Alex Hormozi: If You Don't Understand Margin, You Don't Understand Business

Last updated: Jun 14, 2023

The video is about the importance of understanding gross and net margin in business, and how increasing gross margin can significantly increase net margin and overall profitability.

This video by Alex Hormozi was published on Feb 18, 2021.
Video length: 13:36.

In this video, Alex Hormozi explains the difference between gross margin and net margin in business and why it is important to understand them.

He uses the example of a service-based business to illustrate how to calculate gross margin and how increasing it can significantly impact net margin.

Hormozi emphasizes the importance of focusing on gross margin to improve the overall health of a business.

  • Small and medium-sized business owners struggle to understand gross and net margin.
  • Margin is the number one thing that determines a business's health and profitability.
  • Gross margin creates net margin and is the direct cost of fulfilling goods or services.
  • Net margin is the profit left over after all expenses are paid.
  • Increasing gross margin is the key to increasing profitability.
  • Understanding gross and net margin is crucial for scaling a business.
  • Charging enough is crucial for acquiring customers and having tons of profit kicking off every single month.

If You Don't Understand Margin, You Don't Understand Business - YouTube

Alex Hormozi: If You Don

Introduction

  • Many small and medium-sized business owners struggle to understand the difference between gross and net margin.
  • Margin is about money and is the number one thing that determines a business's health and profitability.
  • Gross margin and net margin are both important, but gross margin is the one that creates net margin.
Alex Hormozi: If You Don

Gross Margin

  • Gross margin is the direct cost of fulfilling goods or services.
  • The equation for gross margin is revenue minus cost of goods sold (COGS).
  • For service businesses, COGS is the incremental cost of an additional unit.
  • Gross margin is important because it creates net margin.
  • Incremental gross margin points can have a significant impact on profitability.
Alex Hormozi: If You Don

Net Margin

  • Net margin is the profit left over after all expenses are paid.
  • Net margin is what the business owner takes home.
  • Net margin is determined by gross margin and other expenses.
  • Increasing gross margin can significantly increase net margin.
  • Most brick and mortar businesses run around 12% net margin.
Alex Hormozi: If You Don

If You Don't Understand Margin, You Don't Understand Business - YouTube

Increasing Gross Margin

  • Increasing gross margin is the key to increasing profitability.
  • The rule of thumb for service-based businesses is to aim for 80% gross margin.
  • There are two ways to increase gross margin: decrease costs or increase revenue.
  • Incremental increases in gross margin can have a significant impact on net margin.
  • Increasing gross margin from 66% to 80% can more than double net margin.
Alex Hormozi: If You Don

Understanding Margin in Business

  • Margin is the difference between the cost of producing a product or service and the price at which it is sold.
  • There are two ways to increase margin: decrease the cost of fulfilling the thing or increase the price.
  • Successful businesses run 99% gross margins.
  • The difference between 80% and 90% margins is twice as profitable because it's half the cost.
  • The difference between 90% and 95% margins is twice as profitable because you can sell twice as many people for the same cost.
Alex Hormozi: If You Don

Increasing Gross Margin

  • Decrease the cost of fulfilling the thing.
  • Increase the price.
  • Increasing gross margin percentage is how you can increase your overall profitability.
  • Pushing from 80% to 90% or 90% to 95% at each increment doubles the productivity of the business.
  • Understanding gross margin is crucial for scaling a business.
Alex Hormozi: If You Don

Calculating Net Margin

  • Net margin is the percentage of revenue that remains after all expenses have been paid.
  • After paying for marketing, you still have the rest of your costs, such as rent, payroll, and software.
  • The remainder between gross margin and net margin is where all the other costs of doing business come from.
  • Understanding net margin is crucial for determining the profitability of a business.
  • Investors look for businesses with high net margins.
Alex Hormozi: If You Don

The Importance of Charging Enough

  • Many entrepreneurs feel bad about charging a lot for their services or products.
  • If you don't charge enough, you will make no profit and will not be able to scale or help more people.
  • You have to get over the mental barrier around what you're able to charge for things that don't cost you a lot of money.
  • Charging enough is crucial for acquiring customers and having tons of profit kicking off every single month.
  • Charging enough is crucial for scaling a business and helping more people.
Alex Hormozi: If You Don

Importance of Understanding Margin in Business

  • Understanding gross and net margin is crucial in business.
  • Increasing gross margin can significantly increase net margin and overall profitability.
  • Calculating gross margin involves subtracting the cost of goods sold from revenue and dividing the result by revenue.
  • Calculating net margin involves subtracting all expenses, including cost of goods sold and operating expenses, from revenue and dividing the result by revenue.
  • Increasing gross margin can be achieved by increasing prices, reducing costs, or changing the product mix.
Alex Hormozi: If You Don

Real World Example

  • A coach was paying his coach $4,000 a month and had 40 clients paying $1,200 for a three-month package.
  • This means the coach was making $160,000 in revenue per month.
  • After paying the coach, the coach was left with $12,000 in profit per month.
  • Dividing the profit by the revenue gives a net margin of 75%.
  • To increase the net margin to 80%, the coach would need to either charge more or pay the coach less.
  • Increasing the net margin by 5% can result in a 25% increase in profits at the end of the year.

Watch the video on YouTube:
If You Don't Understand Margin, You Don't Understand Business - YouTube

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