The Personal MBA Part 1: Value Creation

1. The Five Parts of Every Business

There are five essential elements for something to be considered a business:

  1. It creates and delivers something of value.
  2. That other people want or need.
  3. At a price they’re willing to pay.
  4. In a way that satisfies the customer’s needs and expectations.
  5. So that the business brings in enough profit to make it worthwhile for the owners to continue operation.

Based on these we have the essential processes of business:

  1. Value creation
  2. Marketing
  3. Sales
  4. Value delivery
  5. Finance

You should have a solid understanding of these processes. A good business plan will outline them as well.

2. Economically Valuable Skills

It’s fine to pursue things for relaxation or enjoyment, but if you want to earn money then you should focus on skills which relate to the five areas of business.

3. The Iron Law of the Market

You can invent something ingenious but if there isn’t market demand for it then it’s not going to be successful. Market research is a way of gauging and increasing the likelihood that your idea will be well-received by the market.

4. Core Human Drives 

There are core human drives which help to explain what people will want to buy.

Maslow’s hierarchy of needs:

  • Physiology
  • Safety
  • Belongingness/love
  • Esteem
  • Self-actualisation

ERG theory:

  • People seek existence first
  • Then relatedness
  • Then growth

Five core human drives:

  • The drive to acquire
  • The drive to bond
  • The drive to learn
  • The drive to defend
  • The drive to feel

All successful business sell some combination of money, status, power, love, knowledge, protection, pleasure and excitement.

5. Status Seeking

Humans are hard-wired to place a high priority on status. We spend a lot of mental energy determining what our status is. Research shows that people will make decisions based on the perceived effect on their social status.

When you approach a prospect they will be considering how your proposition affects their social status. Building social signals into your offer increases appeal to the target market.

6. Ten Ways to Evaluate a Market

This is a way of evaluating a market. Rate each of these between 0 (extremely unattractive) and 10 (extremely attractive). When in doubt be conservative.

  1. Urgency
  2. Market size
  3. Pricing potential
  4. Cost of customer acquisition
  5. Cost of value delivery
  6. Uniqueness of offer
  7. Speed to market
  8. Up-front investment
  9. Upsell potential
  10. Evergreen potential

Add them up and if the score is less than 50 forget about it. 50-75 will pay the bills but will require a lot from you. 75 or above? You are onto something promising, go for it posthaste!

7. The Hidden Benefits of Competition 

There are hidden benefits of competition, for example: if you enter a market and find out other people are doing the same thing you know that there is a market of paying customers for this model.

The best way to observe what competitors are doing is to become a customer. Buy as much as you can of what they offer. This will teach you a lot. Learn everything you can from your competition and then create something even more valuable.

The competitor to be feared is one who never bothers about you at all, but goes on making his business better all the time. -Henry Ford

8. The Mercenary Rule

Don’t get into a business just for the money (like a mercenary) because it always takes more effort than you first expect. You should look for opportunities that you’re drawn to and keep coming back to. That being said; dull industries can be lucrative. If you find something you like about doing it then it can be a winner.

9. The Crusader Rule 

Don’t be a crusader either. Changing the world is hard if you can’t pay the bills so don’t neglect soberly checking whether there’s actually a market behind the idea which is so appealing. Side projects can be great; it might be a perfect side project for you.

10. Twelve Standard Forms of Value 

  1. Product
  2. Service
  3. Shared resource
  4. Subscription
  5. Resale
  6. Lease
  7. Agency
  8. Audience aggregation
  9. Loan
  10. Option
  11. Insurance
  12. Capital

11. Form of Value 1: Product

Can be tangible or intangible. Scale well because you only have to create it once and then the process is duplicating it. It has to be something that people want, you must produce it as inexpensively as possible (whilst maintaining an acceptable level of quality), sell as many units (for as high as price as is acceptable to market) and keep enough inventory of product for future orders.

12. Form of Value 2: Service

Service requires you to have employees which can do something (that others can’t, won’t or don’t do themselves), provide it with consistenly high quality and attract/retain paying customers. Can be lucrative but also is difficult to duplicate so it’s not very scalable. Be sure to charge enough to compensate for the time you’ll be investing in providing the service.

13. Form of Value 3: Shared Resource

Must create an asset that people want to use/are willing to pay for, must be able to share it without diminishing the quality and must charge enough to maintain/improve it over time. Be weary of having too many users so that the quality diminishes and you get a bad reputation. Finding the sweet spot between too few members and too many is the key to making this model work.

14. Form of Value 4: Subscription

  1. Provide significant value to each subscriber on a regular basis
  2. Build a subscriber base and continually attract new subscribers to compensate for attrition
  3. Bill customers on a recurring basis
  4. Retain each subscriber as long as possible

15. Form of Value 5: Resale

This what most retailers do.

  1. Purchase a product as inexpensively as possible, usually in bulk
  2. Keep the product in good condition until sale – damaged goods can’t be sold
  3. Find potential purchasers of the product as quickly as possible to inventory costs low
  4. Sell the product for as a high a markup as possible, preferably a multiple of the purchase price

Quite important to keep a good relationship with suppliers.

16. Form of Value 6: Lease 

Must acquire an asset that people want to use, lease the asset to a paying customer on favourable terms and protect yourself from unexpected or adverse events (such as the loss or damage of the leased asset). Need to receive enough revenue from leasing asset to cover the purchase cost, repair costs and replacement: within the life of the asset.

17. Form of Value 7: Agency 

Earn a commission fee for linking up buyer and seller. Must find a seller with a valuable asset, establish contact/trust with a potential buyer, negotiate an agreement on the terms of selling and collect an agreed upon fee for doing so.

18. Form of Value 8: Audience Aggregation

Identify a group of people with common characteristics or interests, create/maintain some way of consistently attracting that group’s attention, find third parties who are interested in buying the attention of that audience and sell access to that audience without alienating the audience itself.

19. Form of Value 9: Loan 

Must have some amount of money to lend, find people who want to borrow that money, set an interest rate that compensates you adequately for the loan and estimate/protect against the possibility that the loan won’t be repaid. Underwriting involves accessing the risk of the loan.

20. Form of Value 10: Option

Includes things like plane tickets as well as financial instruments. Buyer has the option of taking some action for a certain period of time in exchange for purchasing the option. Must identify some action that people might want to take in the future, offer potential buyers the right to take that action before a specified deadline, convince potential buyers that the option is worth the asking price and enforce the specified deadline on taking action.

21. Form of Value: Insurance 

Must create a binding legal agreement that transfers the risk of a specific bad thing happening form the policyholder to you, estimate the risk of that bad thing actually happening using available data, collect the agreed upon series of payments (premiums) over time and pay out legitimate claims upon the policy.

22. Form of Value: Capital

Must have a pool of resources available to invest, find a promising business in which you’d like to invest in, estimate how much the business is/will be worth, access the risk and negotiate the amount of ownership you’d receive in exchange for the capital you’re investing.

23. Hassle premium

Often people could do things themselves but it’s a ‘hassle’ to do so. For example: it is unpleasant, takes too long, distracts them from other matters, isn’t a worthwhile use of their time et cetera. Since it’s a hassle, they are willing to pay someone else to do it.

The difference between the cost of doing something oneself and how much a business can make doing it for them is the ‘hassle premium’. Start looking for things which are a hassle and you may find a potential business. The greater the hassle, the more people are willing to pay.

24. Perceived Value 

Value is in the eye of the beholder. These elements help to maximise the perceived value of the offer:

  • Satisfies one or more core human drives
  • Offers an attractive and easy-to-visualise end result
  • High hassle premium
  • Satisfies status-seeking tendency by providing desirable social signals

25. Modularity 

You can offer a combination of different modules of value, perhaps in different forms. This makes it easier to customise to what the buyer wants.

26. Bundling and Unbundling 

When the value is modular you can bundle it together and then sell it for a higher price. Like when you get a new phone with a plan.

Or you can unbundle: such as by selling single tracks out of the album. This is good for when people mightn’t buy the full album.

27. Prototype

What matters more than ideas to entrepreneurs is knowing whether an idea can be translated into reality according to plan. A prototype is one of the most effective ways of testing an idea with less investment. ‘Stealth mode’, withholding information is not effective in most instances because ideas are cheap and you want to be able to get feedback in early stages.

28. The Iteration Cycle 

This is a process you can use to make anything better over time:

  1. Watch. What’s happening? What’s working/not working?
  2. Ideate. What could you improve? What are the options?
  3. Guess. Based on what you’ve learned, which idea do you think will make the biggest impact?
  4. Which? Decide which change to make.
  5. Act. Actually make the change.
  6. Measure. What happened? Positive or negative? Should you keep the change or go back? Try clearly defining what you’re trying to do each cycle.

29. Iteration Velocity

Generally the quicker you move through the cycle the better because you can improve more quickly, efficiently.

30. Feedback 

Feedback is the core of the iteration cycle. Tips:

  • Get feedback from real potential customers instead of friends and family
  • Ask open-ended questions
  • Steady yourself and keep calm
  • Take what you hear with a grain of salt
  • Give potential customers the opportunity to preorder

31. Alternatives

This is a principle of business. Customers usually have alternative choices. Businesses have alternatives about where to focus their limited time, money and energy to the greatest effect.

If you examine alternatives (and things in general) from the customer’s perspective, it will help you to make better choices.

32. Trade-Offs 

Time, energy and resources are finite. By paying attention to the patterns behind what your best customers value, you’ll be able to focus on improving your offering for most of your potential best customers most of the time.

33. Economic Values 

Here are 9 economic values that people often use when deciding if they want to buy something more than hold onto the money they have:

  1. Efficacy
  2. Speed
  3. Reliability
  4. Ease of use
  5. Flexibility
  6. Status
  7. Aesthetic appeal
  8. Emotion
  9. Cost

1-5 are about convenience. 6-9 are about fidelity. It’s hard to optimise both convenience and fidelity so choose one.

Tradeoffs often define your brand. E.g. old navy, GAP and Banana Republic all have a position based on different trade-offs (cost/quality) but are owned by the same group.

34. Relative Importance Testing 

This is a testing process where consumers demonstrate what they most value. You can’t ask them because what they’ll come up with is ‘ultimate value for free’. By getting them to choose what they most and least value out of various selections, you can obtain a pretty accurate ranking of what values they’ll make choices based upon.

35. Critical Assumptions

When you make a plan for a business to succeed, often you’ll do so based on certain assumptions. Critical assumptions are the ones which must ALL be true in order for the business to succeed according to plan. You want to identify and test critical assumptions wherever possible.

36. Shadow Testing 

You can test one of the most important assumptions (whether people will buy it) by shadow testing it. You should be upfront about what you’re doing.

37. Minimum Viable Offer

The minimum that you need to produce in order for some people to actually buy it. For example Fitbit’s minimum viable offer was a prototype + description + some renderings. Services like Kickstarter can be useful here.

38. Incremental Augmentation 

This is the process of using the iteration cycle to add new benefits to existing offer, creating more value for customers over time.

39. Field Testing 

Basically this is testing your product(s) (and even designing them) in the field. This helps to improve quality a great deal.

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