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THE PERSONAL MBA

Mental models: Fundamental business concepts discussed in the book. Models relate to one another.

Defining a business:

Every successful business creates or provides something of value that other people want or need, at a price they are willing to pay, in a way that satisfies the purchaser’s needs and expectations and provides the business sufficient revenue to make it worthwhile for the owners to continue operation.

Factors in the above (all required for a business):

  • Value creation
  • Customer demand
  • Transactions
  • Value delivery
  • Profit sufficiency

Five universal requirements:

  • Market research — understanding what people want
  • Marketing / sales — getting and retaining customer attention
  • Operations — ability to deliver on what is promised
  • Customer service — meeting expectations
  • Finance — maintaining financial records

1. VALUE CREATION

Note the five above points for successful businesses.

To improve value as a businessperson, focus on improving skills related to the five parts of every business.

Iron law of the market: Every business is fundamentally limited by the size and quality of the market it tries to serve.

Market research is done to find profitable markets.

ERG Theory (by Clayton Alderfer):

People seek existence, relatedness and growth, in that order.

Four core drives — from Driven, by Paul Lawrence and Nitin Nohria:

  • Drive to acquire — objects, status, power, influence
  • Drive to bond — feel loved, valued
  • Drive to learn — curiosity, satisfaction, competence
  • Drive to defend — protect what is ours

5th drive (not in Driven):

  • Drive to feel — new stimuli, experiences

Power and status are core to human decision-making. Building status signals into your offer is a great way to increase appeal.

TEN WAYS TO EVALUATE A MARKET

Ten factors, each ranked 0–10:

  • Below 50: Skip
  • Above 75: Full speed ahead
  • 50 to below 75: Huge investment
  1. Urgency
  2. Market size
  3. Pricing potential
  4. Cost of customer acquisition
  5. Cost of value delivery
  6. Uniqueness of offer and/or replicability
  7. Speed to market
  8. Up-front investment
  9. Upsell potential — add-ons, post-sale support
  10. Evergreen potential — percentage of ongoing sales

HIDDEN BENEFITS OF COMPETITION

  • You know there is an existing market.
  • You can learn their approach by being a customer.

Don’t do things just for the money, where possible, because your motivation will falter — unless there is no or little competition.

Figure out what draws you to an opportunity.

To successfully provide value to someone, it must have a recognizable form, usually one of the following twelve — or a group/bundle:

  1. Product
  2. Service
  3. Shared resource — selling access
  4. Subscription
  5. Resale
  6. Lease
  7. Agency — market and sell a third-party product/service
  8. Audience aggregation — get attention, sell that
  1. Loan — money; take interest
  2. Option — sell the ability to take a predefined action for a fixed period of time for money
  3. Insurance — risk mitigation
  4. Capital — percentage ownership of a business

PRODUCT: Tangible. Create inexpensively, sell en masse, maintain inventory.

  • Durable
  • Consumable

Products tend to scale well, as they can be duplicated/multiplied.

SERVICE: Assistance in exchange for a fee. Skill requirement; maintain quality; attract and retain customers.

SHARED RESOURCE: Durable, shareable asset. Create once; charge for use. Maintain supply without compromising quality — e.g. a gym. Usage monitoring can be tricky.

  • Tangible
  • Intangible

SUBSCRIPTION: Ongoing benefit in exchange for a fee.

Provide ongoing value, compensate for customer attrition, manage billing, max retention.

RESALE: Get wholesale; sell with markup.

LEASE: Acquire asset; allow time-limited access to it in exchange for money. Be protected from loss during use.

AGENCY: Manage marketing and sale for a product; earn commission.

AUDIENCE AGGREGATION: Get a demographic’s attention; provide it to those who can benefit from it, without alienating the audience.

LOAN: Identifying risk — underwriting — is vital.

OPTION: Concerts, financial securities, coupons.

Options can provide flexibility, one of the three universal currencies.

INSURANCE: Transfer of risk.

CAPITAL: Angel investing and venture capital involve negotiating bought ownership.

HASSLE PREMIUM: Time, effort, skill, priority, resource requirement.

Hassles provide good business potential.

Value is in the eye of the beholder: perceived value.

  • Core human drives
  • Offer an attractive, easy-to-visualize end result
  • Command a high hassle premium
  • Provide status signals

MODULARITY: Bundling the combinations of twelve forms of value.

BUNDLING: Combining multiple smaller offers into a single large offer.

The more offers, the higher the perceived value of a bundle.

UNBUNDLING is the opposite of bundling. It may make it possible to make sales that might otherwise not happen.

Together, they can be used to create value without creating something new.

INTERMEDIATION: Adding a party between the buyer and seller to complete a transaction / derive value from a purchase.

Utility of intermediaries: Skill gap; reduce options; decisions on pricing; buffer between parties.

DISINTERMEDIATION: Fewer intermediaries.

How much direction/support does your customer need?

The only justification for stealth mode is if there are competent, skilled, funded, aggressive competitors in your market.

Otherwise, publicly converting ideas into value is good. More feedback.

PROTOTYPE: Early offering representation. Iterate cyclically on prototypes.

Iteration based on the scientific method:

  1. Observe; find flaw.
  2. Create alteration and run experiment; get data.
  3. Design experiment to validate improvement.
  4. Evaluate results of experiment.
  5. Accept or reject the change as an improvement.

Rate of iteration: Iteration velocity.

Steps to improve quality of feedback:

  • Ask real customers
  • Ask open-ended questions
  • Manage emotions
  • Be skeptical
  • Offer preorder as an option — shadow testing even when the product is not ready
    • If no, ask more questions

Always be aware of competing alternative flows in your product, and prioritize based on real feedback.

This prioritizing leads to a trade-off: a decision that places a higher value on one of competing options.

Nine economic values considered to define a product:

  1. Efficacy — how well does it work?
  2. Speed — how soon?
  3. Reliability — can I depend on it?
  4. Ease of use
  5. Flexibility — how many things can it do?
  1. Status — how do others perceive me using this?
  2. Aesthetic appeal — of object
  3. Emotion — how does it make me feel?
  4. Cost

In Trade-Off, Kevin Maney discusses these in terms of convenience and fidelity.

  • Quick, reliable, easy, flexible: convenience
  • Quality, status, aesthetic appeal, emotional impact: fidelity

Most improvement can be thought about through the lens of convenience and fidelity.

It is hard to have both; most try to top one.

People never accept trade-offs unless they are making a decision. Thus, ask them to make explicit trade-offs during prototyping.

RELATIVE IMPORTANCE TESTING

Analysis techniques by Jordan Louviere.

Show them combinations of five criteria — large portions versus variety of food, for instance — and ask them to choose the most important and least important. Do this for 5–10 minutes at a time to avoid boredom.

CRITICAL ASSUMPTIONS are facts that must be true in the real world for your business or offering to be successful.

For testing critical assumptions before starting the business, use shadow testing.

The Fitbit story: opening preorders before the product was more than a Figma representation.

For shadow testing, figure out the minimum viable offer: one that promises the smallest number of benefits to produce an actual sale.

For Fitbit, this was a prototype, a description and some computer renderings.

Incremental augmentation is the process of using the iteration cycle to add benefits to an existing offer.

To enter a new market, or change the game, create a new prototype.

Field testing: Use what you create to learn more about it.

2. MARKETING

The art and science of finding “prospects.” Sales is about closing the deal.

Attention is a finite resource. Attention from prospects is the goal, not general attention.

Receptivity: Measure of how open someone is to your message.

Two components: what and when.

Remarkability is the best way to attract attention — unique enough to pique a prospect’s curiosity.

Probable purchaser

Preoccupation: What you are offering must be more interesting than your prospect’s current subject of attention.

Levels of awareness:

In Breakthrough Advertising, five distinct levels of awareness.

  1. Unaware
  2. Problem awareness
  3. Solution awareness
  4. Offer awareness — not sure if it is for them
  5. Full awareness — convinced; just need to know price and terms so they can decide whether or not to purchase

This creates a funnel, from marketing to sales to purchase.

END RESULT: A distinctive experience or emotion related to a core human drive. The function of a purchased good is important, but the end result is what the prospect is most interested in hearing about.

This is what causes a customer to hone in on a product and conclude, “This is for me.”

DEMONSTRATION: Show works better than tell.

QUALIFICATION: The process of determining whether or not a prospect is a good customer before they purchase from you.

Insurance companies do this.

POINT OF MARKET ENTRY: Attracting your probable purchaser’s attention just after they have reached the point of market entry is valuable.

If you can get a prospect’s attention as soon as they become interested in what you are offering, you become the standard by which competing offers are evaluated.

ADDRESSABILITY: Measure of how easy it is to get in touch with people who might want what you are offering.

DESIRE: We only purchase what we already desire on some level, so marketing attempts should ideally target that desire.

Your job as a marketer is to show/convince prospects that what you are offering will help them get what they want.

VISUALIZATION: Get your prospects to visualize what their life would be like with your offer. Test-driving cars is an example of this. Exposing them to as much sensory information as possible is part of this.

FRAMING: The act of emphasizing what is important while deemphasizing things that are not, by either minimizing…

…certain facts or leaving them out altogether.

FREE: By giving prospects something useful with no up-front cost, you can earn their attention and give them a chance to experience the value you provide.

Limit giveaways in manners that do not maximally attract paying customers.

PERMISSION: Asking for permission after providing free value is effective. Permission is a real asset. Afterward, provide real value.

HOOK: A hook is a single phrase or sentence that describes an offering’s primary benefit.

Example: “1,000 songs in your pocket” for Apple.

CTA: Be as clear, simple and obvious as possible.

The best CTAs ask for a sale or permission to follow up.

NARRATIVE: The hero’s adventure discussed.

“Your customers want to be heroes: to be respected and admired by all, to be powerful, successful and determined in the face of adversity…”

Testimonials, case studies and other stories are effective in encouraging prospects to take your “call to adventure.”

CONTROVERSY: Used constructively, it can be an effective way to attract attention.

REPUTATION: What people think of a particular offer or company.

3. SALES

The end of a good sale is an excited new customer and more cash in the bank.

You can only transact with things that are economically valuable. This is why a minimum viable offer is so important.

The first profitable transaction is what transitions a project into a business.

A transaction will only take place between parties with a certain amount of trust — relates to reputation.

COMMON GROUND: A state of overlapping interests between two or more parties. Finding the overlap of your circle with that of your prospect is your job.

Aligning interests is critical to finding common ground.

NEGOTIATION is the process of exploring different options to find common ground.

PRICING UNCERTAINTY PRINCIPLE: All prices are arbitrary and malleable. Consequently, you must be able to support your asking price before a customer will accept it.

FOUR PRICING METHODS

Four ways to support a price on something of value:

  1. Replacement cost
  2. Market cost
  3. Discounted cash flow / net present value
  4. Value comparison

DCF/NPV: How much would this bring in each month if you rented it for a period of time, and how much is that series of cash flows worth as a lump sum today?

Usually used by businesses.

The value comparison method supports a price by answering, “Who is this particularly valuable to?”

For houses, if the house was previously owned by Elvis Presley, to his fans the house is very valuable.

Value comparison is usually the optimal way.

As you change price, your prospects change.

PRICE TRANSITION SHOCK: Discounts attract customers when the offer is a commodity.

When it is not a commodity, increasing cost can make it attractive.

Two considerations:

  1. Potential profitability
  2. Ideal customer characteristics

VALUE-BASED SELLING is the process of understanding and reinforcing the reasons your offer is valuable to the purchaser.

In SPIN Selling, Neil Rackham describes four phases of successful selling:

  • Understanding the situation
  • Defining the problem
  • Clarifying the short- and long-term implications of that problem
  • Quantifying the financial and emotional benefits the customer would experience after resolution — the need-payoff

By listening to prospects, you gain trust and information about how valuable your offer is.

EDUCATION-BASED SELLING: The process of making your prospects better, more-informed customers. This requires the product to be superior in some way to competitors.

NEXT BEST ALTERNATIVE: Understanding common ground can still be incomplete without knowing their options if they choose to walk away.

Knowing their next best alternative allows you to set up offers with bundling or unbundling various options.

EXCLUSIVITY: Creating a unique offer or benefit that other firms cannot match.

Benefits:

  • Easier to maintain high perceived value
  • Price flexibility, and hence healthy profit margins

Generally good for products and services, and not other forms of value, as things have to be new.

THREE UNIVERSAL CURRENCIES: Resources, time, flexibility.

  • Tangible items
  • Opportunity cost, and being able to work around it

THREE DIMENSIONS OF NEGOTIATION

Setup, structure, discussion.

Stacking the odds in your favor:

Terms of the proposal, considering/framing the offered benefit, their next best alternative, how to overcome objections, barriers to purchase and trade-offs you are willing to make. The aim is common ground.

BUFFER: A third party empowered to negotiate on your behalf.

PERSUASION RESISTANCE: A prospect’s unease toward the “hard sell,” or offering them something that is not in their best interest — reactance, a psychological phenomenon.

The more effective strategy than a hard sell is the “assistant buyer” approach.

Two additional signals that can trigger persuasion resistance: desperation and chasing.

Instead of chasing, use framing to present the situation in a way that encourages the prospect to feel like they are chasing you.

RECIPROCATION: Amassing favors is how people stayed in power.

Car salesmen who offer something small like water or biscuits can create reciprocity, causing prospects to be more likely to purchase, add accessories and agree to less-attractive financing terms.

DAMAGING ADMISSION: Can counterintuitively increase their trust in your ability to deliver.

OPTION FATIGUE: Guide purchasers to select from two or three predefined offerings, then customize if necessary.

FIVE COMMON BARRIERS TO PURCHASE

  1. Loss aversion
  2. It won’t work
  3. It won’t work for me
  4. I can wait
  5. It is too difficult — if there is any effort on their side

Solutions:

  • 1 → framing; value-based selling
  • 2 and 3 → social proof
  • 4 and 5 → education-based selling, then visualization

If they still do not buy, it is often a power issue. Try as far as possible to interact with decision-makers.

RISK REVERSAL: A strategy wherein some of the risk is transferred from buyer to seller in a transaction. Sometimes called “take the puppy home.”

Maximized sales usually involve some kind of risk reversal.

REACTIVATION: Convincing past customers to buy from you again.

Subscriptions do this effectively, possibly offering a discount as free value.

Every 3–6 months, reach out to customers.

4. VALUE DELIVERY

VALUE STREAM: The set of all steps and all processes from the start of your value-creation process all the way through delivery of the end result to your customer.

Or: value creation + value delivery.

The best way to understand a value stream is to diagram it.

DISTRIBUTION CHANNEL: Describes how value is delivered to the end user.

  • Direct to user
  • Intermediary

DTU — direct to user: Services. Simple and effective, but limited by your means.

Intermediary: Products. Loss of control increases counterparty risk — the risk that a partner will injure your reputation.

EXPECTATION EFFECT

A customer’s perception of quality:

Quality = performance − expectations

PREDICTABILITY: Three factors — uniformity, consistency, reliability.

  • Uniformity: Same characteristics every time.
  • Reliability: Count on delivery without error or delay.
  • Consistency: Same value over time.

Major reputation benefits come from high predictability.

QUALITY: Fitness for purpose.

HBS professor Garvin’s eight factors:

  1. Performance
  2. Features
  3. Reliability
  4. Conformance — how well does it meet standards?
  5. Durability
  6. Serviceability
  7. Aesthetics — use pleasurable, attractive or reassuring
  8. Perception — good reputation; deliver better results to avoid the expectation effect

QUALITY SIGNALS: Elements of an offer designed to increase the user’s perception of quality in a direct, tangible way, especially when performance is hard to perceptually note.

Examples: engine noises in cars; sudsing agents in soap.

THROUGHPUT: Units/time.

  • Dollar throughput
  • Production throughput
  • Satisfaction throughput

Measuring throughput is the first step to improving it.

DUPLICATION: Easier to duplicate an existing asset; easier to provide value.

MULTIPLICATION: Duplication for an entire process or system — stores, e.g. McDonald’s or Starbucks.

SCALE: Ability to duplicate or multiply a process as volume increases. Products are usually easier to duplicate; shared resources to multiply.

Services are hard to scale.

ACCUMULATION: Toyota Production System; many small changes add up — Kaizen.

Incremental augmentation: Improving an offer with each iteration cycle.

AMPLIFICATION: Small changes to a scalable system produce a huge result. Changes to duplicable or multipliable items tend to be good.

BARRIER TO COMPETITION: Every improvement to your value stream makes it harder for potential competitors to keep up, creating a barrier to competition.

FORCE MULTIPLIER: Get more done with the same effort. Tools.

SYSTEMIZATION: A process made explicit and repeatable. Allows for examination and improvement. Collaboration is easier.

TRIAGE: Identifying and handling the most important matters first, allowing less-urgent stuff to wait.

Depends on lead scoring, or the ability to collect relevant information prioritized per content.

Example metrics would be strength of prospects and projected lifetime value of a customer.

5. FINANCE

FINANCE: Money in, out, allocation and evaluating results.

ACCOUNTING: Ensuring data for financial decisions is complete and accurate.

PROFIT: Necessary for multiple reasons.

PROFIT MARGIN: Percentage profit; a metric used for making decisions.

VALUE CAPTURE: The process of retaining some percentage of the value provided in every transaction.

Two dominant philosophies for value capture:

MAXIMIZATION: Max it out; anything less is bad.

MINIMIZATION: Capture as little value as possible while maintaining sufficiency.

SUFFICIENCY: The point at which a business is bringing in enough profit that the people running the business find it worthwhile to keep going for the foreseeable future.

Can be tracked using target monthly revenue.

Calculate outgoing funds, add that up, and as long as you bring in more than TMR, good.

Sufficiency is subjective.

VALUATION: Estimate of the total value of a company.

CASH FLOW STATEMENT: Examination of a company’s bank account over a period of time.

Cash tends to move in three primary areas:

  • Operations: Selling offers and buying inputs
  • Investing: Collecting dividends; paying for capital expenses
  • Financing: Borrowing money and paying it back

FREE CASH FLOW: Money collected from operations minus cash spent on capital equipment and assets.

Cash represents options.

If you have inventory or provide credit to customers, then a simple cash-flow statement will not be enough.

IndexUnit Testing Principles, Practices, and Patterns