then as an investor.
Now, you know, what what that does is and we'll
we'll get into it here in a second.
What that does for us is it allows us to look at the economic model
in its purest form.
What do I mean by that?
I mean that we are not married to it emotionally.
It's very easy to get attached to to your economic model
because businesses sometimes become like kids, you know,
and then somebody says, oh, your revenue streams.
And then somebody says, we should get rid of this revenue stream.
It feels like somebody said, you get rid of one of your kids.
It's like, no, but I love that.
You know, I'm attached to that.
That's how I started or whatever it is.
And and when you're looking at your business,
Henry Cloud gives a fantastic analogy when you're thinking about this.
So think of a rose bush.
So the question you need to ask yourself is what's in your business is dead
and just needs to be cut off.
And it's amazing how many times we will leave the dead thing on there.
Maybe it's a person who's not performing.
Maybe it's a revenue stream.
that's not functioning well. Cutting off what's dead. Second question is what is sick and not
getting better? So what in your business economically is sick and not getting better
and is unlikely to get better? And the third thing is what's great but not best?
These three questions are really brutal and they they're hard to you know answer and one of the
stories that Henry shares in this regard is of a guy who came in and bought a 50 million dollar
business. By the way that's smart. Much better to buy a business than build one. Whole lot easier.
Somebody's figured out the economic model, figured out the market, figured out the whole
mechanism for it. But if you're the pioneer and in your partnership with the Lord
He's giving you a new place to pioneer. You're like a way maker. You know like a
a ship that is breaking through the ice to make a new a new shipping channel. A new place to travel.
If that's what's in if God's called you to be that kind of pioneer you're often
going into it not knowing the economic model. So first permission. Firstly do this from rest.
It's very normal that when you're doing something disruptive you have no idea what
the economic model is. So in a book called Innovator's Dilemma Christensen, the professor
wrote it, points out that when you do something disruptive like hey we're going to start a whole
new industry it's very hard to know. Like imagine you were the person who came up with email.
Well good. How are we going to make money? So you're pitching your boss. You know those letters
we get every every week and then we have to pile them up we have to write letters back and the
Lord and then and then your boss says to you yeah but how okay so we're sending this all digitally
but but how are we going to make money? No idea. Who's the client still working on that?
What team do you need? Not sure. And we just don't know anything and the reason is is that's what
that is the very nature of innovation. At the nature of innovation so that doesn't mean we
shouldn't do it. It just means we need to be aware of it. So I wanted to take a second
talk through this concept of what we call black box modeling. So what is black box modeling?
I could put it to you this way. There is probably 20 percent of your revenue on average that you
haven't accessed yet and I say at least 20 percent because for most of us we don't have
such a deep clarity of our own economics. You may think you do and having come from a private equity
background when we're about to invest in a business I would sit down and use this exact
technique I'm about to show you to figure out exactly how good this business is. How healthy
the economic model is. And when I do the simple model modeling I have a very deep knowledge of
that business and it's always amazing to me that the founders of the business and even if it's been
going 10-15 years are not that clear on it. They have a general sense of course. So the question
here is I'm happy to show you but I'd love you to actually do it. So if you want to make notes or
you want to open a spreadsheet or a google sheet or something it'll be helpful. But I was going to
walk you through because this mechanism gives deep insights quickly into your business and often you
find you know where's my money hiding you know where where is the what have I not tapped into
yet. And so we want to help go through that process. So let me share a few quick slides
with you here around this. Can everybody see those slides? Yep. Are we good? Okay. So as we go
through this think of the black box as this. This is black box modeling. I try to get chatgpt or in
this case dolly to generate this and after about 30 attempts I almost gave up because what I was
looking for here was I was looking for the I was looking for something very specific and this is
about as close as I could get. And what we're what we're seeing in this in this model what we're
seeing is that we've got cash coming in. So think of a box. Your business is a black box. Cash is
coming in one end. That's the investment that you have to make. The external. Now whether that's
retained earnings from last year or it's actual money out of your pocket as the as the owner
going into the business that's what that is. Coming out the other end is cash coming out.
Well that's obviously enough. Hopefully there's a whole lot more cash coming out
than cash going in. Now notice I did not say revenue and I did not say profit.
Cash in through the black box,
cash out through the black box is all that matters.
If you think this is overly simplistic,
this is exactly how Warren Buffett looks at a business.
He calls it looking at what the free cash flow is.
For those of you a little more accounting minded,
you say, well, I managed to EBITDA,
earnings before taxes and so on,
before taxes and depreciation and all that.
Yes, that's a pretty worthless number in real terms
because that number can be easily confusing
or even manipulated.
So now we're looking at this black box
and we're saying, okay, I got cash coming
and cash coming out.
The next question is the handle that you have to crank.
How much work is this business?
What is the work involved?
And how often do we crank it?
So maybe you have a business
that runs sort of on a monthly cycle,
or maybe you have a business like maybe Brilliant,
the School of Brilliant,
School of Ministry, School of Leadership rather.
I should know it, it's my company,
but can't get the name right.
So the Brilliant School of Leadership
works off this model where we have one big event in March,
one big conference.
We sign up the next intake of leadership for training
and then we deliver for the rest of the year.
So the crank handle there, the frequency there,
the cadence is once, once a year.
But maybe you've got something that cycles every two weeks,
or you've got something every week or whatever it is.
If you're in social media,
you're cranking that thing almost every day.
You're pumping out social media stuff.
So how fast are you cranking it and how much work?
And the amount of work that it takes
means I have to have a lot of help and a lot of people.
So bigger staff, bigger overhead.
And then the last one is the key dial.
There is one dial in this model
that makes the thing way more sensitive.
So if you took a little financial model, a spreadsheet,
and I'll show you in a moment how to do that.
If you look at your business in this way,
cash going in, how hard is the effort?
Overhead, expenses, team size, all that stuff.
How much cash comes out the other end?
Usually there's one dial that if you turn that dial,
everything changes.
In 35 years, I've never found a founder
who knows what that dial is.
I wanted to let it sit with you for a second
because we all go, oh, well, I just need more sales
and less expenses.
Yeah, we're not talking about that.
What we're talking about practically.
You know, recently we just did this black box
for our upcoming Velocity event.
So Velocity's coming up, we modeled it as exactly,
and Dia and I were going through the financials of this.
Now, Dia, would you say that you were surprised
what the main dial was that moved everything?
100% surprised.
Not at all what we assumed would actually make
the most impact on ticket sales, yeah.
Yeah, and because we thought,
well, it'll be the ticket price, it'll be the whatever,
you know, the acquisition costs from the sales,
how much does it cost us to bring a new person in?
All those mattered somewhat,
but they all turned out to be secondary to one thing.
And when we found the one thing, we turned that dial
and suddenly the numbers went crazy.
We went, who knew?
So, you know, for us, it was surprising
what that number was.
Every time we got to invest, when people came to us,
well, I'm not an investor.
Yes, you are.
You are investing yourself and your family
and your family's money into the venture
you currently have.
So you have to take an investor mindset.
So that means the following, right?
Let's think of how this box really works.
How hard is it to crank the handle?
So this is like your command and control center, right?
This is where, so people say,
well, I have an accounting package.
I'm not talking about accounting.
I'm talking about putting a little model together
that teaches you, when I turn this knob, this happens.
I turn this knob.
You say, well, I'm not very good at spreadsheets.
Then either, you know, you can literally tell
ChatGPT to create one for you.
So in this simplest thing, you know,
I create every single business we run
has this command center, every single one.
And at Brilliant, for instance,
it's now got about 15 tabs on it,
but it started as one simple half a page spreadsheet.
And then as I learned and grew,
I always tweak, tweak, tweak, tweak.
So when I was running 12 companies,
when it was four operational businesses
of which I was the CEO for all of them,
I was tracking these underlying economics all the time.
And so I create a spreadsheet.
I give it a name.
In this case, if I was doing my own,
it'd be I-49 model, and I put it.
date. And I update this every single month. We are not talking about P&Ls. We're not talking
about a report from your accountant. We're not talking about any of that. We're talking about
understanding the heart, core heart of your business. So, we start with simple revenue,
and you can put your different revenue streams in there. You can add your cost of sales, meaning
your variable cost. Cost of sales are different from expenses. Cost of sale is connected to a
sale. So, if I'm selling pencils and they cost a dollar, and I'm selling them for three dollars,
then the cost of sale is a dollar. If I don't sell any pencils, I don't have any cost. So,
that's the way to know. If I don't sell anything, do I still have this expense? In other words,
is it a fixed cost or a variable cost? I don't know. That's very elementary. But for those of
you who are starting out, maybe that's helpful. So, you add three expense items to your model.
I don't want to know about postage stamps and accounting stuff. I'm not interested at all.
All I want to know is what does my team cost me? The big ones, the three biggest numbers.
What's my team cost? What are my operations cost? What's my general admin stuff? That's all I want
to know. And the reason is, this is not about managing expenses down. Sure, you should be
very careful and manage costs carefully. What I'm looking for here is not trying to tweak the
expenses. This is, again, not an accounting exercise. And I go through this with accountants
very accomplished accountants. And they say, why do you have your own spreadsheet on the side?
And I said, because I want to understand the business. And so, when we got serious about
investing in a business, I would put one of these models together very, very quickly. And when I put
these models together, here's how I'm looking at this so that you can sort of see it through my
eyes. Right? So, in the command and control center, what I'm doing is I'm putting all the assumptions
that I'm assuming. Well, I'm assuming the max amount of customers is x. I'm assuming our ads
cost y or our marketing costs or whatever. All my assumptions are at the top of the list. Did you know
that if you go to an investment group and they're going to invest in your company, how well you've
pulled those assumptions out and how well you've documented those assumptions is going to determine
whether they believe anything in that spreadsheet. You know, in private equity world, we say,
you know, spreadsheets never denied ink. You just make the columns wider and then you got making
billions. It's wonderful. So, you know, because most spreadsheets are worthless. Most five-year
projections, one-year projections are pretty worthless for the most part. We're not talking
about creating a pro forma or five-year projections or one-year project. We're talking about
understanding the underlying economics. So, I put all the blue numbers that can change in blue.
Everything that's calculated in black. What am I doing? I am identifying the knobs, the dials we're
going to turn. The blue are the numbers we can turn. The black are all the calculated numbers.
Again, not an accounting model. An executive tool to learn where the money is in this model.
Then what I do is I look for that key driver. Finding that key driver is playing around with
the numbers, looking to what the bottom line is. And what I do to do that is I turn, what's the most
money we could possibly make? What's the number of customers? The most we could charge them?
The quickest time with the least expenses? What would be the most optimal situation possible?
You know, if everything was just wonderful and perfect, what would that number be?
And usually when you hit that number, you might decide this is not a business at all.
Because all my economic model is just terrible. Because even if we hit it out of the park on every
single dial, then we still don't have much of a business. So, that's a wake-up call. B is I go
for the minimum. Why? If my model survives the minimum and all the knobs turn to the lowest level
and we still can survive, then I've got a reasonable risk. Then I'm trying to find my
break-even. Okay, so here's the minimum. Here's the maximum. Somewhere in between, there's a break-even
where the amount of money going in, the amount of money coming out. Again, we're talking about cash.
We're not talking about P&Ls, balance sheets, cash flow statements. We're talking about cash itself.
How much cash went into my business? And finally, I put together a probable case. Why do we do this?
Here's why we do this. So, should you do this? So, let me ask you this question. Here's a quick
example. Grab your calculator, your phone, whatever you want to do. Calculation. I want
to ask you this question. Should you invest in this business? Do you have a business
if you charge $297 a month for your consulting?
and you can handle up to 20 clients at the same time
and you grow by ads,
which costs you $500 to get a new client in.
Should you build this business?
Any answers?
Do some math and tell me what you did.
So now we're getting out of the little presentation stuff.
So.
In here, Dion, how long is a client with you?
Okay, let's assume they're with you.
They sign up for a year, but they pay you,
they say 300 a month, 297 a month for a year.
Anybody have any instincts around this?
What did you all do when you went through that calculation?
Somebody wanna walk me through it?
How many of you took roughly,
cause I would just round it up,
300 times 12 times 20, right?
Is that what everybody did?
Said, okay, what was the number?
Somebody give me your number quick.
We're gonna talk about what's the difference
between this and what I'm suggesting.
So I'm trying to get as practical as possible today.
71,000.
There you go, exactly.
300 times 12, cause it's for the year, times 20 clients.
So now you have 72,000 minus what?
$500 times the 20 clients, right?
So it's minus $10,000 for the total expenses.
Everybody got 62,000 on your little calculator?
Yeah?
Everybody know how I got that?
Well, I did multiply the month per month
times 12 times 20 clients minus the cost.
The cost was 500 per client.
How many clients?
20, 20 times 500, 10K.
Good?
Okay, let's keep going.
Then you have to put in $10,000 to get it all started.
How did I get $10,000?
Does anyone know?
Because that's what the clients cost.
If it costs $500 to get a client,
and you want 20 clients, it's gonna cost 10 grand, right?
If you put in 10 grand into this business,
would it be a business that you would get a return on?
So I'm skipping past the employee mode,
cause you go, oh, well then that means,
oh, I'm making 60 grand, that's five grand a month.
That's a nice salary, right?
I'm not thinking as an employee.
In a business case, if I'm thinking as a CEO,
I'm thinking, well, how many people can I hire
to do the coaching?
How can I buy the people's time?
Here I'm going one level up.
I'm going to the investor mode.
And in this investor mode,
if you put $10,000 into this company,
would you get a return?
Little harder to answer,
because we don't know what the expenses are
to crank the handle.
What's missing here is we know the cash going is 10 grand.
We know that what's coming out the other end is $62,000.
What we don't know is how hard it is to crank the handle.
So we're going to get to that in a second.
So now, more importantly,
if you were asked to invest $10,000 in this business,
some of you, I think, Ray,
you talked about owning pieces of businesses,
which is what private equity fund is,
or well, at least a personal fund
when you're investing that way.
If you're asked to invest 10,000 in a business,
will you get a return or would you see your money back?
Robin, it's got to you.
Didn't we already take out the $10,000
when we multiplied 20 times five?
We put the 10,000 in,
but then we got it back over that year.
Yes, so you would get it back on condition
that you didn't eat it up in other things.
Exactly why that was a good spot.
That's exactly why I put it in there.
Because what normally happens is we say,
what normally happens is we say,
oh, I'll get it back and then we don't get it back.
So being there, done that,
I can see everyone going, yep, done that.
Let me call up the spreadsheet that I want for this quickly.
So I've put together a simple little spreadsheet
for us to use.
Give me one second.
And in this little spreadsheet,
I wanted to give you a real example.
So let's just go through.
So let me share my screen here with you.
What happened to my Zoom?
Give me a second.
There we go.
All right, so let me...
share.
OK, I'm going to go here because
everybody see a little spreadsheet with his example consulting on it.
We can drop this little spreadsheet in here.
So now what we did is we said, OK, well, the cash going in was ten thousand.
I was assuming that we would spend two
thousand a month over a five month period to make it ten thousand.
Just make the example simple,
because what I'm trying to get to is to show how the black box approach works.
So let's what we're doing on the side here is we're writing down all our
assumptions. We can do one on one training for two ninety seven a month
over a 12 month period. That's what we that's what we're looking at.
So here's here's how the black box works.
Number two, I now need to know what is
the crank effort that it's going to take to make this work.
So let me pull this in.
So let's bring in the crank part of it.
So the crank effort is we said it's 12
months, but now I have to put in those three categories, team, general and
operations. Notice you can do a little thing on the side and just write on what
those three numbers are. But if those three numbers are six
thousand dollars, how would I come up with that?
What do you think the number one mistake
that founders make is when it comes to calculating the actual costs?
Anybody want to guess?
They don't pay themselves first.
Number one mistake.
And when you don't pay yourself first,
you are the primary asset in the business, you should get paid first.
If it can't support you and you start to make sacrifices, your team can do it.
Being there, done that.
Anybody made that mistake?
So here is the first question you can ask
yourself as you're putting the simple black box together.
We'll come to this other stuff in a second.
And let's say as I'm sitting looking at
this and I'm realizing, well, I think I can come up with a premium
product for, you know, three times that for a thousand dollars.
And let's say 20 percent of people will take that.
That'll give me another four clients.
Now I'm starting to look at and saying, OK, this seems to be this seems to be
dropping out at about total cash coming out will be all my income,
my monthly income, my monthly expenses, total cash out per month is this.
Here's my total revenue.
I spent that much in cost of sales.
Ninety four thousand.
So my total net profit is twenty two thousand.
If I put out twenty two thousand and I put two and I put ten thousand in,
then I've got a two point three X return on my money.
Right.
Seems simple enough until I start looking for what's the key driver.
So one would look at the key driver and say, well, maybe it's the you know,
maybe it's more marketing investment or or if those of you very familiar with
cost of ads, what if this was two hundred and fifty dollars an ad?
What would happen to the we went from two X to twelve X?
Well, that's interesting to know.
So let's put it back to five hundred.
Turn another down.
Notice I've already set these dials in.
What if I took my marketing
variable costs a month to four thousand a month?
Right.
That now I've got 40 clients.
Can I manage 40 clients as like two a day or something?
And can I actually do that?
So now what we're doing is we're dealing with a crank effort.
So what happens is there's where is the inherent limit?
The inherent limit is the effort it takes
to crank the handle and which knob is it most sensitive to?
Notice that I can get more clients in,
but it's not necessarily unless I can carry it with a team,
because as I bring in more clients, maybe I need more staff.
So what's happening is there gets to be a balance, a trade off.
All this mechanism is called the underlying economics of the business.
We can do the same for, you know, if you have a subscription product.
Right. How do your subscription products work?
By the way, extremely tough business for those of you think, you know,
oh, we'll charge twenty dollars a month for a subscription product,
whatever it might be.
So what do we when we're looking at the business,
what I'm trying to understand really, really quickly is,
will I ever see my money again?
And to answer that question, I need to go back to and say,
what is the most sensitive dial here?
And the only way to if you don't build
the spreadsheet yourself, I don't know how else to say this,
you you don't ever get to that depth of knowledge.
So I'm not good at spreadsheets.
Well, it's really uses very, very basic spreadsheet skills,
which you can get on YouTube in 10 minutes or half an hour if you if you're new to it.
Seriously, build a simple model and start
to turn the dials and see what's the most sensitive of the dials.
Once you know what the sensitive dial is,
the question is, how focused should you then be on that?
one dial, because it's that one dial that and so if we're an investor group and
we're talking to the management team, which they normally are focused on other
things, and they are married to elements and revenue streams, that what they're
doing is they're using up their resources for stuff that's sick and not
getting better. They're using up their resources for stuff that's dead and just
needs to be cut out, just stop it already. And they and then the hard one is they
using their resources for doing what's good but not best. All the nutrients need
to go to the top very best roses. So in the example that Henry Cloud shares, is a
guy buys the business for 50 million dollars and it's got five revenue
streams, got five parts of the business. Here's the fun thing, they're all doing
fine, they're all profitable. What do most leaders do? Try to keep all five. What is
he do? Sold all four of them. Why? Why would he sell all four of them? He's
selling all four of them because he knows something, he's thinking at this
third level. If you're a CEO, you're keeping all five. If you're an investor,
you're selling all four of them. So you know Jack Welch used to say, you're
either number one or number two in your industry or you're very sold. You're very
profitable or you're very sold. And that what they're doing that and you say well
that sounds mercenary. What you're doing is you're looking to make sure you
deeply understand the economics of what you're doing. So this means selling off
the other four, not only provided capital but now all the best, all the resources,
all the best people, all the capital, everything is going into that one thing.
And I can say you know for one part of my career after I got out of my
last business, I spent a couple of years doing CEO consulting. Which is funny
because now we're doing this. And what I found is I made a strategic mistake
when I went in. So I used to back in whatever it was 2003, 2004, I used to
charge you know you know what I thought was a very reasonable sum. I come in for
90 days and I try to revamp the business. What do you suspect was my number one
challenge or some of my top challenges? Let me hear it. Just unmute
yourself and talk. Don't worry about stopping doing stuff. Absolutely
getting people to stop doing stuff. Number two thing I found is the CEO, the
leader was married to certain ideas. And no matter how much, no matter how
clear the numbers were, they refused because they're just blind. They're married
to this. We do this. And so this is an interesting conversation because getting
see so I found that I would develop a model that I could execute on but the
person I was working for he or she was not willing to do it. They were not
willing to sell off parts of the business to outsource. So when I first
came to Brilliant, there were two businesses. There were Brilliant
Perspectives and there was Brilliant Bookhouse. Brilliant Bookhouse was in
Oregon and it was doing all the book public publications and so on.
User manufacturer in Michigan and there was a team and a staff that was doing
shipping and handling and all that stuff to do with book publishing and all that.
And Brilliant Perspectives which is in Santa Barbara had a $20 a month product
and as you all know for those of you that knew it back then as Brilliant TV
now Brilliant Plus, that's what that was. And so you can do quick modeling and you
can go cool so all we need so I remember when we got to over 6,000 subscribers we
thought this is great. So as we were going through all that because you you
know even a small number like 20 bucks times 12 times you know a nice
subscriber base sounds like a fantastic business. What was the number well no Ray
you know that answer because you know the answer to this I think because you've
probably got the the battle wounds on this yourself I suspect. What was the
number one thing that we didn't see coming with that model? The massive
churn rate. You think your churn rates low. Figuring out the lifetime value of a
client in that model my goodness the math was so complex. I was on all these
university sites and modelings and trying to find out how and so finally we
started guessing and we said okay and guess what we found out it was our
number one problem.
don't have stickiness to your service if people if you got a if you got a back
door that's rotating as you know people are coming in you know and then rotating
and leaving straight away that bleed actually costs you more because the
acquisition cost so we cracked the code we found out there were two problems one
the acquisition cost to get a new person who have never met to get to know us and
start writing us you know letting us charge him $20 a month that thing
required us to acquire better quality leads at a much higher rate so what
would be your intuition well you shouldn't spend more than $20 if you're
getting a $20 subscription well you might say well if you cost you $60 then
you have to carry the cash for three months right because it takes 20 20 20
what if they leave after the second month and that's why trials are
ridiculous they never worked in our world all we did is burn through cash
right because people get busy and they forget they won the trial and then hey
what's this charge and then you get angry customers so we made another big
mistake on scale what did we do we came up with annual subscriptions what if we
made it easy for them and they only trust them once we gave him a little
discount instead of $240 we only charge them what was it 196 192 192 one you
know there'll be a discount and so a whole bunch of people bought the annual
thing and then got really annoyed at the end of the year when there was another
charge oh I thought I bought that like they bought it permanently I don't know
and we end up with this adversarial relationship with our clients so we get
a rid so we realize this annual things are really bad idea one of the first
things I tried to bring to when I went to 100x was to stop that annual thing
and then the the next thing we learned was hang on a second you know what we're
missing we don't have an economic driver in this thing we're missing something
key in this revenue stream so we came up with a $400 lifetime membership and we
learned very quickly that 10 to 15 percent of all our customers will buy
one of those and if we use that money to go towards the ads now we're buying new
customers basically free we're using lifetime members to buy the monthly
members correct the code now the good news is we did that in under what are
you gonna say three weeks six weeks three and a half years because we're
really quick that way right it's I mean it's literally exactly what I did I mean
it's you're literally saying the exact journey you know we got a little bit
over 9,000 members and our low ticket and I mean every single thing you just
said we had to learn and it took us yeah a little bit longer okay we'll go
through enough years the point we're making here is this is not because we're
slow I mean I did this for a living and it took long what I'm saying is what
got us there was the relentless monthly update of the black box we refused to
let it go and when we crack the code that the lifetime members can buy the
monthly members guess what we can now do we can scale right as long as the
lifetime members can keep paying for and it turns out that the assumption of what
percentage of new people coming that are lifetime 15 20 percent that continues to
be steady as a rock it's amazing so the thing we thought would fluctuate didn't
here's one thing I wish I knew which I didn't know and took me a long long time
to learn it brilliant and I'm saying all that because there's several brilliant
people on you they've been on this journey with me and know exactly so dear
was director of marketing at the time Jenny was director of operations at the
time and we went through the pain of this and yes when we did it we realized
we didn't have we didn't we didn't have the big-ticket item that we could do
something so we launched a thing called it was a discipleship a 60-day
discipleship program that Jenny Teresa ran which we called impartation and I
think we paid charge was $7.95 or it's about $800 around there now if when
you're used to charging people 20 bucks to suddenly get an offer for $800 this
caught our this caught our community a bit of God and then I realized I made a
strategic mistake how many of you think I went too high my mistake is I went too
low so when we realized hang on a second we need a separate school because there
are people who want to go further what do they do so with that's why we launched
the school getting our inside story here but the reason we launched the school
it's because now we can make a seven and a half thousand dollar offer for
something we know costs way way
more than that to have Graham and me for 40 weeks is a deal because I know what
I paid when we ran catalyst we paid a speaker to come speak for 40 minutes we
pay them 15 to 25 thousand if it was if it was someone like Simon Sinek back
then in 2017 there were 75,000 for that one talk yeah they're getting both of us
for 40 weeks what a deal right so what I'm saying is when the Lord says one do
not fear in our partnership then the next thing he says be bold be full of
courage and here's the funny thing let's say you have your product that's let's
go back to our our group there with their $300 297 a month if you had that
group for $297 a month and then you just decided you know what don't get
don't go 5x or 10x above that you want to have two at most I think three price
points but they have to be very well separated the closer your pricing
structure is the harder it is to distinguish what you're doing and you'd
make it too complex and too nuanced and now they need a whole explanation and
your sales deployment your conversions will be terrible so if you've got this
$300 product what should be your next product be price-wise anyone want to
guess pick a number right because you basically got a 300 times 12 product or
if you're doing it on a monthly basis you should have a three thousand four
thousand dollar product now here's the funniest thing if you put up a $8,000
product 5k exactly if you put up a 5k product 10 to 15 percent of people will
buy your premium product because they just want the best just want that hard
data known while in the industry and that's not just for online people that's
for anybody and the fascinating thing is if you have so now we have you know the
$3,600 a year product let's say we put up a 10k product and then as you get a
little bit momentum and a little bit of credibility you can go to a $25,000
product did you see what I did with the gaps and you don't need a lot of
$25,000 product people so I was speaking to the person who helps us run our event
and she was telling me that in their space somebody was trying to run their
first virtual event they thought they'd have 300 people attending they end up
with 50 and he had a 10k offer so what he did what they did is they pivoted at
the last minute and they are open up an offer for 50k that's the most that
seems like exact that seems like the wrong way because 50 people pitched 3
sorry 5 people bought and he walked away with a turn of 50k event it's a lot
easier to sell a high ticket item to a few people than a small ticket item to a
lot of people so while we're on the subject of pricing let me throw in let
me throw in Warren Buffett here so here's Warren Buffett's view to pricing
Warren Buffett's view to pricing is this on if you take a scale and he calls it a
commodity product that means there's a lot of people in the space if I was
selling a competitor to Netflix right I there's it's a commodity product right
if you sell cars or whatever it is I'm trying to think of our own group here
whatever it is if you have a commodity product you don't have a lot of price
control over what you're doing as you go to a different as you go along that
scale you get to the point where you're doing something so unique that you get
to control the price because there's no way to measure it against anything so
what you're trying to do is you're trying to get along so now we're in a
discussion with the Lord in your partnership so father do I need to think
differently do we need to package things up in a different way do who is my
right-fit client because everybody thinks big mistake start with a small
and then build it to the big and while you can't go for the mega big one at the
top of the list what you can do is you can start at a lot higher than you
thought because I mean if you're gonna you can't go put together a mastermind
and nobody knows who you are and you want to charge a hundred thousand a year
for that maybe you can maybe I just haven't enough courage but it's a fun
conversation because the Lord loves the possibility of that because then people
say well I want this to be for everyone okay let's address that because there's
a common Christian thinking thing and it's very church world well if we charge
people anything you know then those people can't come and those people
here's what happens if you start with your big ticket item and you build an
economic engine that works your black box is
profitable you can give away the cheap stuff
you can give away something to everyone would be wonderful and brilliant our
goal someday is to offer brilliant plus free
that would be our goal but to do that we have to build an economic engine
they can afford to do that otherwise we're relying on people
giving gifts so
so bruce yeah tell us what you did there where's bruce
i just saw your post you said you started on the high end working yeah
tell us what just we've always done like custom works we
had a handful of clients starting at like they're at least 100k
a year and then we've slowly built a product for 30k
and kind of holding that right now we have some other coaching that stuff
that's like a you know four or five k stuff so we've we
tried to get like the least amount of people up front is less
clients to manage less uh infrastructure needed um and also
easier to work with so when you're getting started
the the more people pay you the less maintenance they are
somehow um the people who give you just a few thousand dollars are the ones that
need all the attention in the world so they're making marriage plans and they
they're picking out the furniture for how you're going to live together for
the rest of your life so yeah it's the there's like a meme of
that where it's like the 500 client it's like i'm so looking forward to
partnering together in this new venture we're doing
and the 50k client is like money wired it's just
you know it's pretty true in the space yeah
this is the truth i see you you use tesla as an example they started with a
model s and they work down to the model 3
you start with your you start with well actually before
the roadster you did say that the roadster which was over 100k
then the model s which i think was around 60 70k the three is now 30 40k
see what's going on there so what you do you have to go and find
here's the most fascinating and unexpected thing about this
because i have i have seen that people especially ministry people have a very
hard time with us because they feel like oh now we're
just concentrating on the rich or whatever it is
and the point is if you want to have the highest impact and the highest reach
start with your highest product first i'm telling you guys i wondered if i
came into your business not because i have any magic but we
just applied this principle what if i came into your business increased all
your prices by 25 percent oh we'll lose clients i bet you'll gain
more and in my experience if you can
if you can but here's the cool thing we're not doing this on our own we're
doing this in partnership so go to the lord and say lord what am i
what are you seeing that i'm not seeing where's x marks the spot where we can
drill what do you see as dead that needs to
go and then the lord says and then you say
but i love that thing it's my favorite toy
so it's a fascinating conversation because when you get to that level of
partnership there's a clarity and a precision
and a freedom to rethink your business and when you're thinking in these
terms everything shifts for you right so let
me go back for a second to some of the notes here
that i was sharing with you sorry if we can get me back on the screen
okay so we said should you buy this business well it was a difficult
question to answer because we didn't know what the expenses were
we couldn't figure what how hard is to crank the handle
the cash in cash out and how hard is to crank the handle is everything
how much effort does it take and knowing the one dial
so that's my simple solution to the whole thing
so here let me share with you and i'll drop end up with this
when we're looking at your business if you gave me your pnl
to look at this is what i would do with it the first thing is i'm going to look
at your profitability these are your first three groups of
numbers right so we're looking at your revenue minus cost of sales is your
gross profit so what that's telling me what that's
telling me is how profitable how good is your black
box so how how easy is it to crank the handle
so if you make a hundred dollars and your cost of goods is ten dollars
and you're dropping ninety dollars to your gross profit
that's a good business if it starts to drop below forty percent
in my experience it's very hard to keep the business going
and
Uh, if it's 60 to 80 percent, that's fantastic.
If you're Red Hat, which runs Red Hat software, the Linux people,
if you're running Red Hat, now acquired by IBM for $37 billion,
I think it's the biggest cash transaction in the history,
you know, in the history of the world.
But Red Hat give away their software.
And analysts could not figure out how Red Hat makes their money.
And they make it by the support of the software.
They'll give you the source code.
They'll give you the code.
And they'll control what they're giving, but all their money.
So guess what? Red Hat is sitting at 92 percent profitability.
If you look at a big company like IBM,
the selling of big computers will be a tiny fraction.
Most of their money is going to come from services.
Why? Because I would say 90 percent, I'm guessing,
because I haven't looked at IBM for about five years,
but I would guess it's still similar.
There's something like 90 percent of IBM's revenue
or some very large number is coming from services.
So you say, well, I have a product.
Well, if you have a product and you can add a service to it,
especially if you can combine the two,
we're looking for that number.
If your number is below 40 percent, right?
So there's an old, there's an old, old joke.
To give a moment of comic relief,
there's an old, old joke about two guys
who haven't seen each other for 30 years since high school.
And they connect and they decide to have lunch together.
And as they're sitting there, the one guy,
we'll call him Bob, drives up in a, you know,
a brand new Rolls Royce, chauffeur driven,
person lets him, you know, chauffeur lets him out.
He walks in and he meets his friend, John.
And John is stunned.
Bob, so good to see you.
But man, I got to ask,
how are you driving around in a Rolls Royce?
You were the worst at math of anyone in the class.
In fact, not to be rude,
but you were the worst in math of anyone I'd ever known.
How did you do that?
Bob's answer was, well, I buy these pencils for a dollar
and I sell them for three dollars and then I live off the two percent.
So if you didn't catch the joke,
we have other, we have other discussions to have.
So the point here is,
here's what we're doing.
You don't have to be good at math.
You just have to have an amazingly good profitable business.
And so if you're in a commodity business where that shrinks,
you have to find services or something else
that's going to push up that black box, improve the black box.
Second part of the rule of three,
I now take the next group of three numbers.
So the first group of three was revenue, cost of sales and gross profit
tells me how profitable you are.
The next thing tells me how efficient you are with those profits.
So now I'm looking, I'm starting with the gross.
Sorry, I'm misspelling there.
I start with a gross profit.
The gross profit that we ended up with in the previous calculation
is now the first line item on the next three.
And I look at your expenses and I have a net profit.
This tells me how well managed the business is.
So let's say we started with a hundred dollars.
We spent $10.
Now we have $90 left.
And let's say after our expenses, and let's say we spent $70 on expenses
and we end up with $20 net profit.
That tells me how efficient the business is, how good the management is.
So the tougher your business is, the lower your gross margin is,
the smarter you have to be, the more efficient you have to be as a manager.
Does that make sense?
Because if you have a low margin business, you have to run that thing
worrying about every single cent, every single dollar.
You have to be an extraordinarily good manager and not to be brutal.
But if you run Coca-Cola, honestly, I'm not sure what you have to be
because that thing has such massive margins.
So in that particular case, you can afford some management learning,
some difficulty or whatever it is.
The last rule of three comes down to,
and we'll end with this for this part, is your environment.
The last three numbers tells me your environment.
This is, we take your net profit, which is what we ended on the last one.
We move out depreciation, taxes, and all those other things.
And we end up with your net operating profit.
This tells me where you're operating in.
A lot of companies leaving California is because of this, the environment,
the taxes, the costs of whatever.
By the way, depreciation, these are very real costs.
Depreciation isn't an accounting thing.
Depreciation is, what is it going to cost you to replace that asset?
Even let's say it's a computer and it costs $3,000
and you're only allowed to write.
of $1,000 a year, in three years' time,
it's assumed that asset is now gone,
and now you have to put another 3,000.
So depreciation is like your savings plan
to replace the asset,
the simplest way I can explain that.
So when we're looking at these numbers,
what I wanted to share with you today was the simple idea.
We're not looking to be ruthless with the numbers
for the numbers' sake.
We're looking to be people who, like David,
have a contrite heart upstairs
and skillful hands downstairs.
We don't have to have a contrite heart
and then be clumsy and kind of be half-blind
about our actual economic model.
We have to know it extremely well.
And I found that when you dig that deep
and you ask the Lord,
please don't make my mistake of,
because math's my thing and modeling and all that,
so I jump in and do it all
and I'm struggling through it all,
and then I get a brilliant idea.
Why don't I ask the Holy Spirit to help me?
Try to start there,
because it's amazing how quickly He leads you
to the key dial you need.
He loves to be in it with you.
And it may not be that He speaks to you and says,
do this or do that, maybe,
but more than often, He guides the thought process
so that you land where you need to land.
And why does He want you to do that?
Because He wants you to help you dig where X marks the spot
so you can find the resources you need,
because every promise from God
is an invitation to become someone in the Lord.
It's got built-in economic model that goes with it,
and it comes with His permission
to learn that whole business,
every tiny aspect of it from leading people,
how to price your products,
how to sell them, how to promote them,
how to market them, how to serve people,
how to bring the kingdom in goodness.
How are we doing?
I need a voice break.
Was that helpful, guys?
So my challenge to you is think like an investor.
You say, well, I'm not an investor, but you are.
You're investing in your own business.
You're investing your kids' inheritance in this business.
Wouldn't you put the same focus and energy into it?
I love the way Warren Buffett talks about investing.
He said, if I gave you,
if I took your entire working life,
and I gave you all that money today, all of it,
you're 25 years old,
and I've figured out what you're gonna earn until you're 65,
and I write you a check for the full amount.
Let's just make up a number.
Let's say it's $2 million.
I write you the check for $2 million.
Here's the rule.
You're only allowed to invest in one company.
That's it, the whole 2 million.
What kind of due diligence would you do on that one company?
That's what you need to do for your own company.
Your whole core, your partnership with the Lord
is all in on this one thing.
So go in and become, get as deep as you can go.
Model it out, keep trying.
And if you model it and it doesn't work,
do it again and do it again,
and every month update it until you become an expert
on the underlying economics of this business.
And then the Lord says, we're doing this.
We're launching that.
You know exactly what that means.
So.
We'll be dropping the spreadsheet and the notes
and the replays into the group after the call today
or early tomorrow.
So if you have any questions,
go ahead and post them there as well.
And this is a great thing.
I would recommend taking a stab at it yourself.
And then this is a great thing to book an SOS call
to go through with Dion.
I've done dozens of black box models with him
and it still is really helpful
for the first time to run through it and go, wait,
does this go here?
Does this go there?
What am I missing?
So highly recommend that you do that
and take advantage of those sessions.
And then I think Robin has a question
and there's some good feedback in the comments as well.
But after that, let's take a five minute break, Dion,
and then we'll move into our next session.
Yeah, I definitely need the five minute break, Robin.
We'll go to the break after Robin.
Yeah.
You know, I started our company without any knowledge
of what to do as a CEO.
And I just picked something out of the air
that was basically said, I wanted 25% cost of goods sold,
25% marketing and sales, 25% admin and 25% profit.
And we pretty much run that for seven years
and it worked until we got to where all of a sudden
sudden our expenses started going up and not keeping a good handle on our admin costs was
what I ended up struggling with these last seven months. And so now we're taking another look at
that. And so what happens when, I guess, you have this model and it works okay. I mean, obviously
we weren't 100% on everything, but I would watch it every month with P&L and see where we were
with the cost of goods and our expenses. And if things needed to change, I would change them. But
I really didn't have to change much along the way. But what happens when all of a sudden you start
seeing some dramatic changes in your original business model and you have to change to a
different business model to stay afloat? You always ask such great questions, Robin.
I love this question. I'm trying to think of how to answer this in the simplest way. I think the
simplest thing I could say would be business models are living documents. They are living
things. They're not like, okay, we cracked the code. Now the cookie jar will always do this.
It doesn't always do that. It changes. The market changes,
economics change, your clients change. Here's the coolest thing. It's often
interesting to ask the Lord, you know, because some economic models, which I've made a huge
mistake in this in my early career, kept investing in businesses I should have stopped in. I should
have let them die, let alone stopped investing in them. That is such a great question. Lord,
is this dead? And it just needs to go lie down. And I take the losses and figure out with you
what to do about that. Sometimes that's the answer. It's not a nice answer. Unless the seed
falls to the ground and dies, it bears no fruit. And sometimes what comes out of those ashes are
the most extraordinary opportunities. And then the second thing I want to say to you, in general,
this isn't always good, but in general, when the world downstairs is full of fear,
it's time for you to be bold. When the world is hugely optimistic and gone into this crazy
spending like the town drunk, then you should be cautious. Always do exactly the opposite of
what Wall Street says. There's a 90 something percent correlation to that value. That means.
So. In the Great Depression, there was this little company that kicked off and it had
very small opportunity to become something. The company I'm speaking about is General Motors.
When you look back and you look at something, if you think we're going into a recession
as a believer, as a kingdom leader, you're going, yes, that's fantastic. How are we going to grow?
And if you have this command of the model, then you know when to stop it and let it die.
You know how to invest it to make it grow. You know what you're doing in terms of how to keep
trend and how to take advantage, because it's like, you know, the world is in an economic recession,
but we as kingdom leaders have decided not to participate.
We opted out. So why don't you opt out of what the world says you can and can't do and opt in
to what the Lord's giving you to do? Listen, he changed for Israel the entire economy in one day.
Fixing your business, you're not a challenge to him. But a lot of the times we don't have our
hands on the handles. We don't know where the dials are. And it would be so much easier to
walk with him and partner with him if we could. It's like, imagine if you, when I grew up for a
few years, I spent some time on a farm. We had this little buggy, which was like a car with no
anything. It was just an engine, basically, and wheels. And it was really dangerous. But you know,
you're teenagers, you're invincible. So it's good to do it then. And so and literally had no steering
wheel. It had a pair of vice grips that had been climbed on. And that was the steering wheel.
And I think that's kind of the picture I have. Sometimes the people run their businesses like
there's got no steering wheel, no real brakes, don't know when to stop. So great question, Robin.
Great, great question. Short answer is your partnership will tell you.
But don't invest past the point of death.
Says the guy who's turned that into an art form.