Episode 40: Mike Michalowicz of Profit First, The Pumpkin Plan and Surge


Mike (00:00):

If it’s working for the other guy and everyone’s doing it, it ain’t going to last much longer because it’s become the standard. Entrepreneurship is about innovation, challenging the norms, and customers respond to that.

Chris (00:17):

Every week on this podcast, I try to expose you to the big ideas that shape or will change the fitness industry. Mike Michalowicz has some of the biggest ideas out there. Mike wrote “Profit First.” He wrote “The Pumpkin Plan.” He wrote “The Toilet Paper Entrepreneur,” and now he’s just published his new book, “Surge.” He graciously agreed to come on this podcast and talk about some of the biggest ideas out there. Mike is one of the fastest thinkers you’ll ever hear. If you’ve listened to his audio books, you know that he regularly goes off script and adds thoughts. In fact, if you own the paper edition of any of his books, you should buy the audio books just for those little bonus diversions. And if you don’t own the books, go buy them now. Two of his four books are required reading for Two-Brain mentoring clients. But if you just read “The Pumpkin Plan,” your business will change. If you read “Profit First,” your lifestyle will change. And if you read all four, everything will change.

Chris (01:22):

Mike Michalowicz, welcome to Two-Brain Radio.

Mike (01:26):

Chris, thanks for having me on the show.

Chris (01:28):

It’s my pleasure, Mike. And you know, your book is required reading for everybody in our mentoring program, but for those who aren’t, maybe can you just share your story with them?

Mike (01:38):

Sure, sure. Now I don’t know, are you referring to “Profit First,” by the way? Which book’s required reading?

Chris (01:44):

“Pumpkin Plan” and “Surge” are both required reading now.

Mike (01:46):

Oh, awesome. Awesome. OK. So yes, I’ll give my background. I’ll point to how those two books came out. So I graduated college and become an entrepreneur. I do it for 15 years and love the experience. But after having the good fortune of selling two of my businesses, one I sold to private equity and other to a Fortune 500, I thought I knew all the answers to entrepreneurship. I was quite frankly full of myself and decided to become an angel investor and just do what I quote unquote “knew was right.” And I put money into these businesses and my experience and these businesses failed. It was pretty, pretty horrible. When people ask me about that phase of life, I no longer call myself an angel investor. I call myself the angel of death. The only thing I was good at was like killing businesses, and literally should have declared bankruptcy.

Mike (02:47):

I was putting good money after bad, the businesses were collapsing and my account said, you know, you should just call it quits. And I basically called it quits on those businesses, but never declared bankruptcy. Just my ego, still wouldn’t even accept that. But, it did spawn a new phase for me. I had hit rock bottom. I realized I didn’t know all the answers and it put me on a quest to find things that worked and do more of that and find things I’ve done that didn’t work and fix it. And so every book, “Surge,” “Pumpkin Plan,” “Profit First,” which is my most popular book, “Toilet Paper Entrepreneur,” all those books are really a search for me to find the answers I don’t know. And then, you know, kind of reveal them to the world.

Chris (03:39):

How important do you think those mistakes are or were your career?

Mike (03:44):

Yeah. I hate to say they’re critical in regards to this awareness I’ve had, and it’s brought, and I hope it continues to, a huge amount of humility. I used to think that certain entrepreneurs, were just so gifted and so talented and that they should be envied practically. Now I realize, I think every entrepreneur, everyone’s on a continuum, kind of a big circle. And maybe some of us are up and some of us are down, but it will shift for all of us. But so it’s more about humility, those mistakes, but secondly, when you’re up or if you want to move up, there’s definitely strategies in the entrepreneurial space that will serve you better than others. And many of them are ironically contrarian, because one of the grandest lessons I’ve learned from entrepreneurship, if it’s working for the other guy and everyone’s doing it, it ain’t gonna last much longer because it’s become the standard. Entrepreneurship is about innovation, challenging the norms. And customers respond to that. There’s a certain point that a customer will become tired of the same thing again and again and again. They want something new, something fresh. So we constantly need to learn and when we’re failing, it’s simply an indication of a new path has to be discovered.

Chris (05:03):

Do you think that somebody can succeed without mistakes or without failing at all?

Mike (05:09):

Yeah, I think so. They’re really, really lucky. And then I wonder if they’re jaded, because that was the first stage for me. I started my first business in the tech space, tech services, and really had no clue how to run a business or what I was doing. And I mean, it was a tremendous amount of work and effort to get it going. But a lot of luck played in, the right opportunities presented themselves at the right time and I was there. My second company in particular was in computer crime investigation, computer forensics, and we got part of the Enron trial and talk about right place, right time. Like I didn’t schedule the Enron catastrophe. I had nothing to do with it. I just happened to have a business that was in the right spot to address the needs of trial from a forensic standpoint. A computer forensic standpoint, and it took off, but then I started attributing that success to myself. That it was all skill. So I think luck is a major component and I think we just need to realize that there are certain things we can do, there’s quite a few things we can do to improve our odds, but we also have to appreciate that luck does play a factor. It always does.

Chris (06:28):

So in “Profit First” you were talking about working a lot in these first businesses. And you know, being very busy but not necessarily being successful. And that’s what led to the “Profit First” mindset, is that right?

Mike (06:44):

Yeah. And there’s one more element. It was that I wasn’t making any money. I was working harder and harder and not making any money. And recently, I say recently, in the last five to 10 years, it was about 10 years ago maybe, I heard a statistic that just blew my mind away. And I don’t know how technically accurate it is, but I do believe in it. I heard a statistic that 83% of small business and small businesses defined by the SBA are companies that do $25 million in revenue or less. So the statistics said that 20—I’m sorry, 83% of these businesses were surviving check by check. It resonated with me because my own businesses, those two companies I built and sold, they survived check by check. I had the good fortune of selling them and thought that’s where the money ultimately comes in. But they definitely weren’t profitable.

Mike (07:39):

I remember refinancing my own house two or three times to cover payroll. And as I’ve become an author and have met entrepreneurs of different businesses of all size, I find this to be the norm. Most businesses are just surviving, just getting by. And so I wrote “Profit First” to challenge the process that these businesses, in fact, all business were following because what confused me is that so many entrepreneurs can start a business. So many of us have the ability to land prospects and clients and to navigate all the nuances of business. Yet we can’t figure out profit? Like that didn’t make sense to me that we can do so many things but this one element. And my thesis was that something’s flawed in what we’re following and I truly believe there’s something flawed, is the formula that sales minus expenses equals profit.

Mike (08:38):

I think it’s a total lie. I mean, mathematically I get it. It makes sense. But when profit is the last thing, when it’s the bottom line, right? The very end, it’s ignored. It’s the human propensity for what comes last, we don’t do. It’s like, it’s like exercising, working out, right? Like, if I say I’m gonna start working out and I schedule it for the last thing I do before I go to bed, I’m going to be way less successful, for most of us. Way less successful than if I say it’s the first thing that I do in the morning. And that’s what I propose in “Profit First.” So when you take our profit first, the second there’s a sale, we immediately take our profit. We are assuring profitably. Cause it’s the first thing we do.

Chris (09:19):

How do we set that up, Mike?

Mike (09:19):

So what you do is you set up multiple accounts at your bank, and it’s kinda like the old envelope system. Something that my mother did, perhaps someone in your family did, is that when money comes in, we have different envelopes, in this case, different accounts at our bank, designated to different purposes. So you have one designated to profit, another one to owner’s pay. The most important employee at any company is the owner themselves. And I think we need to designate their money in advance to pay them effectively and appropriately. Tax accounting, we should have another account in our bank called tax that we allocate our tax responsibilities in advance, the company’s and our personal. And then another account for operating expenses. And what happens here is when money comes in to our business, instead of saying, $1,000 came in, I have $1,000 for my business, no, $1,000 comes in. And then we allocate based upon percentages these different accounts. Maybe 10% goes to profits.

Mike (10:26):

There’s $100 there. Maybe 30% or 40% goes to pay the owner so $400 there. Another 10 or 15% reserved to pay for taxes. And now if you see this 10, 40 10, that means we have 40% left, if I’m doing my math right, 40% left to run our business. So when $1,000 comes in, we don’t have $1,000, we have $400 in operating expenses and the rest is used for profit and owner. And to pay our tax liabilities. I think it changed our perspective significantly and it puts the importance of taking our profit first, therefore ensuring our profit.

Chris (11:05):

So with the business owners that you’ve worked with personally, Mike, how much of this is just mindset instead of, you know, increasing revenue?

Mike (11:16):

So mindset is probably all of it. So one of my colleagues, her name is Shannon Simmons, she works actually specifically and exclusively with gyms on profit first. And we had a conversation around this exact thing and she’s turning, using this process, she’s turning businesses that weren’t profitable to profitable within like months. I mean, they just simply start taking the system and they find that all of these expenses or many of the expenses they were incurring are unnecessary and/or they can achieve the same results in the new innovative way. What happens is, and this is truly mindset, is that we reverse engineer profitability. And I think my favorite example is from the movie “Apollo 13.” It’s a true story. These are astronauts that were sent to outer space. They’re circling the moon and coming back to Earth. And I don’t know if you saw the movie, did you see it?

Chris (12:14):

Yeah, absolutely.

Mike (12:15):

All right. So there’s that one scene where they start running out of oxygen. The oxygen filter system is failing on the space shuttle or the shuttle, the capsule. And they radio down to Houston and the next scene is the lead engineer in Houston, comes into a room with all the other engineers with a big cardboard box and dumps that box of stuff on the table and tells the other engineers that’s all we have up on that shuttle, make an oxygen filter, save these astronauts. And they did. Now here’s what’s so fascinating about that. NASA spent tens of millions of dollars in making that one part to put in the capsule, because they had tens of millions available to do it. And it took tens of millions to do it. Then when they only had a box of like duct tape and tubes and radio wire, you know, some wires from a radio, they were able to make an oxygen filter out of that stuff. A few hundred dollars of parts.

Mike (13:10):

And the lesson is when we are forced to find a way to work with less, we inevitably find a way, because it kicks in innovation. It kicks in frugality but also innovation, new thinking. And so this doesn’t just apply to NASA, in our business, every dollar that comes in, that’s the equivalent of our $10 million. It’s all the money we have and we find a way to spend it. And this isn’t like a conscious thing. This happens subconsciously. We just justify, we say, well, this makes sense. I need to do this, I need to grow, blah, blah, blah. But when we first take the profit out and hide it away from ourselves and there’s less money, we basically are dumping that cardboard box on the table. We’re like, OK, this is what I have to work with. Let me make it happen. And so the business itself doesn’t need to change, the mind of the entrepreneur, the business owner running the business needs to change. And when you take your profit first, it forces that mind to kick into high gear and find innovative ways to get things done.

Chris (14:12):

I want to add something here for listeners to this show who are primarily gym owners, two consulting clients of mine, I shipped your book “Profit First” to them. This was before I met Shannon. And within two months, without making any more revenue, both were buying houses.

Mike (14:32):


Chris (14:32):

And it’s the mindset.

Mike (14:33):

It’s the mindset. So just real quick about Shannon. You know, she’s has an accounting practice. So she’s in with her numbers regularly. And here’s what I think is super interesting. Everyone listening to this show, every entrepreneur I know, has an accountant or bookkeeper; they have someone that’s with the numbers. The old mindset, traditional accounting says sales minus profit equals expenses. I mean, sorry, sales minus expenses equals profit. And at the end of the year, the accountant often puts that income statement down on the table and says, “Hey, look, you had a smaller profit but this is what you had.” And then we’re like, “Well, where’s the cash?” And they’re like, “Oh, you don’t actually have the cash. You had a paper profit. That money’s already gone.” And what’s interesting about profit first is we simply—by taking our profit first, we’re assuring the cash has been reserved, and this sits on top of accounting.

Mike (15:27):

So as Shannon’s been doing and is like none of the accounting needs to change, we just take this one new step and we are addressing the cash up front. But the second thing I thought that was most fascinating is that many entrepreneurs and business owners don’t read income statements and balance sheets and cash-flow statements and know the operating cash ratio and all the metrics that we’re supposed to know. It’s way too heady and complex. I’ve been in this industry now for quite a long time and I don’t know how to read those documents. So most of us revert to what I call bank balance accounting. We just log into our bank account and say how much money I have there today and I’m going to work with what I have. That’s why it’s important to set up these envelopes, these different accounts, because now when you log into your bank account, if you’ve one main bank account, you see the wad of cash, but you don’t know what that money’s been allocated to, what the purpose is of that money. So we just spend it on the next important thing. But if the money’s pre-allocated to these different accounts, you instantly know exactly where your business stands just by logging into your bank account. It circumvents your need to look at any of those income statements and it now sits at the one spot that you always check, your bank account.

Chris (16:42):

Amazing. We’ll be linking to Shannon’s service in the show notes along with all your books. Maybe we should be calling this the seven epiphanies of Mike Michalowicz or something, because that’s a huge one. But there are more. So, next I want to talk about how not all money goes into the same pot, I want to talk about maybe how not all clients are equal.

Mike (17:03):


Chris (17:03):

One of the first exercises that every gym owner goes through in our program is identifying seed clients from the “Pumpkin Plan.” Can you walk us through that, Mike?

Mike (17:21):

Yeah, that’s awesome. I wish every coach and every industry put significance on this. It’s probably the most important thing you can do to grow your client base, to grow your revenue, to grow your business, is by realizing not all clients are created equal. Some clients are extraordinary. They pay you well, they appreciate your services, they talk about you to their friends, they recommend you. And then there’s some folks in between. And then there’s the folks at the very bottom that are—they don’t pay you well. They challenge every charge you make to their credit card. They complain constantly. They threaten you. They’re just horrible clients. And so basically I found there’s three types of clients. There’s good clients, there’s bad clients, and then there’s no client. And what I found is unfortunate, most businesses do sort of that way that a good client’s best. We all know that. A bad client we think is second best. And the worst client is no client, cause there’s no revenue. But I found the reality is actually the best client is a good client. The second-best client is no client at all. And a bad client is actually the worst, because a bad client—you have to render service to them so you have to deliver some service to them and they may not pay you. They may, you know, call their credit-card company and challenge the charge. Then you get whacked by all these fees and so forth and the money’s pulled back from you. They’ll talk badly about you. They’ll never be satisfied and you’ll work more to try to cater to them. So more effort, more time, less money. And so it takes your eye off of your good clients. Now, no client is better than a bad client because if at least you fire the bad clients and now you’ve no clients, you can avail your time.

Mike (19:16):

Cause all this time frees up to focus on finding clones of your good clients, convert those no clients into good clients to seek them out. I think also what a lot of people don’t appreciate is the emotional drain of a bad client. I bet you, Chris, everyone listening now can think of that one or two, just horrible member you have for your gym.

Chris (19:38):


Mike (19:38):

Right? That’s probably the last person, last thought before you go to bed is thinking about that horrible client. And then the first thing you wake up in the morning, you say, “Oh my God, they’re still with us.” And they’re draining your energy. I want that time available to say, how do I service my better clients even better? What new services can I offer for them? What other revenue opportunities are there to really cater to my best clients? But if you’re clinging on with bad clients, you’re not making that time available to improve your best clients. It sounds bold, but fire that those bottom feeders because the quote unquote “revenue” you lose is so insignificant compared to the opportunity to gain more great clients. I see that when people fire their bad clients, they usually replace that revenue within weeks, if not months. And then the business starts skyrocketing forward because they’re focusing on attracting and serving only the best clients.

Chris (20:36):

  1. So, I recommend that everybody read “Pumpkin Plan” to understand how to identify the best clients and you know, to get themselves in the mindset of firing the worst. But how do you fire the worst, Mike? I mean, that’s the hard part, right? Those conversations.

Mike (20:51):

Yes. So, you know, I mean, the very kind of abrupt way of doing is sort of saying “We’re so sorry. We can no longer honor your membership because we can’t cater to your needs specifically. And we’d like to introduce you to a new gym.” That’s difficult to do because it may be like, well, “What do you mean, you can’t cater to me, why can’t you?” And then it becomes a conflict. Another way is to raise prices, right? So you can increase your membership fees. And what’s interesting is your best clients often are very resilient to price increases. So think about that. When organizations dropped their prices, it becomes attractive to anybody and everybody, because it’s so cheap. Thing is you attract anybody and everybody, and I want you to understand that money, I actually call it appreciation points, the less you charge someone the less they appreciate what you do.

Mike (21:48):

Think about this. Say you charge your members $1,000 a month, that’s your standard membership. The people that are gonna make that investment are seriously interested in a successful outcome. So ironically, the higher your prices are, they attract a better customer who’s more devoted to a positive outcome. Now, I know there’s a certain range of reason. I mean, you can charge $1 million a month. Well, if you get anyone that way, it’d be amazing. It’s so high. But if you did get that one client, they will be so devoted because it’s such an extraordinary fee. So you probably can’t go that high, but I find that most organizations, gyms and otherwise, actually charge too low and then they attract the, I hate to say bottom feeders, but they attract the bottom feeders. So you can have a direct kind of confrontation. I wouldn’t be confrontational, but you can directly address it.

Mike (22:40):

You can start increasing prices, but another way, and I’ve seen restaurants do this, is you just uber-cater to your best clients. There was a restaurant, and I write about them in “The Pumpkin Plan” in theory, but this has now played out in reality, that found his best clients were attorneys. The attorneys were coming into this restaurant, bringing in their clients and having extended meetings, usually two hours at a table. And if you think about if you own a restaurant, you want what’s called table turn. Someone’s sitting at a table for two hours, that gets a little costly. But these were their best clients. They’re paying, they’re buying premium foods, they want to impress their clients and stuff like that. But this restaurant was also attracting families and other people. And not that families are bad, but young children in a professional environment who are loud or you know, just could be distracting, was actually tempering the number of lawyers that were working with this restaurant.

Mike (23:37):

So what they did is they established things that the lawyers benefit from, but actually was a distraction, or detrimental, I should say, to the other types of customers. They disabled Wifi and they put up cell blockers. So literally you’d be in there and you couldn’t access your phone, which for lawyers is great cause you’re interviewing, you’re talking with clients, but for a big family that wants to have their kids playing the video game, there’s no access to it. They set up these booths that had some soundproofing, and now you have a confidential conversation and no one could hear you. And they were kind of secluded so no one else could see you. For a family that’s not so family friendly, but it played to lawyers. A lot of these people were being delivered to the restaurant.

Mike (24:26):

I don’t have delivered’s the word, but brought to the restaurant in private limousines and stuff like that. And the limousines would wait. So the restaurant set up a special parking lot where the limousine drivers now could park their car and also would get free coffee and food while they waited for the lawyers and their clientele to finish the meeting, and what’s so great about this is now the limousine drivers were so excited, they’ve never been treated this way. They were telling more professionals to come here. So just like catering more and more to the best client, it naturally started to fade out the clients that weren’t so fit as a customer. So you could do the same.

Chris (25:07):

  1. So one of the big slogans in CrossFit is that we’re all about community and that everybody comes into the gym is equal, but we know that’s not actually true, right? So a lot of my challenge is getting the gym owner over the emotional hurdle of finding the best clients even after they’d been identified. Any advice for them?

Mike (25:33):

Yeah. So once you identify your best—actually let me rewind this. To identify your best clients, I would do a real simple analysis, and I do write about this in “The Pumpkin Plan.” I was sort your clients by revenue, and why this is important is clients who spend the most money with you are showing through their actions that they value you the most. A lot of people measure the quality of client by their words, but I argue we should measure the quality of client by their wallets. I can say, “Oh, I love this, gym, you’re amazing. I’ll come here forever” and then next week I cancel my membership. But if I’m spending money with you regularly, at increasing rates over a long time, I am demonstrating my value or my appreciation for you. So sort your clients by revenue generated by client.

Mike (26:22):

Then the second component is identified those clients. Which ones do you like the most? And maybe you don’t interface with them directly, which ones does your team like the most? Now, why that’s important is the intersection of clients that you and your team appreciate and pay you the most are clients that you’ll naturally service the best and will want to continue to spend more money with you. So that’s the first step. And in “The Pumpkin Plan” I specify many more steps to identifying them, but that’s the two core elements. Once you identify the best, interview that customer. Now, I’ve gone to gyms my entire life. I’ve never—maybe I’ve never been a good customer, but I’ve never been pulled aside and interviewed by the owner or the team there saying, “Hey, we love that you’re a member of ours. We want to learn more about you to serve you better.”

Mike (27:10):

I think it’s unheard of, but that’s what you need to do. Once you know who your best customers are, interview them, take them out for lunch or something and say, “Listen, I want to learn more about you because we love having you as a member. It’s an honor to have you here, and we want to see how we can serve you better.” And remember the adage, birds of a feather flock together. When you identify who your best clients are, we want to clone them everywhere. And so take them out to lunch, interview them and find out what their story is. Where else do they go? Are they in clubs? Are they in a cycling club? Are they active at the local town pool? I mean, where else do they congregate? What’s their personal story? Are they moms, are they dads? Are they single?

Mike (27:57):

You know, what’s their background? Are they germaphobes? I mean, could you imagine if you find out your best client is a total germaphobe and appreciates your control of the environment? You can ramp that up. You could have the most germaphobe, the cleanest gym in history. You could have a bacteria test that’s run at the end of every day and posted publicly to show how clean the place is and you will attract a customer base just like that. So identify your best customers, the ones you love doing business with, the ones you want to clone. Learn all about them. And then uber-cater to their needs and congregate where they congregate. If they’re going to the local pool, that’s their big hangout, that’s where your advertising should be. I wouldn’t run a yellow pages ad, I wouldn’t do anything else except for put my ads, my marketing and myself were the best customers are already congregating outside the gym.

Chris (28:52):

I love it. And we can’t do that until we know who the best customers are.

Mike (28:56):

Exactly. That’s why you go through the evaluation process first. OK. They’re there with your gym right now, you just have to identify them. We got to spend the time identifying them.

Chris (29:07):

I love it. And so I think, Mike, that CrossFit, the fitness industry in general, is preparing for a surge. But you know, from an outsider’s perspective, how does it seem to you?

Mike (29:19):

So good question. I can’t tell, and that’s something that sounds like a horrible answer, but let me explain what a surge is. Surge is the concept of an imminent movement in the market, which represents a significant opportunity. An example is the shift in transportation with taxi cabs. Uber is exploding, right? And the sharing community. So that was a surge. It’s still going on now. That’s a surge invoked about five to seven years ago. And it’s exploding now. So in gyms it could be existing too, but the problem is there’s so many surges that we as individuals have to pick a category to study and see where the surge is. I happen to choose bookkeepers and accountants as what I’m studying. And I can tell you there’s a massive surge going on, but if I asked you or anyone that doesn’t know the community, like I don’t know what the surge is in bookkeeping, it sounds crazy, but there is one.

Mike (30:20):

So I don’t know what’s going on in gyms because I haven’t studied it. But I’ll tell you what we look for, is we look for an increase in demand for an offering that doesn’t exist, meaning clientele often will try to create their own solution to it or you’ll see early adopters who are vehemently committed to an existing solution. It just hasn’t propagated in a big way. Let me give you examples about both. When the customer creates their own solution. I studied the story of Ugg, Brian Smith, is the founder of Ugg Boots. And how Ugg kicked off was he noticed that surfers would come in onto the beach after surfing in the cold ocean water. They wore neoprene suits. Now, neoprene is becoming more advanced. They could surf winter round, but they come in with their bare feet and they would wrap them in towels or try to heat them up by the fireplace.

Mike (31:16):

He said, OK, there’s an opportunity—fire place. A fire pit on the beach. He said, there’s an opportunity to create warm feet here. So beach sandals weren’t working anymore and he invented the boot specifically for surfers before it exploded out. But another example—so that’s an example of customers trying to solve for themselves. Another example of a surge is what we see going on with the electric car right now. Electric car, five, 10 years ago, that was a golf cart. But Tesla comes into the market and now there’s all these emulators that are emulating Tesla. The established providers like Ford, Nissan, they’re all doing their own version of electric car. But what we had to wait for was to see, could the early adopters stick with it? So that first person that bought Tesla was mocked for they’re driving a golf cart, it’ll never work. It’s dangerous. There was actually articles, as you remember going back, how dangerous electric car could be, that if it got in an accident, all that battery acid and the risk of an explosion and noxious fumes and all this stuff, which has now been eradicated. But that was all over the news when Tesla was first coming out. The early adopters, the people that took the risk of buying it stuck with it. And now you see, I’m sure in your neighborhood, like my neighborhood, inevitably you’re going to see a Tesla driving around. Those early adopters have been able to convince others to get their version of a Tesla, maybe a Tesla or another electric car. And now, I’m just following Tesla, we see that Tesla has 400,000 preorders for its next car, the most in US history when it comes to orders for cars. So we see explosive growth. That is a surge. And the question is how are you gonna ride that surge? Maybe you can make an electric car, but maybe you could make a derivative product, stuff that complements the surging demand for electric cars. So I don’t know, again, I don’t know what’s going on in gyms, but if I did focus on that, I know you could find it. Are the early adopters already doing it or are people trying to create their own solution? Either way, there’s probably a massive opportunity right there.

Chris (33:19):

Yeah, I mean it’s my show. So let’s just assume that everything I say is right.

Mike (33:23):

  1. I love it. I love it.

Chris (33:25):

So let’s say that the surge is coming, and I own a small gym with a 100, 150 members, what should I do to get ready for it?

Mike (33:34):

OK, so you gotta identify what the surge is. The broad thing is there will be increasing demand for fitness. A more specific thing would be saying with the explosion of Pokemon, I see, for example, I’m just making up an example here. I see that there’s intrigue from not just youth, but some adults in exercise that’s gamified. And so maybe it’s the gamification. So we want to get very specific of what the surge is and study it. So we would say we think it’s the gamification of exercise, right? That’s now much more specific. Then you seek examples of it in the existing community and how people are currently navigating it. So maybe it’s Pokemon Go and you’re observing how people are using it, and then you set up a test run. There’s a great book about this called Lean Startup by guy named Eric Ries, and he proposes this concept called the minimum viable product.

Mike (34:39):

Can you make a basic solution for your gym right now? A gamification. Can you set up a Pokemon room or your own version where there’s an obstacle course or something in your gym that people get points or some kind of scoring as they do it and it’s publicly posted on a wall. And I’m not saying like, you gotta get some sophisticated software. You could just for the next two weeks, try this out, rearrange your equipment and have one person writing on a board all day, just going up there and marking who’s doing what and try gamifying it. Then you start measuring the response. If the early adopters—so when you introduce something new like this, most people say, oh, that’s crazy. But a few people may be the early adopters. They’ll say, “Oh, this is kind of cool.” Gyms are already setting up lan obstacle course where it’s like American Ninja, that TV show, here to live and do and participate in, I’m going to try it out.

Mike (35:34):

If those early adopters can stick with it and convince others to do the same, then you’re on an opportunity. Once you see others converting, then you improve your minimum viable product to now a viable solution. The stuff that’s working, you do more of it, the stuff that’s not working and people aren’t into it, you dump it and you keep kind of improving your offering on an iterative basis and then you’re on a surge. So I see something going on with gamification. So that’s why I’m picking on that in the community with Pokemon. Now my question is, when I look at the gym, is that an opportunity for a massive surge too?

Chris (36:10):

That’s a great, great example. A lot of CrossFit gyms are actually looking at that and asking themselves, how can I, you know, seize this opportunity? But if I’m already in a surge, and I would say the CrossFit has been surging for a while, how do I stay on that wave, Mike?

Mike (36:27):

Yeah, so it’s about constant improvement. Here’s the irony of catching the wave. So once you’re up on a CrossFit wave, for example, and you’re riding it, there is a period of time that the market itself will carry you. People are like “Oh my God, there’s a CrossFit gym right down the street and I love CrossFit.” And they’re promoting you. Until they find a better solution. And the danger is once you start riding the wave, you’re like, “Hey, we got the solution. Everyone loves CrossFit.” And then one day the rug is pulled out from under you. I think a great example is like if you and I, Chris, were walking through desert dying of thirst and someone’s selling water all of a sudden, we come across a person and they’re selling water. It’s muddy water, it’s disgusting tasting, but it’s water nonetheless. We will buy that water because we’re dying. And that vendor’s at risk now, because the vendor says, “Oh, clearly consumers love muddy water. We should’ve been serving muddy water from the beginning. Let’s do this.” But the day another vendor shows up next to him and has clean water, that muddy water vendor’s out of business, and he stockpiled on muddy water, did everything to get muddy water. He is now out of business because the consumer really wanted clean water but was willing to settle for anything because at least it was some kind of water. We got to be careful. You know, CrossFit’s exploding. The question is how long can you serve CrossFit until the consumer says, ooh, there’s a better alternative? So once you’re up on the wave study, again, your most devoted clientele, your favorite clients that are the most into it and seek ways, meet with them. How can we improve this? What changes can we make? What shifts can we do?

Mike (38:16):

And there’s probably countless ideas, but you’ve gotta brainstorm with your best customers and innovate again. The danger here when it comes to the surge is business will flood to you when there’s a lack of supply. When when people want something, there’s not enough supply, it’s very easy to get business. When we’re dying of thirst and there’s one person something muddy water, it’s very easy to get business. But as the competition sets in, it’s the most innovative one, the one that’s catering most of the clients’ changing needs or enhances their service so that it better serves their existing needs, that’s the person that’s going to come out ahead.

Chris (38:55):

And without knowing CrossFit personally, Mike, you described what’s happening to a T. That is exactly right. A lot of us in 2012 were selling muddy water and we thought this is CrossFit. And now there are gyms out there selling some sparkling spring water and the old guys are feeling the pinch. You know, the last hour of your audio book is just one thought-provoking statement after another. And so last night I shared a few of them in our private Facebook group for Two-Brain mentoring clients. And I’d like to get your thoughts on some of them. One of the quotes was, “To stay on top of your wave, look at the customers who break the rules.” What did you mean by that?

Mike (39:38):

So I love to use analogies or examples and I’ll leverage one that I saw literally this weekend. I took my daughter to college and she’s going to Virginia Tech and it was so fascinating and you can actually do this on Google Maps if you Google Virginia Tech. In the center of the campus is a massive field that separates the academic buildings from the residential buildings. And there’s these paths or sidewalks that the university installed, but there’s also paths that are blazed by the students. And the lesson is this: The students aren’t following the rules of following the sidewalks, they’re blazing her own path so they have the shortest walking distance to the classes that they’re going. I think the mistake that university made was they installed the sidewalks without first watching the students. A park, a well-designed park, will actually install all the play sets and all this stuff first, and then they’ll simply watch for the paths that people blaze on their own and then install the sidewalks there.

Mike (40:46):

Same with our business. What we need to do is look at how customers are actually breaking the rules of your gym. How are they incorrectly using equipment, not to their detriment, but to their advantage. What are they trying to sneak in to the gym that you’re not making available to them? Wherever they’re breaking rules, there’s possibly an opportunity there. We just get stuck. Like Virginia Tech, we blaze these paths, so here’s the pat we blaze, sorry—here’s the sidewalks we installed, follow them. But it’s not necessarily to the best advantage of the customer. So you really have to be observant what the customer’s doing and then pave the path after they blaze it for you.

Chris (41:32):

OK, so here’s a curveball, Mike, because a lot of us are seeing clients who’ve been coming to CrossFit class and getting coaching for five, six, seven years, and now they want to do their own thing. They want to use our gym space to do workouts that they’ve made up on their own or they’ve seen online somewhere. The problem is that what they want is access and what we’re selling is a service. So they want something that’s less expensive. Does that mean that they’re a less good client?

Mike (42:02):

No, it does not mean they’re a less good client. It means there’s an opportunity there. If people want to do something on their own, my question always immediately goes to how do I empower that? How do I leverage that? So say people want to come to your gym and they want to make their own routines. Could you have a new service, a brand-new service where you offer to film their routines, document their routines, and post it on your private side so other members can use it and they can download new routines for say 10 or $20. Right? So now your customer becomes the innovator of new routines that says, you know, here’s, here’s Mike Michalowicz, he’s been a CrossFit guy. He came up with a whole new workout. It’s the Mike Michalowicz Ironman workout, and you can download it for $10 and then you even tell me who came up with the workout, we’ll give you 20% of everyone we sell.

Mike (42:49):

We film it, we document it, we record it, and we’re going to sell this to other people. And you sell for $10 a month or whatever it is. And I’m not saying that’s a great idea. I’m just saying if they’re doing something, it’s the natural course of the ordinary business owner to say, that’s not how we do it here. At a certain point, there’s going to be a collapse. That customer’s going to leave and go elsewhere. They’re definitely gonna be dissatisfied as it goes on. And you, the owner, are gonna be dissatisfied. It’s hard to keep jamming the same thing down their throat. So just when they’re doing something, start asking yourself, how do I leverage it? Well, that’s now just kind of like taekwondo. The technique of taekwondo is instead of taking a punch and trying to block it, actually when a punch is thrown to grab the punch and pull it forward even stronger to topple your opponent. We gotta do the same thing in the business. When a customer is doing a move, our first question should be, how do we take that momentum and push it forward even stronger? It may represent a whole new business opportunity. May topple the industry, may change the industry.

Chris (43:52):

OK, and another quote Mike. And so this morning and last night, I removed 60 people from our mentoring group because they’re great people, but they weren’t contributing to our team. And the quote of yours that I had written on my whiteboard as I was doing this is “Action is the ultimate truth.” Where did that come from?

Mike (44:09):

So I caught myself, I’ve caught others, I catch the world saying something and then behaving differently and there’s a lack of integrity there. Even, or most importantly, when we do it with ourselves. Last night when I’m going to bed, I said to myself, I’m going to work out this morning. If I didn’t work out this morning, there’s this lack of integrity there. So absolutely I was going to do it, but I’m not a hundred percent consistent with that. So, and and now I’ve been punishing myself too, because I haven’t been consistent with it. We as individuals and also ultimately as businesses will be measured by ourselves and by others, by our actions. What we do. And I’ve seen many business owners make bold statements like, oh, I intend to clear out my low, you know, the worst customers I have and dump them so I can grow my business. They say it and they never do it. I’ve seen businesses make bold statements like, we will grow this year by 20% and then don’t take the actions that are consistent with it and then say, well, we just didn’t achieve our goal. That nonsense. We got to take decisive action. And the interesting thing is with decisive action, when you do something, it also puts guardrails around what you say going forward. We say things less flippantly and become more calculated. I think by making bold actions we become a much more articulate, entrepreneur and in saying what we’re going to do and actually doing it. When we feel emboldened to say whatever we want and never follow through with it, I think it starts weakening our business and we feel comfortable in not achieving things. It’s a dangerous trap.

Chris (46:10):

A lot of us will have clients also, Mike, who, they’ll sign up for everything that we do, you know, but they’ll really struggle with follow through and we are in the motivation business. You know, we hold people accountable, but sometimes it just doesn’t work. You know, is there a point where a gym should fire a client, where you would fire a client?

Mike (46:33):

Yeah, yeah. I mean, it’s a trap, right? You’re getting money, you’re getting money and this person’s not doing anything. They’re not getting money. But at the end of the day, is that integrity. I mean, you had to define that yourself. We actually have—so I have a membership organization too, with accounts and bookkeepers. It’s been a tough decision to make, but we’ve had certain members come on board, speak a good game. They’re paying diligently, but they’re not following through on their commitments. And financially they actually represent the ideal client. I don’t do anything. I just sit here and collect their money. But integrally, ethically, it’s not a good situation because they’re ultimately representatives of the brand, too. Could you imagine if someone went up to one of my members and saying, “Yeah, I pay all this money and I get nothing for it?” Well, they don’t participate. It’s their responsibility, but they’re the ones telling the story.

Mike (47:27):

So it’s going to hurt me. Could you imagine of your members is paying you money, and someone else approaches them, “Say, what about that gym?” “I never go. They kind of suck anyway.” That may be the reputation you’re getting. So if you have a customer that is paying you but not participating, you may want to—I encourage you to think about the integrity and the long term of that situation, and you may want to approach it. Now, let me give you one tip to stabbing that off from ever happening in the first place. And it’s by getting commitments up front, not just the financial commitment, but there’s lots of books about influence and persuasion. Actually, there’s a book called “Influence” that’s kind of the Bible into getting people to do things. And in this book there’s a story of motivating people by getting written commitments.

Mike (48:18):

And so one—I don’t want to give you some bold, crazy ideas, but when someone joins up, say, “Listen, we’re excited to have you as a member and we’re excited about bringing results to you, but it requires that we’re here for you when you need us and it requires you to show up every single time. Is that your commitment? Is that what you want?” Customer says yes then say, “OK, what I’d like you do is write a letter saying about your commitment. We’re going to post it on the wall in our gym and every time, you know, you come in we’ll punch a hole in the bottom or tear something off to acknowledge you were here, but it’s going to be a public statement, it’s like a billboard to the rest of the community about your commitment. Because we know that when you’re that committed, you’ll show up, that you’re going to get results and others will know too.” And that changes the commitment game. So when you see a problem in your business and you think the solution is to get rid of that customer because it’s not integral, that’s not the ultimate solution; that’s fixing that one problem. I want to go back and rewind, find a way that we don’t have this problem systemically, that we address it and fix it for all future customers.

Chris (49:25):

Oh boy. And I think that could apply to 99% of the problems in business. Let’s fix it systemically.

Mike (49:31):

Yes. Wonderful. Yeah, well usually, it’s reactive fixes and that’s the problem. This guy’s not working out. Just get rid of him. But what caused that thing to go awry in the first place? What caused that relationship to fail? If we investigate that, you may find some fixes that can be applied early on.

Chris (49:48):

And now we’re back to the value of mistakes. So Mike, do you have any last things you’d like to share with people aside from buying your books, which I recommend to everybody. I’ll put them in the show notes, they’re required reading again for Two-Brain mentoring clients. But is there anything else? Any other action you’d like people to take?

Mike (50:08):

Well, yeah, I’ll give you two steps. Hire coaches. It’s so worth it. I know Chris, that’s what you do. And this is not necessarily, I’m not trying to plug you, but I want to plug you cause because what I’ve experienced in my own business, too, is we don’t know all the answers. I think I know all the answers. But when I bring in outside expert, I work with this guy, Barry Kaugh, when he comes into my office, he’s coming in without an emotional attachment to the business. He’s not persuaded or dissuaded by the day-to-day goings on here. And just that different vantage point is worth everything. Plus he has the collective knowledge of all the other people he’s coaching. He can give me shortcuts. So always, always get a great coach to navigate you. And then the second thing is action. Now, I mean we mentioned earlier, you know, measure by actions. I think the very first thing, if you want your business to be profitable, I’m really pushing profit first right now because I think the impact can be so significant. Today, call your bank, set up just one account, call it profit, and starting today, allocate 1% of all your income to profit. It’s not going to make you rich, but it’s gonna make you start understanding that you can see your business from a new paradigm, and I think you’ll build confidence in taking your profit first and become very profitable.

Chris (51:26):

Wow. That subtle change in behavior can make a big difference. Well, Mike, I really hope that people take all these lessons to heart. Thank you so much for sharing your time with the listeners of this podcast and, yeah, everybody, “Pumpkin Plan,” “Profit First” and “Surge,” read them and then get “Toilet Paper Entrepreneur” too.

Mike (51:45):

Thank you, Chris.

Chris (51:45):

My pleasure.

Thanks for listening!

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