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

In the video lecture, Alex Hormozi emphasizes the importance of understanding the difference between gross margin and net margin in small and medium-sized businesses. Gross margin is the direct cost of fulfilling goods or services minus the cost of goods sold, and net margin is the money left over after everything is paid. The speaker explains that gross margin is the more important of the two because it creates the net margin. By improving gross margin, businesses can increase their profits. The speaker provides an example of a business that charges $60 per hour and has a cost of goods sold of $20 per hour, resulting in a 66% gross margin. By increasing the gross margin to 80%, the net margin doubles from 12% to 26%, which significantly impacts profitability. Hormozi concludes that understanding and improving gross margin is crucial for the health of a business and its potential for investment.

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

Key Points

• Many small and medium-sized business owners struggle with understanding the difference between gross and net margin.
• Gross margin is the direct cost of fulfilling goods or services and is calculated by subtracting the cost of goods sold from the revenue.
• Net margin is what's left over after all expenses are paid, and it's what the business owner takes home.
• Gross margin is the more important of the two margins because it creates net margin.
• Each incremental gross margin point is significant and can greatly impact net margin.
• Increasing gross margin by even a few percentage points can significantly increase net margin.
• Gross margin can be increased by increasing revenue, decreasing the cost of goods sold, or a combination of both.