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Create Value: Discover What People Want & Create It

Lesson 3 from: The Personal MBA: The Foundation of Effective Business

Josh Kaufman

Create Value: Discover What People Want & Create It

Lesson 3 from: The Personal MBA: The Foundation of Effective Business

Josh Kaufman

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Lesson Info

3. Create Value: Discover What People Want & Create It

Lesson Info

Create Value: Discover What People Want & Create It

The first part of every business is value creation and you can think about the purpose of every business larger small is to make someone else's life a little bit better every day, so value creation is the process of discovering what people want or what people need and then creating that thing and making it available and the best businesses in the world are the ones that are the best at this process they're really good at finding something people want or something people really need and they're really good at making that thing actually exists and serving those customers in that way and so the way that businesses do that could be very different. There are some businesses that create just a tiny bit of value for lots and lots and lots and lots of people, right? Can you think of the business that would fit that mold toilet paper great creating a little bit of value right it's important value but creating a little bit of value to a lot of people consistently over a long period of time. And ...

so when you go to the store and buy toilet paper, you're not spending an enormous amount of money but that company is able to serve lots of people over a very long period of time and so they create enormous value what about a company who creates a lot of value for just a few people? Apple, maserati maserati is a great example why? Why is that? Well, so they only make a handful of of each model car and they cost a lot of love a lot of money, exactly. So each customer to maserati, each paying customer is worth it a ton of money because the customers get a ton of value out of it and they don't need to serve very many customers in order to make it worth it for them to keep doing what they're doing, so there are all sorts of ways to approach this process of value creation. The general idea is, uh, looking for something people want or need and then finding a way of creating that, ok, so we're going to talk about specifically how you do that now. The reason the stuff is important, by the way, is an idea that I'm going to call economically valuable skills an economically valuable skills are the skills that you yourself can create can develop related directly to the five parts of every business, so if you can learn how to create more value, if you can learn how to market or sell or deliver value, make customers happy and analyze finances, the better you get those things, the more valuable you personally become, so if you want to get a raise at work, getting better at at the's skills is the best way to do it if you want to create a valuable company, getting better at this process is the best way to do it and so if you you are you have a corporate job, for example and you look at what you do on a daily basis and it doesn't directly match up with one or more of those five things guess what, you're probably not very valuable to the business, so what's the best way to become more valuable and make sure you get promoted and paid more and the business wants to keep you try to find a way to work directly on one of these five parts of every business same thing goes for an entrepreneur entrepreneur, right? If you want to become a more valuable entrepreneur and have greater potential to build a business that works working on these five areas is the best way to do it don't make sense now the iron law of the market called the iron law for a reason and, uh I have a quote in the workbook by mark andresen, who is probably best known back when the netscape browser was really popular. He was the guy who invented that made that and now he's a ah venture capitalist and a founder injuries and horowitz, which is a big silicon valley the sea from and mark talks about the iron law of the market like this market matters most neither a stellar team nor a fantastic product will redeem a bad market markets that don't exist I don't care how smart you are, all right? So even if you have what you think is the most ingenious idea that has ever been thought of in the history of the universe, if there is not a market of people who are interested enough in that idea to pull out their wallet, checkbook or credit card and buy it, you don't have the business, and so the iron law of the market is the first big barrier as business people we need to overcome when we have a new idea about something that people may want or need, we need to validate that that market actually exists if the market doesn't exist, if there aren't enough people to who are potentially interested buying this thing, you're dead in the water before you begin. And so the most dangerous situation to be in as an entrepreneur or as as a person running a business in the process of launching something new is having this great idea, putting a ton of work into it and then launching that business to the sound of silence. Nothing anybody ever had this experience, I have, yeah, they're back when when I started the personal mba uh, I've been running it for a couple of years and I was trying to come up with ways that I could serve the personal mba audience better and coming up with ideas for courses and and all sorts of things and there was one particular course it was one of the first ones that I tried to launch I thought was just this brilliant, brilliant idea brilliant format, brilliant class I put it together made the marketing page put hundreds of hours into the development of this thing and I launched it silence that's like so the general idea is it's ok, if you want something and people don't like it because at least they're reacting to it they're looking at they're paying attention to it, right? The worst thing that you can put the worst feedback you could possibly get from all market test is absolute complete and utter silence after think nobody cares, right? Anybody in the live audience ever had this uh, this experience is going to take just a couple of minutes for folks to give us their input on that, but I can tell you specifically for myself I've experienced for at a couple of times I have a company think action where I where coach, young entrepreneurs, new workshops and session remember for me the business at one point I thought was just about frankly getting the website up and announcing I'm here everybody launch my website yeah, that hasn't pay bills no launching a website and launching doesn't do anything, so it was a wake up call for me after that. If the friends like the page, then afterwards absolutely radio silence and that's, particularly with with tools like facebook and twitter and all of those things that you can get that, you know, nice, like all your friends like the page that's, not a business, right? So what we're going to be talking about in the value creation section is, how do you evaluate a business idea that you have to see if it's likely to work? And then how do you actually market test that idea to make sure that it will work? And the more quickly you can do that, uh, and the as inexpensively as you could do that the better, because as soon as you know there's a market, you can continue investing in creating this thing secure in the knowledge that it's actually going to pay off when it exists. Somebody from the now we have the responses from the internet, qin says, I did I begin a small import business importing computer accessories, ready to sell the stores. Local stores were not interested in it, and no one knew I was selling. Yeah, and she goes on to say I was stuck with thousands of dollars in product and no interested buyers from sarkin so so hopefully what we will talk about in this section will prevent a similar situation from happening because that that's that's the worst case scenario you spend years, you spend thousands, tens of thousands, hundreds of thousands, millions of dollars making this thing exists, and then it sits in a warehouse or it sits in your garage and you've wasted your time and you waste your money. Now, the reason that I call this the iron law of the market is this law is cold, hard and unforgiving. If you don't make sure you're on the right side of the iron law of the market before you invest your time and your money, uh, you're putting yourself in a situation where all of that could be for not and so what we're trying to do in the section is make sure in advance this thing you're investing in is going to work. I did something like that to am I built a product and wrote a book, I did a video I spent, I don't want, say, fourteen thousand dollars, but I did I sold one I was pretty excited about it when I get that one. So but it's, what it's important to also understand not just your friends and family like it, but also goto. The actual marketplace and see if they'll give you the credit card even if they like it if they're not willing to give you their credit that's a big transition from liking it was a great idea to here's money and we will talk about that in a minute it's an idea called the shadow test of doing some market research in a way that actually asks people to pre commit to giving you money you get way better results when when you go that far in the test is somebody saying hey I made this thing do you like it you don't don't get it get as good a feedback ok makes sense more accurate improved all right now oh the other thing that I would like to mention on the iron law of the market is the iron law is why it is often better to find ideas in existing markets so a lot of and this this is a trap that a lot of entrepreneurs fall into is I have this new awesome idea for this thing that has never existed in the history of the world and nobody has ever seen this right it's a brand new idea it is a brand new idea you have absolutely no idea whether or not it's going to work you don't know whether other people have tested it it's completely new uncharted territory if it works great you have a dominant position there that's a really good thing if it doesn't work then you could potentially waste a lot of money now in existing markets you have a huge advantage which is you already know that there are people spending money on this stuff and so by entering in an existing market with a with something that is likely to serve customers in a slightly newer slightly better way you can be assured from the outset that there is a market that is spending money on this thing that they care about and if you can if you can create and deliver that value you're probably going to have customers okay? So that's why entering an existing market is usually a much easier thing to do than to build something completely from scratch make sounds ok now the iron love the market says make stuff people want right so that kind of begs the question what do people want what do people tend to want and this is even a more interesting question when you think about all of the different cultures around the world when you think of all of the industries and markets and all of the diversity of human experience can we understand some things about what people tend to one and that can help us figure out ideas that may work there was there was a wonderful book written by two harvard business school professors paul lawrence and nuria who is actually now I believe still the dean of harvard business school they tackled this question and the book is called driven and their answer to this question what do people tend to one they came back with four things therefore what they call core human drives or things that people generally want almost all the time around the world and the four drives in order are the drive to acquire so that's the desire to collect material things or the desire to acquire things like imagery of things like power or status or fame right the drive to get more bring it closer to me okay the second is the disease the drive to bond so to be loved and to feel valued in the relationships with our family with our friends with our colleagues with our associates we are group creatures we like to feel that we have a bond with the folks around us okay, the third is the drive to learn so we're pretty curious creatures we like to be exposed to new things we like to see things that we've never seen before and that curiosity can be behind the desire to go on vacation right see some travel, see something new or read a book any other examples of the drive to tow learn that you can think of being here the whole reason that the a lot of folks are here is being curious about learning more about business right and that drive is strong enough to motive motivated behavior right let's go back to the drive to acquire what are some businesses that, um that are related to the drive to acquire yes exactly so you're purchasing something functional that will actually get you around but there's the added benefit of the status of the prestige that you get from buying the luxury vehicle right dr require apple apple how so? Well, not only is it the the forefront of all the devices that you could have but it's also a status symbol tio be able to show that you have this fancy new fangled device right and it's fun it is but I mean even something as basic as as your local supermarket or or wal mart is a pure acquisition business right eye want to go to the pharmacy to get some aspirin is an acquisition type behavior? What about the drive way just to say any business that that is around a collectible? Yes that's all and that's almost compulsive acquisition right there's something else in this series I need to get the next one. What about the drive? The bond? What are some businesses that are built around the drive to bond e harmony dot com e harmony? Yes online dating sites that's the whole whole thing facebook twitter meet up what may be some some less less obvious once built around a desire to bond the bar yes exactly. It's well, for some people it's about requiring alcohol but for a lot of folks is just hanging out with your friends right? Sporting sporting events? Yeah. Ok, now the fourth dr is the drive to defend that's, the drive to protect ourselves, our loved ones and our property. So what are some businesses that are built around the drive to defend smith and wesson smith and wesson or home security systems? Right? Um locks on doors. What else about a safe car? How so? Things like an air bag and involved with you by involved? Because, quote unquote it's safe. Exactly. So we're seeing kind of an interesting dynamic here, right? Because we talked about the mercedes, which is an acquisition type purchase. You're buying car in either case, but this one gets you more status or you can buy a car that gets you around, but it makes you feel safer so they knew otherwise would feel so you can see how you can layer these drives into a single purchase, right? The idea is that the more drives that your offer connects to, the more compelling it is to purchase or participated so let's ah let's analyze facebook for a moment it's like hello, it's all of them right? How how is it all of them? Well, the acquisition pieces you that many people want to acquire as many friends as they can so the bigger the number the better yeah, the bond is is the friend status anyway? Um the drive to learn is is you're wanting to keep up with your friends you're e r I'm wanted to keep up with the people in my life and so one great way to do that is just by looking a couple times a day at a facebook feed um drive to defend I don't see it but I definitely see online flame for some people there some of that absolutely and then this the drive to feel knowing what's going on in other people's lives really helps me feel more connected to them and also I know it's if someone's having a new baby or or getting married than that emotional connection you know, like is that's an emotional experience? Yeah let's talk about the drive to feel for a moment because this is this is something that did not appear uh in the book driven that I think was a pretty major oversight by both of the author's, which is people have a desire for emotional experiences that could be pleasure that could be excitement um any intense emotional experience we have, we feel the need to have those on a pretty regular basis, so the classic example of this particular drive is think of what you are buying when you buy a ticket to go see a movie you're not acquiring anything you're not really bonding with people because you're sitting in a dark theater not talking to the people around you right uh you're not unless it's a documentary type picture you're probably not learning anything and you're not defending anything it's a pure emotional experience that's the dominant value that's being delivered there and it's a big one it motivates people to drive across town and sit somewhere for for an hour and a half to three hours on a semi regular basis really powerful drive and so those five things acquiring bonding learning defending and feeling are the things that motivate people to take a particular action and the more things that you can build into whatever it is that you're offering or ways you can talk about what you're offering that connect to one of these things the more compelling that offer is going to be so wedding photography is that how how does what you offer connect to all of these things quite a bit the my entire business is is based off of creating emotion and connecting the feelings that people have so primarily I photograph weddings and newborn babies those are my two niches um and for your wedding it happens once you know um anyone who's been married can I can testify to the fact that it goes by so quickly that you don't really remember it so what? My business is is creating beautiful images to help people remember so they can feel that feeling again when their father who unexpectedly passed away six months after their wedding they see a picture of them hugging them right before he gives her away you know that that picture is amazing because it makes you remember and feel all of love that your father who is no longer here can have along with going to you know, new warns and things you have that that feeling and then defending that memory I guess in a way kind of an abstract way of looking at the giant to defend but to bond with people to remember you you look at the images from the major parts of your life and makes you feel good and want to reconnect with people that might have you know, in life just not been around as much. But um and how much did people on average pay for wedding photography services? My particular clients my clients on average pay about four thousand dollars right? So it's a strong enough drive that people are willing to drop multiple thousands of dollars to make sure all of thes needs or wants are satisfied. So the more of these things that you can build in the er the more compelling your offer becomes and here's here's where all of this this theory intersects with market research if people are feeling a lack of one of these drives in some way shape or form or some form of deficiency a market will develop around the satisfaction of that particular drive right? So if you look at something like facebook or twitter, there was a market deficiency need in people feeling connected to folks that they went to school with that they haven't seen for ten years and they want to share baby photos or updates between the two something that is less than a handwritten card or a personal email ah, but not as intense as like updating your own website for example, there was a deficiency there and the reason those businesses exists today is they found a very efficient waiting give mohr of something that people felt a lack in does that make sense? So what I found is that this is a really interesting checklist to walk through and when when you're going about your day looking for up for business opportunities it's a good thing to look into the world and say where could people be feeling a little bit more of this? I have a question from the yeah josh it's interesting as you break down these core human drives from discussion going on in the chat boards online and they want to know is is this related at all to maslow's hierarchy of needs or kind of two different things it's it's two different things that it's a a similar idea so you can think of missiles hierarchy of needs there's an abbreviation of that that I think is really, really valuable, which is called e r g theory so existence, relatedness and growth so people have needs to make sure that they are able to exist to pay their rent, to put food on the table, to buy medical attention, all of those things when that level is met, people look for ways to relate with other people, spend more time with friends or family, right? And then, when that need is met, people tend to turn towards growth opportunities, learning more things, developing their skills uh, spending time on things that are fun or rewarding in some of their way, right? So there's there's an intersection it's not a one to one overlap there actually to two frameworks that exist very nicely alongside each other. Ok now, good encore human drives. Any other questions? I think in the businesses that I am working and I'm kind of in two separate size and just looking at it from this is just so interesting because on the one side in commodities were developing product it it really only our customers who buy it, whether it's gold or agriculture or wood products is simply dealing with the acquire right there's no there's, nothing else there's nothing for where we're now if we're making if we were making diamond rings and all that, then we would be selling to a lot of different ones working on the consulting in strategizing and working with people, setting up businesses, helping them understand what they're doing. What are they trying to achieve? What are the steps to do it? I see that there's there's many mohr core human drives that we're addressing that's why that market and maybe even some service bass industries air a little easier to find the market testing like you were talking about before? Where is the need? I'm sitting at home and people are calling me hey, what do you think about this? How can we do this? What strategy would work for this? You help them do this like I'm not even trying to develop a market and it's right there, whereas with the products we have to be making sure that we're meeting the price and just delivering the product there's no emotional there's, no defending there's no learning connected to that that particular? But this this is since we're talking about what people want, this is the part of the value creation process that that connects very well into the marketing process, right? Because if you know what core drive you are fulfilling in the in what you're doing it's really, really easy to then take that insight and when your marketing and when you're selling make sure you're talking about this thing that you're offering in a language that's likely to resin why people desire it in the first place, right? So this is a really good prime ing checklist for now, but then you'll see how this intersects with with marketing and sales when we talk about this. Okay, now next idea is called status seeking and status seeking is the idea that humans are social creatures. We wait, we care tends to care very intensely about how other people perceive us, and so we spent an enormous amount of tension, attention and energy, tracking relative status and trying to raise our status in the groups that we care about. Okay, so for example, talking about the example of buying a mercedes earlier part of the benefit of buying a luxury car isn't just the transportation that it gets you right, it's this the perceived status, the bump in relative importance or attention that other people give you because you have invested in this very specific social signal. So in general, we like to be associate id with things that are powerful for luxurious or nice. So I think of all of this s o some luxury brands thinks I think of some luxury brands product what is product sell? Yeah, how much did they charge for them? Way too much money, wade right? Right, s o if you take the functional element of a prada bag, for example, you could walk into a wal mart and buy a plastic or a nylon bag for what a couple dollars product sells the same functional thing for several thousand times that amount, right? Same thing with, you know you can buy a rolex watch, spend a couple thousand dollars on on a gold rolex watch it doesn't tell time any better than the courts watch from from the local supermarket just doesn't. What people buy when they buy luxury brands is the status how it changes the perception, how other people around them view them. Does that make sense? Okay, now, all things being equal when opportunities to increase social status appear, people tend to take them it's one of those things that if you can have something that satisfies the need and makes me look better versus something that satisfies the need and makes me look worse or makes me look neutral, people will pick the better one, and so you'll see a lot of, uh, social signals, and we'll talk about this in great detail in marketing and sales, but you'll see a lot of social signals built into the product from the beginning, right in the design of the product. In the way that the packaging is presented in all of all of the things that make people feel that their status is improving when they purchased this thing right, it's related to one of the core human drives, which is acquisition, right, but it's important enough that it deserves its own mentioned people are status seeking creatures. Any examples of this it's an odd one, but for some reason it popped right into my mind recently, uh, budweiser lodged there, bud light platinum, which I'm not particularly a budweiser fan myself, or or bud light for that, for that matter, but just by changing the bottle, I've had the taste of both the taste isn't particularly different when it comes in this bright blue bottle it's very slick and the people that are drinking it, you know, are justin timberlake and pitbull and all these, you know, like they're sipping cognac, they're drinking, but I I don't think maybe they are, but it was just interesting just the just a very small shift affected that status. It's it's bad enough, you know, and for for people that have seen platinum under a microscope versus goldar versus copper, you know, everybody wants to be platinum, right there's actually a series of really fascinating psychological studies about that very effect you talked about with wine take wine out of the bottle, you put it all in identical containers, and you give somalia's wine experts a test and you ask them to rank a lot of times the less expensive wines, the ones and the cheaper bottles, the less expensive packaging, the wind on taste as soon as you show people those those same people who did this blind taste the bottle, all of the characteristics of the wine start magically changing it's the same stuff, right? The perception the status difference makes a big, big difference on how people perceive things make sense. Perception creates reality in a lot of ways. Now, one of the things I'm really big on checklists or ways of breaking down a complex decision to make sure you're evaluating all of the most important things and so it's helpful toe have now that we've talked about what people generally tend to want and how they think about wanting or needing things. It's helpful for us as businesspeople toe have a way of evaluating a a new business idea when we come up with it, right? We've all had that experience is like having a having a great idea, like the skies opened up in the sun, starts shining and angels start saying is like, this is a great idea, uh, it's helpful to have a way of getting past that initial excitement and evaluating the strength of the idea based on the merits and the information that we have at our disposal. So this is a checklist I call it ten ways to evaluate a market which is a series of things that you can think about or ask yourself to figure out if this new idea really is as promising as you think or feel that it might be and so the first thing is urgency how badly do people need this right now? Is it something that they could potentially wait their entire life to get or is it something that they need? Absolutely right now a second delay is too much right the more urgently people want or need this thing, the more attractive the market. The second is market size how many people would purchase this? Is this something that's going to be a track attractive to billions of people around the world? Or is this something for which you have only one or two prospective buyers? The more buyers you have, the more attractive the market right pricing potential what's the highest price people would be willing to pay? Is this something that people are going to pay five or ten cents for? Where is this something that people are going to spend billions of dollars on so it take, for example, a shipbuilder um if if the navy wants to buy an aircraft carrier for twelve billion dollars you only need one customer to make that potentially really worth it right um so what's the highest price people would be willing to pay the higher the higher the price they would be willing to pay the more attractive the market costs of customer acquisition how easy is it to acquire a new customer is this something that doesn't take very much time and energy and attention to attract attention and go through the sales process or is this something you're going to have to spend months for years trying to sell a prospect on the less it costs in time and attention and money the more attractive market ok so good good so far okay cost of value delivery how much does it cost to create and deliver the offer is this something that you can deliver to people very quickly and very cheaply or is this something you're going to have to spend a lot of time and energy and attention and money delivering to your paying customers the less time and money have to spend the more attractive the market uniqueness of officer offer how unique is your offer versus the competition how easy is it to be copied so in other words is this something that you and only you have access to where is this a commodity that anybody else can can also acquire and compete directly with you? The more unique you are, the more attractive the market speed to market how quickly can you get this thing up and running? How long does it take to create itself the less time and energy the more attractive the market same thing with upfront investment how much do you have to invest before having an offer ready less you have to invest the more attractive the market up sell potential is what related offers could you present to purchasing customers? Is there something else that you can sell to people who are likely to be interested in this thing that you're offering so for example um back when that when I was working at procter and gamble I did a little bit of work on the gillette brand which has the last I knew something over ninety percent of the blades and razors market hugh they almost almost the entire market is july and so that really limited opportunities for growth right? What do you sell when you can't sell people more more razors and blades itself a shaving cream you can sell them ship who you can sell them lotion you can sell there are billion things that people that guys who buy razors or ladies who buy razors may want or need the more related things that you can potentially sell them or attack to that market isthe right ok and number ten is evergreen potential once the offers created how much work do you have to put in to continue selling it is this something that so for example in publishing you write the book once and they print lots and lots of copies and unless you want to do a new edition, you don't have to continue working on it, right? That's great if you're in technology, technology changes on a daily basis, right? And this thing that you're spending a lot of time and energy and money creating is going to be obsolete by next week and you have to continue that cycle, right? The mohr evergreen the thing you're creating is the more attractive the market so here's how I use this thing uh, you have ten criteria and what I try to do when I come up with a new idea is try to rank to this each criteria from zero to ten. Zero is absolutely the worst possible case scenario and ten is this is the most attractive thing that I have ever seen in my entire life. When in doubt in ranking these things rank on the low side. Okay, so be pessimistic. Instead of optimistic, if you have anything over fifty, you probably have a workable idea. If it's over seventy five to eighty, you should probably quit your job and start working on that right away. Okay, this is a nice this is not scientific it's a back of the envelope method to evaluate an idea on criteria that actually matter making sure you're on the right side of the our in law of the market now james, you probably have you have a lot of experience with this can you talk about how you've used this framework to evaluate some of your ideas? So where to begin say so I think it's fair to say that so I've been a coaching client from with you for a while and so this is one of the first things that we covered because I often would come to you with this grand new exciting idea and and I would wonder, well, is it a good idea or not? And and so you've helped helped me with listen some strategies for mapping through well, what what are the good ideas? One of the good ideas look like and and I created a list of of these air someday maybe things and these were things that are really more now. So everything from a a plastics recycling business that we talked about it all the way through to the to the the pop up dinner idea. So we've talked about lots of business and it seems like the more the more ideas that I began to walk through this process of of really where where does this fall one to tend? The more I became comfortable with with assessing whether or not it was a good idea and and I began to uncover my biases as well, so I discovered my tendency was to was to overshoot in terms of urgency, and I would think I think that people wanted things more than they perhaps did, and then and then I would often times overestimate the upfront investment. Sometimes it would be a whole lot easier to start or test something. Then I was giving myself credit for right and that's that's the real benefit of using this as a checklist or a decision framework is it moves the idea from wouldn't be totally cool if no evaluation, right? Actually stepping through the things that are going to be necessary to think about to figure it out out if it's a good idea or not. Now, what do you do with the ideas that you evaluate that aren't attractive enough to pursue? Well, I put him on what what I called my someday maybe list, and so oftentimes they're not it's it's more like not now versus never because things could change. And so, like what could given a bill to the plastics business? Because I was a interesting as who it was, I read a research article about a japanese company that had developed a machine that would basically take your plastic bottle and turn it into a renewable fuels, so what would it look like to you, too? Have a franchise of that company, or or to partner with that to bring it and bring it to the states. And I began to do research and found that there were other companies did something similar there's, a test in in d c, where a different company is using a different process. And so what, what I discovered, where was that there's? A lot of urgency in terms of renewable fuels right now, there's a lot of of there's, a lot of excitement and a lot of enthusiasm about moving that direction, huge market size, really good pricing potential, because oftentimes it's written into into contracts and and legal stuff for for either municipalities or states that they have to use renewable fuels, a cost of customer acquisition that seemed like it might be kind of high and then and delivering the value those those were pretty expensive, very unique offer, so it was kind of off the charts, their speeds market could happen very quickly, and then I ran into upfront investment and so talking, talking with with one of the companies, it was a million dollars up front for the franchise fee and three to four million dollars cost in terms of beginning to to build, build something that would where I could, where I could operate, and it was and I began to ask myself, well, what would have to happen in order to to be able or be willing to make that up front investment to make sure that it was it wasn't ill advised and and as I begin to explore that further I realize that that's that's more of a someday maybe thing yeah did you notice what he did there? Okay, so here's crazy idea right? I found this machine that can potentially turn plastic into fuel awesome let's do it right going through this checklist helped turn that from awesome into here's something specific I need to evaluate right? I looked at a licensing fee and it's going to cost me four to five million dollars based on my research to get started what am I gonna have to do in order to make that worth it or what needs to be true in order for that to pay out so using this framework helped you go from here's this thing that I've never looked into before into here some very specific things that I need to research to figure out if this is going to work or not and then it got into the round there's there's a wonderful quote is uh he who is not willing to do arithmetic is doomed to talk nonsense thiss got you to the arithmetic stage and that helped you figure out whether it was going to be a good idea or not that's the value of this so it's not scientific it's a back of the envelope but it helps you figure out the most important things very quickly. All right. Any questions from the er from the live audience before we go. Well, it's funny the question I was about to ask and it sets this up, I think perfectly. See, nora writes, where does competition fit into this? And lo and behold, little it's on the screen sonora josh is three steps ahead. Meat in your mind? Yeah, so the competition fits into this week. We previewed this a little bit earlier. Uh, there's, this is an idea called the hidden benefit of competition. So the classic entrepreneur mistake is I want to enter a market in which I have absolutely no competition whatsoever because then I can get the entire market. What that puts you on is the wrong side of the iron law of the market from the very beginning. So when two markets are equally attractive when you've evaluated to ideas and one has competition and the other does not have competition generally the one with competition is going to be the safer, more profitable, more direct route to making something work. And the reason is you already know customers are spending money right? The other part of this is there are lots and lots and lots of people in the world and people who are trying to do the same thing that we're all doing right look into the world find a problem finding need solved that in a way that's profitable and you can keep going people have also been doing this for hundreds thousands of years, right? There have been a lot of business ideas that are have been evaluated and tested if you can't find a really good, successful example of a business kind of like the one that you are thinking of setting up, it may not be as good of an ideas you think that it isthe right so it's just one of those things that having competition protects you from the beginning here's the other hidden benefit of competition if there's a competitors selling something close to what you want to do, the very best market research that has ever been research method that exists in the world is becoming a customer of your potential future competitors because you get to see their entire process right, you get to analyze what they're making, you get to analyze how they're marketing it, you get to analyze how they're selling it, you get to analyze how they're delivering it and you can get a pretty good sense of their financials and you can do that all yourself just by spending a little bit of money, right? So having a competitors in the market that you can study is a really great way to learn about a lot of the things that matter in entering that market don't make some good what do you suggest in situations where that's not really feasible for example, I'm a wedding attire for I'm not going to have a wedding just right tio and competition especially this day and age with digital being what it is and how many people are out there trying to become a tire first the competition in my industry's fears but people can be very cagey about talking to their competitors obviously about what they're doing so you kind of get to a stalemate where you're like what do you do? Well, wedding is a little bit of a special case I'll admit that um you can if you find a photographer that you really like and you want to learn more have more about how they work book them for something a little bit weird so a family photo session um you're buying their time you get to see their equipment and get to see the process you get to see accuse you get to see how they deliver a photo there's there's a lot of things there that really work the other nice thing particularly about professional services like photography or like a design or whatever a lot of folks are available for advising consulting you just have to make it worth their while to spend the time focusing on teaching you how to improve your stuff uh versus taking another gig, for example but in markets with competition there are a lot of people to learn from you know, I think that there are a lot of people were just really wanting to share in that especially in photography, so I know jeremy coward in nashville did of creative live and and c'mon facebook all the time talking about good photography strategies and asking questions about what do you guys think about this or or here's an experience that I had on dh it's been just thinking about the fact that that it may just be a selection process of finding finding somebody who who would would want to work with you or talking to, you know, make sense to other rules of thumb and I call these thieves that kind of sister concepts one is called the mercenary rule and then the other which will talk about in the second is called the crusader rule, so the mercenary rule is don't be a mercenary don't start a business for the money alone because it always takes more time and money and effort to start up a business than you expect. We tend to be very optimistic in our estimates of how much work it's going to take and how much we're going to spend to make something work and so if the only thing that you are fascinated about about this particular business is the potential pot of gold at the end of that range rainbow uh if the only thing you're interested in is the money and you're probably not going to make it very far because you still in order to get to that pot of gold you still have to wake up every morning and make progress on this particular idea right? So if there's nothing aside from the money that you're fascinated by you're probably never going to get there right? So just blindly following the money is not a generally good strategy right now that said there are some businesses that you could pretty legitimately classified as boring that also happened to be extremely profitable right take something like garbage collection not the sexiest business of the world never will be plumbing right but a very profitable one something that people need and are willing to pay sometimes very large amounts of money for right as long as you can find something about the business that's fascinating something that you can get excited about those boring businesses can turn into really tremendous opportunities if you're able to find that fascinating part of it right? So part of it I'm just making this up but part of it something that might be fascinating about running a trash collection business is truck routing right? There are lots of complicated logistical mathematical systems like all sorts of things that could be fascinating about the process of making that business work if you can get excited about the process, the business becomes a little bit more exciting, right? What? That has to be something more than the money right now, crusader rule is there is a difference, so you need to follow the money a little bit, right there's a difference between an interesting idea and a solid business. So in order to make this idea work, you have to be able to pay the bills. It has to be worth the time and energy that you're investing in making this thing work or it's going to die anyway, right? So it's okay, it's perfectly so for james. Have a business idea and evaluate it and say this is not worth my time. That's a really, really, really great thing. The failure mode is when you have this awesome idea and the skies open up in the angels start singing and you go all in on that idea without really evaluating if it's goingto work as a business or not so it's really crucial when you have an idea evaluated before you start investing because it needs to be sustainable enough for it's not gonna work make sense are part of this signaling so you've got in terms of the mercenary thing. Maybe you can often get a vibe from someone if they are our I don't really believe in what they're doing there or even there not so crazy and all they think of is is the they're multi level marketing business or something you can cut oftentimes get a a sense of either one of those things there's kind of a vibe that it does that does that play into the reason to avoid both both of those things as well? Yeah, a little bit I think it's really easier it's much easier to see that from the outside than it is to see it from the inside. So these two ideas are self checks of my being to mercenary about this and my only interested in the potential return. Or am I not thinking enough about what it's going to take it to work? Because I'm so enamored with the idea that I'm a little bit blind to it. So it's one of those things like check it before you, you really you quit your job and borrow a bunch of money to do this thing, okay, so what we're going to do is fortunately, because business has been practiced for thousands of years, you don't have to make it all up from the beginning, there are what I call twelve standard forms of value so things that people have a demonstrated interest or ways that value is created for people that appears patterns over and over and over again right and so you don't have to make up the entire value creation process from the beginning more likely than not you should be able to pick one or more of the standard forms of value and have a head start on figuring out what this thing is going to look like right those twelve standard forms of value and we'll go through them in order our products services shared resource is subscriptions resale lease agency audience aggregation loans options insurance and capital and so will go through as many as we can before the break in we'll get the other ones after okay now first form of value is uh what's called a product and a product is just something tangible that people want so you walk into a store you look at a shelf that shelf has stuff on it you pick the thing up you go to the cash register and you buy it you get to take home you can hold it that's a product right and the key to to running a product tight business is to produce that product as inexpensively as possible while also having us a certain amount of acceptable quality right so you want to invest as little as possible in each unit that you make available for cell as long as it's good enough that somebody is actually going to buy it in a way that's going to make them happy right you want to sell as many units of that product as possible at the highest possible price for the market right so loper is so make it for a low price sell it at a higher price uh air the highest price that that market will bear and you need to keep an inventory to deal with future quarters so product businesses usually revolve around making thousands tens of thousands uh or if it's a small business a couple hundred you haven't inventory of finnish stock that you were just just waiting to sell right now inventory makes product businesses james you deal with this on a daily basis inventory management is hard because if you have too much inventory you have a lot of money tied up in physical stock that you can't do anything with if you can't sell it that's all wasted money right? So having just enough inventory to cover cover all of the demand for your product but not so much that you're wasting a bunch of money is a big big challenge and running a product business okay now there are lots of different types of products so some products are durable like for example a refrigerator you can go to a store by refrigerator have it delivered in your house and if all goes well that will sit doing its job for years and years and years to durable product they're consumable products like what what would be an example of that? Your bottle of water bottle of water coffee, food, people paper that table, this table? Yeah, it would be a consumable products. Oh, I thought you said with durable product. Yes. Durable product. Um, cosmetics. Anything that is used up over time. Okay, now they're even some products that are intangible products. They have no physical form, but they but in all other respects, they act like a product. Like what? People he books mp three downloads. Anything that buys and sells as a unit could be considered a product. The nice part about intangible products is you have no inventory, which is a big advantage right now, the nice part about products is they can be duplicated or multiplied, and we'll talk about exactly what those duplication and multiplication. What exactly? That means indeed, to, uh but in general, what makes a product a product is you design it once or you develop it once, and you could make lots and lots of copies of that thing to sell to lots and lots of people, right? So the nice part about writing a book is only had to write the book once and then it goes to a printer and they print hundreds of thousands of copies and those show up on store shelves worldwide. That's great if I had to write the book over and over and over again for each individual purchasers I would go insane right but because it's a product it can be duplicated you can make more copies of it and so product type businesses you probably heard at some point the idea of scale or scale ability that's just a shorthand way of saying being able to serve a lots of people with the same thing right so products are unique in the respect of the usually duplicate and scale relatively well right as long as you could manage the inventory cost that's the wrinkle make sounds ok would something that it would be more customized will say for example a wedding album the album actual physical thing that I'm giving a climate the same but what's inside of it has to be customized for every client yes that's still technically a product but it's a hybrid okay so we'll talk about the second form of value this is a really really good segway second form of values of service so a service is a form of value where you helping provide some benefits some type of benefit to someone in exchange for a fee right so the service of you shooting a wedding and capturing all of these digital images that are now on a card that you control that's the service right you are going and doing something intangible for somebody who wants to pay for it now you are able to take that result and put it into a product that is print photos or a wedding album or something and you can actually sell both right. You can sell the service. You can also sell the product on top of that, you can already start to see that these air not binary decisions you just pick one you can actually provide multiple forms of value at the exact same time to the very same client they go together. That makes sense. Okay, so search for service oriented business businesses. You need to provide a skill either by yourself or by your employees or contractors. So I know you have contractors that go and perform home inspection services. You have to have somebody actually going out to serve the client to do the actual work. Uh, and usually that work is something that they would the client would prefer not to do themselves right, so you probably could shoot your own wedding, but you really disrupt, right? You could probably cut your own hair, but you would probably not get as good a result. Right? Services are things that people buy because they don't want to do it themselves. So you have to have somebody to pry that skill, and you have to make sure that that that services provided at a high enough level of quality to make it worth it for that person to pay for it right okay, now you have to attract and retain paying customers and here's the trick about services they can be really lucrative, right? Because if most of what you're investing is your time in your energy not a lot of money most of what you bring in can be considered a prophet but here's trek unlike products human beings do not scale right we only have twenty four hours a day and subtract enough time for sleeping, eating and all of those things to take care of yourself you're never going to get more time, right? So you can't legitimately unless you hire lots of contractors or expanded the business out you can't shoot a thousand weddings a day there's just no way that you can possibly do it. So the trade off for services a lot of times it's easier to get started in a in a service because most of what you're investing is your time and energy but there's a natural cap on how much business you can do and that cap is the amount of time and attention you have to actually serve your clients that makes sense okay? So it's really, really critical if you're running a service business to make sure you're pricing reflects the amount of capacity that you have because you're pricing combined by the amount of time that you have to invest is the cap on your businesses profitability on any given point there are ways of getting around it like hiring employees or hiring contractors but there's a natural limit if what you're providing relies on human input humans only have so much energy today okay tight no it sucks it does yeah and it's it's a big thing like it's nice when you're getting started because there's not a whole lot of barriers to getting started in the business but once you reach that threshold like man I could totally be making more money if I had forty eight hours a day and I had the energy to actually do that right you reach the cap pretty quick and so a lot of growing a service oriented business either means hiring contractors or employees to scale out to have more people doing the same job or combining the service with things like products or some of the other forms of value to bring in revenue that's not directly tied to your time not to say service is a bad model it could be a great model you just have to really know the tradeoff it's evolved okay now products and services are the two things that most people think of classics like that's what business does offers a product offers a service not true not true there are ten other ways that businesses typically provide value to customers we're going to talk about some of the less common or less well known ways so form of value number three it's called a shared resource and share resources are durable assets that can be enjoyed by many people. So for example, think of running something like a an amusement park, ok, you're not selling roller coasters to individual people, right? You're not really providing a service, you're building some really, you know, a big right or some really attractive thing that lots of people can enjoy, and as long as you maintain that asset and you charge people to access that asset. So you give tickets of that at the beginning of the park, that roller coaster, that amusement park is a shared resource that you just charge for access? What are some other businesses that follow this particular model? Creative life would be an example, so it's a shared space for trainings totally. And then the actual course recordings are you get access to a web site that allows you to view the course recordings at any time. It's a shared resource like time shares are rentals, timeshares? Um, gyms are a great example of that, right? You buy a membership to a gym, you don't get to take the weights home if you want to, they're just there, if you want to use them in the space that you're paying access to write, what something like an internet subscription or that's a little bit more of a service. Yeah, but it s so it's the durable asset part there that really makes a shared resource. Ah, shared resource. So the first part of creating a shared resource of businesses that is to create or or acquire some asset that people want to use, right? And then you want to be able to serve as many people as possible without affecting each individual's experience. So if you saw too many members are too many tickets to your amusement park, and it takes five hours to get on the roller coaster. People are not having a good experience, right? So managing access to this shared resource is a really big deal. You want to have enough people using it that you're making a lot of money, but not so many people using it that they all get ticked off that the king they're not getting what they pay for. All right? You also have to charge enough to maintain and improve your asset overtime, right? So your roller coaster is gonna break down at some point. And so you have to invest money in in maintaining this thing that you've developed so people can continue to enjoy over time, uh, and the really big trick, just like managing inventory levels, are the primary challenge or managing your time. Eyes the primary challenge of the service business managing levels of access there was called utilization er is the primary challenge of managing a shared resource business getting enough people to use it that you're making a lot of money not so much that you took everybody off and they go away that makes sense and a subscription provides tangible or intangible of benefits on an ongoing basis in exchange for a recurring fees so internet service is a subscription uh what other things that are sold by subscription magazines. So cellphone razor blades these days? Yeah. Yeah. Razor blades. Yeah. There's a lot of product businesses are experimenting with a subscription type model. You could do that. What else? Microsoft office is switching to subscription. Exactly. Uh, adobe is to write you instead of buying the song that software is a product, you can buy it as a subscript service. Uh, the what makes a subscription of subscription is the expectation of paying in the future for benefits that are going to be provided in the future. So if you think about it, you subscribe to a magazine you are committing to buying future issues of the magazine that don't exist yet, but you expect that they will exist at some point, and so you continue to pay for access to that thing right? Sometimes the form of value is tangible like like a physical magazines sometimes it's intangible like internet service it's kind of like you're buying convenience for to some extent you're buying the permission not to have to write them a check person on your credit card number everybody exactly and so one of the wonderful things as business people about subscriptions is that you are asking your customers to make a purchase decision once and as long as they don't make the decision to cancel their subscription they continue to pay you and you continue to provide service so it's really nice if you have something that a way to continue to provide value to people over a long period of time subscription service, subscription products or subscription services can be enormously profitable because you keep doing serving your customers and they keep paying you and all it takes is one decision to get that process started couldn't e courts via subscription you sure how would you do that? Well, just thinking of like photography knowledge during an e chorus tohave teach people which people who don't know how to use their camera to use their camera it would be limited I would guess though then you wouldn't you know, after they learned what they need to learn from you, they'd be gone but you'd be surprised so I really good example of this one of my friends and fellow creative life present her roommate safety anybody seen his materials fantastic his creative life courses awesome um he actually does both so he has a couple of online courses that are classic product share read first model you pay the feed you get access you can take it whenever you want but it's a thing he also has programs where you sign up and you pay fifty dollars a month and every month there's new stuff about this certain topic to train you about this thing that you care about and you keep pain he keeps delivering training on and on and on and on so the same general type of value being provided but two very different models or two very different forms of how that value is created you can do either you can do both so to create a successful subscription service uh you have to do a couple things first you have to create a provide value consistently that's just the point of entry you have to build a subscriber base and then constantly attract more subscribers than you're losing. So this is an idea called attrition a certain percentage of your subscribers are naturally going to cancel or drop off over a period of time and so you have to be in order to make the subscription successful you need to bring in more people on a consistent basis than you're losing through attrition ok, you have to be able to bill customers on on a consistent recurring basis which is sometimes more complicated thanet than it sounds uh you have to retain your subscribers for as long as possible, right? But longer you retain them the more profitable that subscriber is, which is why, if you see, has anybody ever subscribed said to something like netflix and canceled? What do they do? Yeah, they keep emailing you were sending you things and they give you like these crazy deals right? Come back and you'll pay like one dollars a month for the next three months to get fifty dvds every month they do whatever they can once you have subscribed, they want you to keep subscribing as long as they possibly can, right? So retaining subscribers is a very big deal and the attractiveness of subscription models as business people is that off all of the forms of value subscriptions tend to make their tend to create more predictable businesses because you know how many subscribers you have, you know how much they're spending, you know, generally how what your natural rate of attrition is and how many folks you're bringing in. You can count on that revenue every month, whereas if you're running a product or a service type business, you got a lot of sales one month maybe had a big spike, but you can't count on that same number of sales the next month so it makes the demand planning and your financial modeling way more complicated because you can't count on their evidence. Subscriptions make that generally pretty easy. So as long as you keep providing value, you keep making your customers happy. You keep bringing more people in the door. Subscriptions. Khun b in an enormously profitable way to run a business.

Class Materials

bonus material

The Personal MBA Workbook
The Personal MBA Recommended Reading List
Personal MBA Guide to Small Business Infrastructure
Financial Statement Templates

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a Creativelive Student
 

Each of our 20 students (leadership and business) in Benin Africa read the Personal MBA last week. It was simply amazing to see them discuss this book in class. Josh thanks for helping us build great business leaders in Africa. We (the entire class) will listen live on the 14 and 15 here in Africa. It's worth staying up late for this.

a Creativelive Student
 

I have watched almost every business course here on Creative Live and the Josh Kaufman's The personal MBA course is probably one of the best. I watched the live broadcast and then the rebroadcast a few weeks later. I decided to purchase the bundle, course 1 and 2. I still go back and watch them, because even though I'm now very familiar with his content- it still inspires me every time. He is a terrific teacher and he will help you to understand the foundations of business very quickly.

a Creativelive Student
 

I had the great opportunity to attend one of Josh's MBA courses and it was one of the best investments I've ever made. Josh has the great ability to explain concepts so that anyone can understand. He teaches all the principles needed to understand and analyze a business. I can't wait for this LIVE event to get a refresher on all the things I've learned. Everyone who enrolls is in for a treat.

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