https://www.youtube.com/watch?v=9xAMe0QBFhU

1 00:00:00.000 --\> 00:01:00.000 if you've ever struggled at the end of
the month and worked all the way there to only to look at the bank
account and find that there was nothing there there was too little for
you to take out and then been like i literally just worked for an entire
month for nothing then this video is for you all right so one of the
number one issues that i see when i talk to small business owners of ms
or medium-sized business owners is that they don't have an adequate
grasp on the difference between gross and net margin and the reason i'm
coloring the background green and i'm using my green pen is that margin
is about the money so um this is a topic that people do not talk about
it is also probably the number one thing that i look at in a business to
determine its health and whether i would be interested in investing or
any of those types of things so let me break down the difference between
gross margin and net margin and then i'm going to tell you the
functional ways that i use to fix a business alright so gross margin
gross margin is what the direct cost of fulfilling your goods or
services are and so the equation for it don't get everyone's like i
don't like math it's subtraction all right

2 00:01:00.000 --\> 00:02:00.000 it's not math that you be you're
confused about if you like zone out at this moment it's because you
don't want to do the thinking to understand the words i want to be
really clear i'm literally going to use subtraction here all right it's
the revenue how much money you're making minus the cost of goods sold
all right that's the cogs now the thing is if you're in a service
business your cost of goods sold isn't the physical products that you're
selling because you're not selling those you're selling people you're
selling payroll hours all right and so the cost of goods sold for a
service business which is what the majority of people are listening to
this are using is the incremental cost of the additional unit which
means that that doesn't count your front desk roll that doesn't count
your hr director it doesn't count your rent none of that stuff counts
it's just the cost of one additional unit all right very important your
net margin and i'm going to give you examples in a second your net
margin is your chop right that's what it's the juice at the end of the
month it's what you get after everything is paid what's left

3 00:02:00.000 --\> 00:03:00.000 over that's what you end up taking home
all right but the gross margin in my opinion well they're both obviously
very important but the gross margin is the one that begets that creates
the net margin and this is the one where i always focus and this is the
thing that i fix and this is what i help people fix and this is the game
all right so my revenue minus cost so let's say we're selling a service
for 60 per per you know per hour that's what that's what let's just say
you know you're a hair stylist or your trainer doesn't matter right
you're selling 60 right in your business and your cost of goods sold
let's say is 20 bucks right you're paying somebody 20 for the 60 thing
you're like that sounds good there's 40 left over for me this makes
sense right wrong all right and i'll get to why in a second and what
number i use um but let's just do this so you can understand what the
gross margin is here so the gross margin on this and that's assuming
we're not using any product to like work on this if you were like a hair
stylist for example but let's just say simply here 60 is what you're
charging 20 is what it

4 00:03:00.000 --\> 00:04:00.000 costs and 40 is left over right now
what you do to figure out your margins you take that 40 right what's
left over divided by the 60 of revenue which is what you got gross and
what that does is it gets 66 percent that's the gross margin you'll be
like oh that that sounds reasonable that's not that much you know that's
not that bad the thing is is each incremental gross margin point is
enormous and so let me show you the difference so let's say at the end
of the year you're running a business that runs on 66 gross margins and
let's say at the very end of the year now we're in the net margin
category you uh you end up with 12 margins all right now most brick and
mortar businesses run around there crazy right but that's what most
brick and mortar businesses run around so if you're at 12 margins and i
say listen you got to be at 80 people like well 80 and 66 it's not that
different if you bumped your margins to 80 percent what happens at the
end of the year that's 14 all right so what that

5 00:04:00.000 --\> 00:05:00.000 does is you now have 26 net margins at
the year we more than doubled we 2.2 x how much you make so do you think
this is important can i double how much you make simply by changing this
one number yes all right so let's use the 80 example which by the way is
my rule of thumb this is the number that i get any service based
business over all right doesn't matter what you're selling this is what
you have to get over all right now i'll show you the difference between
80 90 95 100 in a second but this is important all right so if 80 uh
gross margin is what i need there's two ways i can do it one i can
decrease this cost right i could say that i get this to 12 12 right this
becomes 12 bucks so cross that out and now my uh my new uh take home on
this is 48 dollars right and so 48 dollars

6 00:05:00.000 --\> 00:06:00.000 over 60 equals 80 so one way you can
increase your margin is decreasing your cost gross margin the cost of
actually doing the thing right the second way is by increasing how much
you charge this guy right and so let's say instead of 60 and we have
this 20 so what is how do we get 80 loafed over if we have a 20 cost
well it's easy with this number because 20 is 20 right and so that means
that you'd have to charge a hundred dollars for your 20 thing to have an
80 margin and so way number one you decrease the cost of fulfilling the
thing way number two you increase the price right now this is why this
is so important obviously i showed you at the end of the year you'd have
a lot of money but besides that if you're making a hundred dollar or
you're charging a hundred dollars or something right and it cost you 20
you got 80 left over all right now from

7 00:06:00.000 --\> 00:07:00.000 that 80 and here's what's important you
have to pay for everything else in the business and have enough money to
market to acquire more customers and you have to have enough money uh uh
to have a profit right and so it seems like you're like eighty percent
alex that's crazy and so by the way all successful businesses the
biggest businesses in the world they're not running 80 margins they're
running 99 gross margins all right and you're like well they're only
that's only 19 more it's actually not it's so much more than that so let
me break down this difference real quick and then i'll finish this
example so the difference between 80 margins 90 margins 95 margins right
uh i'll just go all the way to 100 right and 100 let's do this is that
difference between 80 and 90 is that this is twice as profitable as this
why because it's half the cost right it means i took that 20 and made it
10 right that's the difference you're looking at this side of the
equation not all of

8 00:07:00.000 --\> 00:08:00.000 this all right this is between 90 and
95 gross margins again twice as profitable and what i mean by that is
that you can sell twice as many people for the same cost that is the
magic and that is how you scale that is how you get something that's
enormously profitable allows you to acquire customers and has tons of
profit kicking off every single month and so this is where a lot of
entrepreneurs get messed up because they feel bad about charging a lot
for their services or a lot for their products or whatever right the
thing is is that if you do not do this you will make no profit and you
will not be able to scale you will not help more people unless you get
this price you got to get over this mental barrier that you have around
what you're able to charge for things that don't cost you a lot of money
right right okay so back to this example so if i have 80 left over that
means that it depends on what my cost of acquisition is so let's say uh
you know there's a certain percentage of my revenue that i'm willing to
give for cost of acquisition

9 00:08:00.000 --\> 00:09:00.000 let's say it's 20 right so if 20 of
this i'm willing to give uh that means that 16 is what i have left to
market this right because you see like you can only use it off of what's
left here and you still after you pay your marketing right you still
have the rest of your costs you still have rent you still have payroll
you still have you know a payroll for all the non-essential stuff you
still have software stuff all these other costs of doing business all
right that have to come out of just the remainder between here and here
all right this is the game and so in in sum total here if i'm looking at
a business the big number that i'm looking at is 80 and that's what i i
target i target any business especially for service that's over 80 and
so if i'm trying to invest in something i'm trying like this is the game
that we get to and so you can do this for any brick and mortar business
for your business for anything

10 00:09:00.000 --\> 00:10:00.000 you got to be over 80. and ideally
pushing from 80 to 90 or 90 to 95 at each of these increments doubles
the productivity of the business again right and that's where it gets
magical and so the two ways you can do it just as a quick recap to
increase your gross margin is number one you can decrease the cost and
number two you can increase the price and that is how you can increase
your gross margin percentage all right so i hope that was i before you
hope that made sense i hope if you look at your own services and you're
like well like what's my gross margin break it down what's the
additional cost for one more person right um if i like i said earlier if
i was selling something for 60 and if you don't know let's say you've
got one person i'll give you one more example for this let's say you've
got the type of business where one person fulfills for many people
because you're like i don't know what my cost would be so i actually had
this example not that long ago i was at a mastermind

11 00:10:00.000 --\> 00:11:00.000 and a guy said he's got coaches and
they coach people right and so i said well what are you know what are
your gross margins he's like i have no idea i was like well let's walk
through it together so he was paying his coach four thousand dollars a
month all right that's what he was paying his coach and i said cool how
many clients can your coach handle he said well um my my coach can
handle uh 40 people all right 40 clients i was like okay what do you
charge your clients per month he said well i sell packages and i was
like all right what are your packages costing it's like they're 1200
packages i was like okay what does 1200 get me he said it gets you three
months i'm going to give you a real world example here so please you
dice dig this all right which means that it's 400 per month if you
spread it out right so he's got 40 clients 400 a month is what is what
they're what they're charging all right which means 40 times 400
hopefully my math is right here is 160 000 hopefully am i missing
something up here i think it's 160 000 isn't it

12 00:11:00.000 --\> 00:12:00.000 uh zero four times four thousand
sixteen thousand i was like whoa um is sixteen thousand dollars per
month right that's cool right that's neat so sixteen thousand dollars
per month and the cost of the coach is four thousand right everyone
following with me so it means that there's twelve thousand left over so
that's what's left over after the cost and then we're just dividing it
by the total revenue right which is this guy you just bring it back down
so it's just 12 divided by 16 right which in this instance would be 75
so he's close to 80 but he's like well you know i don't want to change
anything because because i'm already at 75 but remember at the end of
the year the end of the year let's say you've you've got 15 margins
right let's just say at the end of the year you got 15 percent bumping
the extra five takes you to 20 right you're like oh wow that doesn't
seem like a big difference 15 to 20 net margins at the end of the

13 00:12:00.000 --\> 00:13:00.000 year is a 25 increase in how much
money you make that is how important this is and so anyways so what
would he need to do he either has to pay this guy less or he's got to
charge charge more money here and so um the way to figure this out
backwards if you wanted to if you didn't want to change excuse me if you
did want to change your uh your price to get it over 80 then you simply
uh basically increase what this number needs to be until it's 80 so um
gosh what's the it's 1.6 times 8 whatever that is uh eight and then uh
uh god it's uh 12.8 yeah so that would mean that he have to get to 12
800 if he wanted to get over 80 which means he either needs to charge
the the extra uh 40 clients an extra uh 200 no 20 yeah you need to
charge an extra

14 00:13:00.000 --\> 00:14:00.000 20 bucks here right per month or he
could pay this coach 3 200 per month and that is how he would get from
75 to 80 and that my friends is the game so hope you found this useful
hopefully you like this hopefully you thought this was awesome if you
didn't um well please tell me i just want to make stuff that you guys
find valuable this is the game this is the stuff that i dive super deep
into when i'm trying to fix a business model uh or i'm consulting with
somebody and i hope you find that valuable too so anyways keeping
awesome please leave a post or review or any of that good stuff and i
will see you on the next one bye
