Alex Hormozi walks through the core value equation from his book — dream outcome, perceived likelihood of achievement, time delay, and effort and sacrifice — and shows how to use it to build an irresistible offer. He covers how to stack bonuses, structure guarantees, and close more sales without giving discounts.
Speakers: Guest (Alex Hormozi), Sam Parr (co-host)
Supply vs. Demand Constraint Businesses [00:00:00]
Guest: Fundamentally, you think about whether there are supply-constrained businesses or demand-constrained businesses. I like going into demand-constrained businesses because that’s what I’m good at.
The Value Equation [00:00:20]
Guest: The core framework — if there’s one framework in the book that everything relates to — it’s the value equation. You have to understand how to create value so that you can charge as much as possible, and also convert as many people as humanly possible.
There are four elements. One is the dream outcome. The second is the perceived likelihood of achievement. Below that — so it’s a fraction — you have time delay, and then effort and sacrifice.
The dream outcome is what separates whether someone’s even interested in your category of offer. Men in general probably want to make more money. Women in general usually want to look better. Both of those are more associated with status. Why is it that B2B offers tend to be more expensive than B2C offers? Because it’s more closely tied to ROI.
But within, let’s say, weight loss: if you’re B2C, how is it that you can have a $5 PDF and a $50,000 liposuction procedure that both fundamentally solve the same problem — they don’t like the way their stomach looks? What are the other three variables?
Perceived Likelihood of Achievement [00:01:30]
Guest: The next is perceived likelihood of achievement. Take the liposuction example. If you’re thinking about getting liposuction and there’s one surgeon who’s fresh out of medical school, hasn’t done a surgery yet, and there’s another physician who’s got 10,000 surgeries under his belt with five-star reviews — who do you go to?
The guy with 10,000 — and the crazy thing is it’s the same procedure. But the perceived likelihood of achievement that you’re going to get what you want is significantly higher. So you pay for that premium.
The equal opposite of this is risk. How do we decrease risk? You have this dream outcome, and you want to be absolutely certain you’re going to achieve it. That’s where guarantees come in. How can I further decrease the risk associated with this purchase?
Time Delay [00:02:30]
Guest: Then we have the bottom side of the equation: time delay. How far is it between when they buy and when they get the result?
To use the example of personal training versus liposuction — personal training, you got to arm-wrestle somebody for an hour to get them to buy a $2,000 package. The reason is because they might get their six-pack 12 to 18 months later. Whereas if you do lipo, you go to sleep, you wake up, and you’re significantly thinner. The time delay is so much shorter, so the value overall is so much higher.
Effort and Sacrifice [00:03:15]
Guest: Finally, you have effort and sacrifice. Effort is the things you have to begin doing that you don’t want to do as a result of a purchase. In the personal training example, you got to wake up early, you got to be sore. Sacrifice is the things you have to stop doing that you want to keep doing — stop Taco Tuesday, stop sleeping in.
When you itemize all the things a customer has to do as a result of a purchase — what increases their risk, what makes it take longer, what makes them start doing things they hate, what makes them stop doing things they love — and then you create solutions for each of those categories, you build an incredibly valuable offer.
From a weight loss perspective, many people think, “I’m going to help them lose weight.” But they’re going to have to go grocery shopping differently, they’re going to have to learn how to prep food. Getting granular about all the little steps that have to occur for someone to get a result — that’s where you get these massive stepwise increases in company value. Because all of a sudden you can double or triple the price and close at a higher percentage.
That’s when these crazy lollapalooza effects occur in the business, where they go from $2 million to $10 million in a year, changing nothing but the core offer.
Enhancers: Scarcity, Urgency, Guarantees, Bonuses [00:04:30]
Guest: Then we have little enhancers I’ll add on top.
You’ve got scarcity — limiting number of units. You’ve got urgency — limiting time. You’ve got guarantees. There are four types: unconditional, conditional, zero guarantee, and performance. Performance is what I call an implied guarantee — “if you don’t make money, I don’t make money.” Anti-guarantees — you lean into the fact that you don’t have a guarantee: “If this type of person needs a guarantee, this isn’t for you.” Conditional — “I’ll guarantee it if you do X, Y, Z.” And unconditional — “I’ll give your money back if you ask for it.”
Then you have bonuses, which drive action in the short term.
The Bonus Stack Sales System [00:05:20]
Guest: From a selling perspective, hand-to-hand — the salesman doesn’t need to say all seven things you have from the jump. The idea is you make the ask on the initial offer. If they say no, you figure out what the constraint is, and then you plug in a bonus to address it. Maybe you need to add three bonuses to get them over the edge.
This also allows the sales team to stop doing discounts to close people. You just add value rather than taking away price.
Then post-purchase — to make sure operations stays clean — you give them a surprise. Say, “By the way, since you did buy, I want to give you these other things.” So if you get the fast buyer who doesn’t need the bonuses, you give them the bonuses after the fact and they love you. If you had to give someone all seven bonuses on the sales call to close them, they already got them. That’s how you get increased close rates without giving away discounts.
Sam: God damn. Highly useful. I feel pumped up. I need to go read the blue and the purple one.