More reader questions!

Hey everyone,

I love the questions you folks ask me. And once in a while, I think I’m actually helpful!

Here are six great questions I got at my last AMA. 

(Want to ask questions? My next AMA is Jan 23rd, sign up here for free!)

How does one not fail immediately when opening a fitness studio?

Lower your fixed costs as much as humanly possible.

Think about it: you've got rent, your salary, staff, cleaning, equipment maintenance. All of that is fixed. 

But your income is variable: how many members you have and what they're paying. The gap between those two numbers is your margin of safety.

Early CrossFit gyms figured this out by starting in garages with scrounged equipment. They only moved to a warehouse or strip center once they had members and proved the model worked.

So for your fitness business: can you start in a park? Train people at a big gym where you rent space? Work out of your garage?

The lower your overhead, the less you need to succeed to actually succeed. Run the experiment first. Prove you can get clients and keep them happy. Then invest in the real space.

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How do you diagnose cash flow problems?

When you take over a business in a turnaround situation, you need to figure out what's fundamentally broken.

Think about the business as a machine that produces money. It's supposed to systematically enable customers to solve a problem, they pay you, and at the end you're left with cash after covering fixed costs.

First, understand how the business is supposed to work. 

Then dig in and talk to people: inside the business, experts outside (bankers, lenders, whoever), and compare what people tell you against the KPIs and numbers.

That lets you say, "Okay, here's what's broken." Then test that assumption.

For example: you might discover they're not doing sales because they're priced too high. Why are they priced too high? Cost structure is too high. Why? They're sourcing from China when they should source from India for 50% less.

So basically: understand the ideal business, find the real world difference, come up with hypotheses about the problems, and solve.

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How do gold standard business owners understand their markets and consumers?

Look at Eddie Lambert when he ran Sears. He ran the business from a mansion in Florida by telephone. Never at headquarters. Never in stores. Never talking to customers. That's one way—the wrong way.

Great business owners are all about getting closer to customers. Trying to understand what's going on in the real world.

Intuit makes everyone in the company man the phones during tax season when people call with TurboTax problems. H-E-B in San Antonio: everyone on the team, all the way up to the president, works shifts inside the stores.

So the best thing you can do: make the experience of dealing with customers visceral for your team.

I don't think Cracker Barrel management spent an ounce of time in their Tennessee stores thinking about what customers cared about. I think they flew to New York, talked to some fancy design firm in Brooklyn, spent $2 million, and thought they'd solved it all.

What's the number one predictor of success for a leader?

Grit. Above everything else.

Of every leader I've worked with, the ones who get outsized returns are the ones who want it more than the next guy. And are willing to make it happen. 

They're always on, thinking: how do we win? How do I be grittier? How do we make our customers happy?

When I’m hiring, I’m usually hiring for grit. 

I find it with behavioral interviews. I’ll sit down with someone for a couple of hours (more or less depending on seniority). I want to understand all the decisions they’ve made as an adult. How did they approach situations? How did it resolve? How do they think about it now? 

Because people don’t change. They’re wired how they’re wired. So when you start seeing a pattern in how they approach things, that’s the best predictor of how they’ll act. 

(Then I verify what I learn with in-depth reference checks.)

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Is hiring friends always a bad situation?

I've hired friends before. 

What I've learned: I only hire friends if I’m comfortable saying them ahead of time, "This may not work out and I may have to fire you (or you fire me)." 

If I’m not 100% sure I could do that and it wouldn’t be weird, I don’t do it. 

Think about it from game theory. From a math perspective, hiring from your friends is drawing on a microscopic candidate pool versus the whole world of candidates. 

What's the likelihood your friend is the absolute best person for this job? Pretty low.

What I do like, though, is referrals from current employees. It's an excellent predictor of future success, because A-players recognize A-players. 

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How do you enter an industry where you're not an expert?

My favorite analogy for this is NBA coaches.

None of the superstar players turned out to be great coaches. The guys who became great coaches were barely on the team or role players like Steve Kerr, Phil Jackson. They had a mountain to climb, so they always had their brain on.

Same with swim coaches who train Olympians. A lot of them look like they'd drown.

So go out and become the absolute best expert you can. Read, watch videos, talk to experts, be an apprentice for someone else. 

Make it your life study to become really good at that thing. Then use that to develop a plan where you become amazing and just stay on the journey of always growing.

What's the biggest question you're wrestling with in your business right now?

Thanks for reading!

Michael

P.S. Got questions? My next AMA is Jan 23rd — free! Sign up here.