Build Your Business Like Harvard

Here's how to actually scale an education business. You feel like you're losing customers, you're not sure how to expand. And so education businesses, one, are they sellable? Two, are they valuable? And then three, where do they go wrong? I'm gonna cover it all right now. Back streets back. All right. Or is it let's go? I don't know. I actually don't know the words to the song. Don't know the words to any song, believe it or not, except for one that I did for poetry class in 7th grade. Anyways, that's not why you're here. Here's the issue. Many people have education businesses, books, courses, coaching, all of that stuff, and they want to make sellable businesses. They also want their customers to never leave. And so they have these problems, which is that customers are leaving and their business isn't sellable, and they think there's something wrong with their business. And the answer is maybe. So let's dive into this. Number 1, what makes Harvard Harvard? Well, number 1 is that Harvard has standards. So they have many people apply and only a few get in. If you accept everybody who has a credit card, that's not a very high standard. And so if you want to create a brand around education, you can't let everybody in. Thing number 1. Thing number 2, Harvard makes no promises. They don't say, hey, you're going to make this much money and you're going to make it this many days. They've completely gone away from that. Instead, it's just, it costs this much money to get in and you might not get a result. Now here's the craziest part. Number 3, not everyone passes. Not only does not everyone get in and everyone pays with no promise, not everyone passes. And so if you just look at those 3 criteria, there's more, but if you just look at those 3 criteria, you'd be like, oh, that's why they're They're different from 99% of other education businesses in general. They also do education. Now, what else is different about their thing? Well, it's in-person versus remote, which is probably, again, another big differentiation for the vast majority of these businesses. On top of that, the network of the quality of the people is probably the most valuable thing that they give on top of the brand. They just curate an experience for very smart people and they slap their brand on top of them. And fundamentally, that's actually what they sell. What's the next issue that comes up? For most people of like, why is my business not a Harvard? They will then get into, well, my customers leave. So do Harvard's. They leave after 4 years. Now they also have an extended time horizon in terms of the promise of when someone might get to the end of this thing. Yours is 6 weeks, theirs might be 6 years. What is continuity in the form of education? Well, every quarter you have new courses and you have a curriculum. And so a lot of people who are in the education space are like, I want to teach this one thing and I want people to pay me for it forever. And the reason for that is because people in the education space mistake a payment plan for continuity. So if you sell something that costs $12,000 and you give them access to it for a year and people pay $1,000 a month, you don't have churn, people have graduated. You have a payment plan, not continuity. If you're trying to solve for continuity or solve for sellability, let's, let's, let's go into those. Why not? We're partying, right? A business that has enterprise value has reliability of future cash flow, meaning there's a high likelihood that this business will continue to make money in the future. And so typically, like, Harvard has a brand. And so because of that brand, they're not worried about demand, right? They can demonstrate the fact that they have a certain number of people who are applying every year and a certain number of slots available. And so because of that supply-demand discrepancy, because of the brand that they built, they're able to likely, if it were a private enterprise— uh, what is private, but it's not a nonprofit, it's not a for-profit institution, it's a nonprofit technically, let's not get into that— point is, is that for your business to have value, you're going to have to build a brand around it that guarantees demand in the future. Because, and this is the big one, Because education does not lead to continuity except under one circumstance. So let me explain. So if you teach someone to do a thing, they usually learn the thing if you're good, and then they graduate from the thing and they should do that. But a lot of people are like, man, I want to have recurring revenue. But the thing is, is that you have to break up the deliverable that you have into two different columns. All right? So this is a good exercise for you to think through. Column A is what's the stuff that someone uses one time, gets the value, and then after they get the value, it's no longer valuable. So if I teach you how to sell and then you know how to sell, I don't need to teach you again. You already have the value. If I teach I teach you how to generate leads for yourself. As soon as you learn the skill, the skill now continues to provide value, but I no longer provide value to you in teaching it. Right? Right. So there are education components which are typically one-time value. People aren't on a, like for a Harvard, for example, they teach you, you know, Communication 101. Okay. After that semester, you don't take Communication 101 again. And it would be weird if they tried to charge you again for Communication 101 because you're like, well, I already know it. But we do this. And as we, as entrepreneurs who do education stuff, try and do this stuff all the time. Now you're like, wait a second, then how did Gym Launch sell for a lot of money if there was enterprise value? Ah, because most people mistakenly think Gym Launch was an education business, and that's because the people who profit from education businesses try to sell you on that. As the owner of Gym Launch, I can tell you the vast majority of the enterprise value in that business was not from education because there's other things. So I said column A is one-time value, column B is consumables, things that continue to provide value again and again and again. If you look at your service, which I like to think about from that perspective. What are the other things that you have in the business that someone must use again and again and again? Examples for Gym Launch. One of the primary things that we do there is that we go and test ads in representative markets. We spend our own money to get ads that we know work. And then once we have that ad, we then sell it at a margin basically to everyone else. And it's 100% gross margins for us after we've incurred the initial cost of one, filming the ads, you know, editing the ads and then displaying the ads, actually running them, putting the money behind it to see which ones are the winners. But once we scoop up the 4 or 5 winners, we can just hand them to 1,000 or 10,000 locations and they are valuable to each of those locations because within those local markets they are new ads. But what do you need next month? More new ads. And so it is a consumable that has 100% gross margins that can be sold again and again and again. What else do you think someone could have that is consumable? There's a, there's a great school community, for example, where they do 3D printing. So the guy teaches 3D printing, how do you do it, how do you set it up, whatever, one-time value. And then after that, every month he scours the internet for new products that are hot and trending right now so that you could set up with your 3D printing business. And so people stay every month because they can get this list, the hot list, and then they grab the things off that list and they stay in there. And for him, he just has to do the one-time work of creating the list and then he can sell it over and over and over again. But people stay because they don't want to lose it. I'll give you a different business. There's a real estate business and they have super low churn. And one of the reasons they have low churn is because every month he has bird dogs. So basically people go out and scout for properties and he puts a list out of properties that meet his criteria for his way of doing wholesaling. And so then people pay to be in his community in order to have access to this list of fresh properties. So he does the one-time work and then he basically licenses that or fractionalizes the sale of that to many people. Now these are the consumable consumables. What other ones are common? Let's think through them. So one of them is you've got community. Community in and of itself is actually a consumable thing. You use it this month, use it next month, right? These are things that you can do. These are fundamentally why network effects exist. If you can build a valuable enough network, people don't want to leave that network. And fundamentally, that's what communities are on a micro level. Now, what are other things that you might use? You use traditional services, right? So if you have a marketing agency, you might pay monthly. If you do SEO, you might pay monthly. And so we have to look at our deliverables and think, what are the things that are one-time and what are the things that are consumable? And then here's the key part. We have to price them appropriately. The reality is that education, extremely valuable. There's a reason that Harvard can spend, you know, charge $60,000 a year or 70 or whatever it is now is because that, that is very valuable to educate someone. Gives them— they basically pay today to increase their skill set so they can increase their future earnings. That's what education is about, is literally increasing someone's future earnings. That's why people learn shit. Or if it's, you know, if they want to learn how to paint, then I mean, they could obviously monetize that too. But some people just want to learn how to paint., or they wanna know how to do music, they wanna learn how to sing, whatever the skill is, right? But they pay today because they know that they're basically paying a discount over the long haul as long as they learn the skill. So in this context, how do we get customers to stick? One is with the pricing, we wanna price the one-time value as high as we possibly can relative to what people are willing to pay. On the consumable part, we price it where people are also willing to pay if the other piece didn't exist. So think about this, this is the big mistake, right? This is the big mistake is that people will price their consumable at a payment plan price of their one-time upfront value. For example, if something's worth $30,000, then they say, cool, you can pay $2,500 a month for 12 months, and you're going to get this one-time value and this consumable value. But then once people have kind of drained that one-time value, and sometimes it takes less time than a year, then people exit because the consumable value is not worth the $2,500. This is why I'm a big fan of the— or big advocate of the big head long tail model, which is Maybe the upfront thing is worth really $10,000 and your consumable thing might be worth $100. It might be worth $200, might be worth $500. I don't know what that is, but if you only sold that, so this is a good mental frame, is if you only sold this thing, what do you think would be a price that people would not want to leave? That's the price you have for your continuity because that is the price that people are willing to stay at. And typically it's significantly lower than a spread out version of the upfront value of whatever the educational skill is. And so you have to differentiate those things. Now, beyond that, you might be like, well, shoot, my consumables aren't worth that much. Fine, then structure your pricing so that you always have a value discrepancy in what you charge and what you deliver. Now, the other piece of this is, okay, well, I wanna have enterprise value in the business, which means that I should have a reliability of future revenue. Sure, we have a little bit of our consumables that will stack up over time, great. We have our upfront, which typically serves to liquidate the acquisition cost, at least how I like to structure things. For the high, high margin continuity that goes on the back end. But what else can we do? Well, what does Harvard do? They sell you more courses. They sell you more degrees. You want to have a bachelor's? Guess what you have now? You want to get a master's? Get a master's. After a master's, what do you get? You get a PhD. Well, after a PhD, what do you get? You get a double PhD. You get a super duper PhD, right? They'll keep selling you, but the thing is, is that's the continuity. That's the ladder, is just what's the higher level version. But they also know that it's a fraction of that, right? If 100 kids go to, get a bachelor's, it might only be 10% or 20%. I don't know the numbers, 20% that they get a master's. And of the master's, maybe it's only 10% of them that get a PhD. Also, the pricing also reflects that. Interesting, right? Now back to the stickiness of the business. A piece of advice, don't start an education business and then say, I'm going to make it a SaaS company. Famous last words. Now, if you're white labeling somebody's tool, whatever. It's not really yours and fine. That's really just you being an affiliate of someone else's thing, whatever. But if you're like, I'm gonna start something from scratch, the likelihood that you succeed is basically zero. And when I say succeed, it's like actually have a true software exit. I have yet to see, literally yet to see, and I look at a lot of businesses and I kind of sit in this space, like I understand it pretty well. I have yet to see a business that has successfully done this. And the likelihood that you are the special snowflake is probably not a bet that I'd be willing to make. You might feel like a special snowflake. Your mama might've told you you're a special snowflake. Your father, well, hopefully he didn't, He didn't tell you special stuff. Like, he should hopefully have you prove it. But the point is, it's unlikely, and I prefer to make bets that where if I wait, I win. And if I look around and look at the marketplace and no one's won using this path, it's probably because it's a flawed path. And it is, because when you attract someone with education, then you try to keep them with software, it typically doesn't work unless it's a core function of the business and you're fully focused on it, which you probably are. So, if you want something that is super sellable, then you want something that's sticky. If you want something that's sticky, then make the business about the sticky thing. A lot of stickiness here, right? Now, the trade that most people in education and even media companies make is that instead of having something that is inherently valuable as an asset, they tend to just make more money than they otherwise would with a similar scale business in just about any other space, and I see that as the trade of future value or future money for today's dollars. I'll give you a story. So, a buddy of mine had a business. He worked on it for his between 8 and 12 years, I can't remember. And he took a salary of $70,000 a year. And at the end of that period of time, he sold the business, software company, for $250 million. So $70,000 a year for 8 years, 10 years, 12 years. He lived on Dave Ramsey style, paid his house off, like lived on that, and then boom, $250 million. He could have done an education business and maybe made $10 million a year for that whole time. He's skilled enough for entrepreneur. And so the question is, how do you want to make money? And I want to be clear, I don't think there's anything wrong with saying I have a business that makes me $10 million a year that I'll never be able to sell. Well, you get to enjoy the $10 million every single year. So I mean, life's only going in one direction. It's getting shorter. So I mean, I don't think there's anything inherently wrong with that. There's this kind of mantra of what I call the 3 marshmallow problem. So there's the typical story of the child who, you know, gets put into a room and he gets 1 marshmallow now. And if he doesn't eat the marshmallow, he gets 2 marshmallows. The problem with that for those, those of you who learn how to delay gratification, is that once you learn that skill, you then want to delay gratification forever, and then you hope for this third marshmallow that might never come. Think about different versions of this experiment. If we were to say, hey, you get one marshmallow now, and if you wait a year, you can get a second marshmallow— is it worth waiting a year for a second marshmallow? Like, is the payoff of a second marshmallow worth it? Maybe, maybe not. Is it worth it at 10 years? Is it worth it at the end of your life, you get the second marshmallow? Maybe, maybe not. And so I think a lot of people mistake delaying gratification with maximizing gratification. Yes, it's true, delaying gratification in general tends to, especially at the beginning, increase your reward. But at some point there is a diminishing return, in my opinion, beyond which you should just get your reward, right? Also, there's this misconception, I think, that by taking the reward, unlike the experiment, that it prevents you or precludes you from getting another marshmallow again later, which oftentimes it doesn't. And so I think there's a sweet spot, and that's like most things, is that the magic is in the middle, is being able to balance both extremes. And what many people will do, strivers especially, will just suffer for extended periods of time, and then sometimes they don't even get the second marshmallow, and the first marshmallow is stale. I don't see an issue with the fact that the business that you have might just generate more cash flow and not really be that sellable. That's okay. It's a trade you make, and I think that's a— it's a reasonable trade.. But if you want to get, have your cake and eat it too, then there is one specific type of education that does have continuity. And so that's what I'll dive into. So obviously all the components that I talked about that are consumables, those will drive continuity. But there is one specific type of education that drives continuity, which is continued education. So there are professions where you have to stay up to date with technology. You have to stay up to date with new practices where if you can build a business where you recertify people on new skills or new technologies that come out on a consistent basis, then that membership, which is really what the business is, that membership business can over time continue to compound and you can demonstrate that people will stay with you for an entire career. If you could demonstrate that, then you have a business that is very valuable and is in education and can sell at almost a tech multiple. And fundamentally, inherently, technology businesses aren't— they don't get these multiples because it's not like, oh, I have a software, therefore I get a software exit. Like, no one gets this. And the thing is, is that people will preach this because they want to sell you on that idea. But that's not how an investor sees it. The things that make a software valuable are the things that make a business valuable, which is that there is revenue retention, there's high gross margin, there's high incremental margin, there's less operational drag at scale. These are all the things that make software companies at scale more valuable. It's not the fact that they use code that makes them valuable. If you sell people into a software and they churn out, you know, every 6 months, That's not valuable. It's basically the same as a service. And you're going to be valued based on the fact that you have customers that come in every, you know, come in and out all the time. And the thing that you'd have to establish is a brand that would then prove out the fact that you're going to continue to have demand like Harvard for years to come. And so if you're not doing this, then you're basically just building something that generates cash flow, which to be fair, I'm not saying there's anything wrong with that. But the big misconception is the idea that number 1, there's something wrong with it. Number 2, that I have to add software or something to make make my company valuable, which it won't make it valuable. It'll likely make it a distraction and decrease the size of the business. Number 3, we're cranking. You're charging too much for the consumption and too little for the education. You probably need to do this: charge more for the upfront thing because it is life-transforming value, and then charge less for the thing that's ongoing because it probably is less valuable than the other one. And if you're like, I'm not sure if mine is less valuable, well, just look at your churn. People are telling you if it's less valuable. And if you don't have something that is consumption-based, Think about what components of whatever it is that you sell someone must consume on a monthly basis. They use and reuse so that you can get them to buy again and again. So these are my qualms with education done right. This is how I think about it, and hopefully that, that should put to rest one, uh, how do I sell my education business? Well, it's not about an education business, about keeping a business that keeps customers for a long time and having high gross margins. I gave you one model that does work. The other model is having a stack of consumables. Continued education is also a method that works there. But again, that's the new thing. That's the PhD, that's the master's. It's certification level 1, 2, 3, 4, 5, 6, right? It's the extra thing that you're doing, and you have to understand that there's gonna be a trade-off or drop-off at each level. Now, if you sell only continued education on the front end, then you have people who already have a prerequisite. So then the issue there, it's gonna be finding the people who already have the prerequisite that matches your continued education demands. All businesses have problems. Now, if I wanted to go use my marketing skills on something, 'cause you probably, if you sell education, you have to get good at marketing and sales, it's one of the parts of the business. If you want to build something like that, then let me give you the easiest hack in the world to build something that's really valuable. Find stuff people already don't stop buying, then use your marketing and sales skills on that, which is fundamentally what we did with private equity. So what do I put in my feature set to make it stickier? So number one is I would add as few things as possible, and you likely can delete things. This is big. This is very big. How many education businesses do you know that include calls, accountability, some sort of resource library, uh, library of all past you know, Q&A calls or one-on-one calls? Probably a lot of them. Have any of them solved churn? No. If you want to have a feature set, the way that I think about feature sets is that I want each feature to be on its own valuable enough to more than justify 3 or 4 times the price. If someone can't just say it's worth it for this alone, then I don't want it in the stack. And that may mean you only have 3 or 4 things, or 2 things, or 1 thing, and you just do it really well. That's fine. So that's in terms of how I'm thinking through it. In terms of what things should I, should I add and when, we have to answer what problem are we solving? If people are churning and you have an education business, well, unless you're doing continued education, that is the nature of the business and you're probably mispriced on the back and probably mispriced on the front end. In terms of when to add it, it would be when I know that this particular service is something that people consume again and again and again. So if you get repeated questions month after month after month of a problem that needs to get solved, This is where service businesses start to sprout off of education. Now what you'll realize is if you do the service well, the service business itself will be more valuable than the education business because they're not coming for the education, they're coming for the service. They come for the service, they'll keep paying for the service if it's good. Part of the reason that sometimes service businesses, even if the service should be sticky, they aren't sticky is because the nature of the customers. So let me explain that. So if you have customers that are inherently volatile, then their volatility will reflect on the volatility of your product or service. And so if you're dealing with VSMBs, so very small business owners or prosumers, people who just, you know, they have a job and they kind of upgrade. Those people are notoriously volatile. They're going in and out all the time. They get passionate, get unpassionate, they get whatever. And so it doesn't matter how good the thing is, you're going to have churn that's going to be there. And so you have to make sure that you're comparing what churn, what you expect to churn, what you want to get to. Like Facebook has super high churn. If you think about churn as people who stop using the product. Now I'm saying super high relative to Salesforce, but way better than every other social media platform. And so you look at Shopify. Shopify, I think, is considered best in class. They have, I think they have 55 or 60% renewal on an annual basis, meaning they lose 40% of customers every year. But the people who stick after that year stick for the long haul. They're going to have involuntary churn the lower on the axis you go. What you wanna make sure is that after people reach a milestone, they never leave. So that's what you're really going for. So if you have some period of time, let's call it 12 months, where people churn in and out and then after 12 months no one ever leaves because they, they reach certain benchmarks or certain activation points. If you get there, then you have a valuable business because those people, you just have this year up front that doesn't matter. It doesn't really factor in the value of the business. But the valuable part of the business is you do this functionally as a sales motion in order to generate this reliable recurring revenue stack and you're just filtering through to find the diamonds. So the question was, what kind of churn benchmarks exist? So I know if I'm doing, you know, good or bad, I can tell you on school because we have a lot of metrics there, 18% monthly churn is the average school community churn. So if you're doing 10% %. You're doing like basically about half that. So that's, it's, you know, decent, good. If you're above that, you probably have some things that you can improve on. If you're at 5%, so that means that you have 20-month LTVs. If you're like, how did you do that math? All you do is you just take 1 divided by your monthly churn. So 1 divided by 10% monthly churn means 10 months of average stay. 5% is 20 months. 1 divided by 0.1, you know, if you have 1% churn, then you have 100, right? 100 months. What's good? What's bad? Well, the lower the better. The piece that I would really care about is M12. So the 12-month retention. How many people get to month 12? And of those people, what's my churn on them? If my churn on them is zero, then I'm very excited, right? If they're also just slowly churning out as well, then I just have this very long tail and I have to always keep selling people, which of course every business has to keep selling people. The percentage is going to matter based on the industry and who you serve by a wide margin. If you're serving high-end enterprise, then it should be like you should be 80% annual renewal or higher. If you're serving, you know, beginners, then it's going to be, it's going to be high. And that's also a feature, not a bug. It's just part of selling to that customer. For me, what I care about fundamentally is the cost and the return of a permanent customer. So let me, let me break this down. This is probably the most important concept. All we care about in any business is how many permanent customers do we have? So let's say that you have, you know, for every 10 people who buy your education, 3 of them transfer over to your service. And of the 3 that transfer your service, 1 of them never leaves. Then we just have to know, okay, it costs me 10 times my current cost to acquire a customer. To get one person who never leaves? What's that LTV to CAC ratio? If you're having just your LTV to CAC ratio for front-end business, that's different than LTV to CAC, LTV to permanent. What's my permanent CAC to a permanent LTV? They just never leave. And if you're like, well, I don't, I don't really have that yet. Well, yeah, because that's the hard part of business. Once you figure out the product market fit of what's my feature stack, what type of customers that feature stack better, you know, better serve for so that 12 months from now these people never want to leave. Once you solve that part, that is the hard part of business. That is the hardest question to solve. Once you solve that, then everything else is basically just math of how do I find more of those people? And if I have to go through 5 to get to 1, then this is one permanent customer. And then it just becomes a cash flow question, which is why people raise money and then they get really aggressive. But then you want to see like, okay, is there a way that I could either select better on the front end or is there a way that I can increase activation so it becomes 1 out of 4 instead of 1 out of 5? But we have to get to that one point you have a permanent customer and then build backwards from there. When do you upsell other feature stacks? Well, it's going to be based on their need. If someone comes in and has all of these needs, then you'd sell it naturally at that point. If someone has has one problem solved, but then creates another problem. A simple example would be like, hey, I teach people how to do, you know, DM setting or whatever. So you teach people how to, you know, reach out to people and create appointments. Okay. Well, once they learn how to do it themselves, what's the next thing they're going to want? They're going to want other people to do it for them. And so if you want to sell a service of placement for those people or sell some sort of like fractionalized service where you have a pool of people that works for many people, or you say, hey, I'll employ them myself so you don't have to deal with the liability or risk, but I charge 20% above and I pre-train them and that's the ongoing rate. Fine. Like these are all different business models you could have there. But you can't sell the GM Center, I don't think, well, you could upfront, but likely they would have to have the business model and understanding first, and then you would upsell them on the backend. So offer timing matters just as much, if not more, than the offer itself. Like sometimes you have the absolute right offer and you're just offering at the wrong time. So people say, hey, I really want to start a business that has enterprise value. They'll say, I want a real business. I don't think they're like, fundamentally, if you exchange goods and services for money, then you have a real business. So you've got some, you got to deal with your own head trash on that. If you define real business as a business that becomes an asset that's sellable to somebody else, fine, I understand that. Don't let anyone make you believe that there's something inherently wrong about the business you have. If you follow the law and you exchange goods and services for money and you make a profit, then there's— in the eyes of Alex, there's nothing wrong with what you do. You, you, you use the skills you got to provide for your family. I don't think there's any shame in that. I would die on that hill. Beyond that, if you're like, I would just prefer to have a different business, or I'd rather have a business that doesn't rely on me, I'd rather have a business I could sell someday because I have whatever goals that I have. Fine. I have yet to see the, I'm going to use my cash flow for my education thing to feed my, you know, software or service business and then let that take off. Usually what ends up happening is that both businesses end up taking your attention and the service business doesn't put as much cash flow out, neither does the software company. And your lifestyle has already accustomed to the higher income level that you've generated from your high cash flow business. And so you never really want to give it up because you don't want to take a lifestyle cut, which most people can't. And so they end up not being able to pursue it. If you do make the jump, you can win. So to be clear, Sam Ovens from school had consulting.com, sold and shut down consulting.com, went all in on school. Alex Becker with Hiros had Market Hero, which is an education business, sold and shut that down, started Hiros, went all in on Hiros, made it work. And both have succeeded exceptionally well. Same, same. If you want to do it, do it, but no half measures. Well, hopefully that puts the nail in that coffin for those of you who are unsure about that. I get that question probably twice a month. And hopefully that just resolves that. And if you like this type of business breakdown, I actually break down real businesses all the time and you can check out one of our most popular ones