You're Not Unscalable, You're Just Small

0:00Hi Alex, so I am one of those people who believe that my business is not scalable in the current state. I would love to invite you to challenge me on that. Basically, I am in Los Angeles, California. I run a >> [laughter] >> I run a salsa and bachata dance academy for adults. The model is we do 10-week programs. The price point is about $400, approximately $20 per hour. >> Cool. >> Top line right now is 360. Bottom line is

0:28>> Why don't you think you can scale it? >> I believe instructors are the constraint. >> Yeah, it doesn't mean it's not scalable. You just aren't skilled enough. >> Okay. I don't believe it's worth the effort when I look at the numbers. And we did a pilot project in Las Vegas. And I saw how much work it needed to improve. And it looks like way more work than it's worth to scale it to other cities. >> Okay. So, this is great. This is awesome. Thank you for bringing this up.

0:54So, Got my nicotine hit. Um >> [laughter] [snorts] >> So, this is great because this is a very traditional business, service, brick-and-mortar. Um you require skilled people. Now, mind you, Alliance right here has to get black belts and above in jujitsu in order to hire. So, like you need skilled labor. And there are problems in every business when you have skilled labor, but the advantage of that is it's difficult for someone to copy you. And so, like every every Basically, the bigger the problem that you have to solve, the bigger the price tag that's associated with solving it.

1:27And so, sometimes I like this is like a rewiring thing, but when I see problems now, I get like really excited. I'm like, "Ooh, no one else is going to solve this. This will be fun cuz if I solve it, everyone else is screwed." And so, I mean, fundamentally, that's what it's going to be. And so, I guess I would ask you the different question, which is, do you like this business? >> I love the teaching part of it. >> Okay. >> But I'm not teaching anymore. Or I am, but uh >> This is the same This is the the black belt who is no longer the black belt anymore. Now, you're running the business.

1:56>> I take it back. I'm a lot, but I need to be teaching less. >> Okay. Would you prefer to teach zero and have the business make money? More money? Okay. So, okay. This is great. So, when you went to Vegas here for the thing, I'm going to bet, so this is not an over-expansion thing, fundamentally, but it was just I'll bet you that your first model needs to still be more dialed before you expanded. So, if you have a brick-and-mortar business Who has a brick-and-mortar? Can I get a hand? Oh, awesome. [ __ ] yeah.

2:24Good. Main Street, what's up? Okay. My people. It is Main Street. That's what it is. Wall Street, Main Street. Anyways. Um so, this is like the big mistake that brick-and-mortar makes is that they get one that kind of works, and then they get really anxious or really excited, you know, you're not in your head cuz you're a franchise owner. Uh so, they're like, "Okay, I got one to work mediocre, so then off I have two mediocre ones, and I'll make twice the money." But that's not what happens. You have one mediocre one, you split your attention, and then the mediocre one becomes a shitty one, and the new one also is shitty because it's shitty, too, cuz it's new, and you don't have enough bandwidth cuz the first one you put all your attention to. The second one, you don't cuz you have the first one, but the first one doesn't get the same amount of attention you did cuz now you have a second one. Right? So, now you have two terrible ones, and you're like, "Oh my god, this business is terrible."

3:06And so, what really has to happen, this is a rock and hard place, is that you usually have to shut one down so that you can fix the one that you're in, which means you have to get the model right. So, I'll bet you that right now you're probably mispriced. Or, cuz you're in service, so you're either mispriced or overcompensating. And you overextended. You're almost in the whole thing. Uh >> [laughter] >> And you tried to do the over-expansion, and that didn't work, right? And so, we probably have to fix pricing.

3:33That would be my bet. So, how much So, what is So, what does it cost How much do you make in one session? >> We sell 10-week programs. The price is $400. >> Per session? >> We don't do per session. It's just 10-week programs. >> Well, you do. >> Oh, $20 per hour. >> Okay, that's what you pay your people. >> Uh no, excuse me. We pay the instructors $100 per hour. >> Okay, well, okay. So, how many people can come in a session? >> Up to 45. >> All right, watch this.

4:03Okay, so every service-based business, you have to know this. All right, >> [clears throat] >> so you charge $20 per session. By the way, you have the identical business model to a group training gym. So, it's the same thing, except instead of shaking booty, we're lifting weights, but it's one person with a mic in front of a lot of people and there's music going. Literally the same model. So, I feel very confident saying that you can make it make money.

4:30Okay. So, you charge 20 bucks per session, fine. You can get up to 45 people, but what's the average class have? >> 25 recently. >> 25, okay. All right, we have to find out why we're not making money. So, if you have 25 and that's what that's what they pay or this is just the drop-in rate and then >> We don't accept drop-ins. We take $400 upfront for the entire 10 weeks, which is 20 hours of training.

4:55>> So, it's 20 hours of training, so that's what they pay, okay, got it. All right, I'm I'm working through this. So, you get You said 25 people is the average? >> Correct. >> Okay, so you're making 500 bucks per session. >> And one session is 2 hours, so it's >> That's 2 hours, okay. >> for the night. >> And they And so, for their hours are count Wait, okay, got it. Well, fine. I'm just going to leave it this way cuz everything was up to this point, okay. And you said you pay 100 bucks for the tr- for the tr- whatever, the coach.

5:22>> Correct. >> Okay. Cost. >> Plus $60 per hour to rent the studio space. We do not We do not do this. >> Interesting. Okay, so now we're at 160. Okay, so So, my rule of thumb is that if I have service-based business, I need to be at least 80% gross margins. At least. I'd like to be at 90. So, right here, so if you were at a you'd be at my bare minimum, but when you add the 160, and we're below that.

5:49And so this may not seem like a big difference, but let's let's spell it out. So what's this? Uh this is 340. 340. We divide that by 500. The stats going to be the same if it's a 1,000 by the way. We just double everything. All right, so can you do the math on this for me? >> 0.68 >> 68? Okay. 68%. What's your what's your net margin right now? Your net margins? >> Uh like what I take home?

6:14>> Yes. Like not in not including you as an instructor paying for yourself. >> I'm sorry, on the whole business or per session? >> What's the profit of the business for the year? >> Uh 360. >> Okay. What's your >> Excuse The margin uh >> Well, yeah, that's fine. Okay. >> No, no. 270 after we subtract uh direct expenses. So 360 top line minus 270 when we take away the instructor and studio cost.

6:39>> Okay, 360 top line, 270 is your cost. >> 90% margin or 90,000. 90,000 >> 90,000 on 360. >> 60, correct. >> Okay. Which is >> 25%. >> Yeah. Okay. So you're running 25% margins right now on your business. Now does that include you like are you paid out of that 90? >> Sorry Alex, I think it's 75%. Am I wrong? >> Unless I flipped it. So you're saying well, is 270 the profit or is 90 the profit?

7:08>> Uh excuse me. 360's top line, 270 is the profit. >> Okay, 90 is the >> And then you subtract overhead from that if you'd like. >> Okay. >> Direct Direct expenses are 90,000. Overhead expenses are 100,000. >> All right, I think it's cuz you're categorizing [ __ ] How much money do you take home from the business? >> 190. >> Thank you. Okay. So if you take home 190 on 360, you're running 50-something percent margins. Okay, great. So then I asked you is that including you basically working for free and taking that as your income.

7:42>> Yes. Okay. So, we'd have to factor in what you would pay yourself if you were an instructor. So, if we take that out, then we'd get the actual profit of the business, not what you make as both owner and instructor. Okay. So, if you Have you factored that together? >> I would subtract approximately another 50,000 40,000 for that. >> 40,000. Okay. Well, then fundamentally the business is fine.

8:08It's just small. So, you just need to sell more people. Basically, you're you're running 50% margins. If you take out the the 50K that you said, then you go from 190 to 140. 140 on 360 is I don't know, something not bad. Um 37 and 1/2% whatever it is, right? That's not bad for brick-and-mortar business that's service-based. That's That's normal and fine.

8:34Um and so, all we have to do is just sell more. So, basically, I'm I'm like, "What's the problem?" Cuz this is fine. This is a business that works. >> I believe >> like this margin, by the way. This gross margin is not good. But, we can do with that later. >> I believe the problem is that uh Los Angeles is a large market, and we are one of the most dominant players in Los Angeles. And and this is still a small business, so I believe that expanding to smaller in other cities is just not going to be worth the effort.

9:00>> How are you getting customers right now? >> It's 95% organic, 5 to 10% >> Organic being what? >> Uh just they search us they search for classes online. Yeah, and then tap 5 to 10% referral. >> Dude, you are not even close to the cap of LA. Like, not even not even a whiff near the top. Just for context, LA metropolitan area has the same amount of people as Australia. And [clears throat] you're saying your $360,000 per year dance business is capped Australia.

9:32You just You don't market at all. >> Correct. >> Everything is coming to you, and you're like, "I've capped this market." You've capped everyone who just finds out about you. >> [laughter] >> You haven't capped the amount of people that you could let know about yourself. Fundamentally, the book of advertising. I say this violently because I just wanted it to hit, but like the business is fine. You just don't advertise.

9:56So, what the real thing is that cuz this is what's going to happen. If we take out that profit, you're at 37, maybe 40, whatever percent, okay? Now, you have no cost to your car customers right now. >> Correct. >> Right. And so, if you had marketing costs in there, that would eat 20% or more of the margin you have. And so, that's why I went to Vegas, no one knew who you were, and then no one came. Right? And so, because you never advertised. So, I mean, the fact that you're able to make the money you have without advertising just shows you how much [ __ ] demand there is. But, anyways, like everybody else here is like, "Yeah, I'm running 50% margins, right? I don't advertise at all. It's amazing. I've capped the market."

10:32>> [laughter] >> So, if you're running 37 and 1/2 and you would put 25% into marketing, then you're at like 12 and 1/2% margins, which is bad. Now, if this were at 80%, that 12 and 1/2 bumps to 25 cuz that 12% goes straight to the bottom line. Now, if you're at 85%, now you're at 30% margins, which is why I say this. Cuz like this math, like this needs to be 80. >> It can easily increase because when we fill up more people in the class, it really um does a lot for the bottom line.

11:02>> Yeah. >> [laughter] >> We sell more people and we pay the same amount, we make more money. >> I agree with you. >> All right. So. >> [laughter] >> So, this is what you need to do, all right? Is that you need to learn and you can crush this with Instagram ads like tomorrow because dancing is super visual, it will it will crush with that. I want you to record a session, all right, on your iPhone of lots of people dancing. Lots of people ideally in in concert. So, if everyone's doing the same thing at the same time, it really draws most attention.

11:31And then advertise what's the what's the offer you do for the 400 bucks? >> Uh 10-week program. >> Well, yeah, but what's the promise? >> All the foundations. >> Okay. So, I'd be like, don't suck at your next dance thing in 10 weeks, like call us up. Don't put the price, just advertise it sell over the phone. Cool? >> Yes. >> Okay. And you can probably get it with 600, by the way. Um you can sell the other benefits of like weight loss and whatever, like moving your body.

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