Twelve Standard Forms of Value

Value is not intrinsic; it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. – Ludwig von Mises, an Austrian economist.

To successfully provide value to another person, it must take on a form they are willing to pay for. Fortunately, there is no need to reinvent the wheel – Economic Value usually takes on one of twelve standard forms:

  1. Product. Create a single tangible item or entity, then sell and deliver it for more than what it cost to make.
  2. Service. Provide help or assistance, then charge a fee for the benefits rendered.
  3. Shared Resource. Create a durable asset that can be used by many people, then charge for access.
  4. Subscription. Offer a benefit on an ongoing basis, and charge a recurring fee.
  5. Resale. Acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price.
  6. Lease. Acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee.
  7. Agency. Market and sell an asset or service you do not own on behalf of a third party, then collect a percentage of the transaction price as a fee.
  8. Audience Aggregation. Get the attention of a group of people with specific characteristics, then sell access in the form of advertising to another business looking to reach that audience.
  9. Loan. Lend a certain amount of money, then collect payments over a predefined period equal to the original loan plus a preset interest rate.
  10. Option. Offer the ability to take a predefined action for a fixed period, in exchange for a fee.
  11.  Insurance. Take on the risk of some specific bad thing happening to the policyholder in exchange for a predefined series of payments, then pay out claims only when the wrong thing happens.
  12. Capital. Purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend.

We will investigate these Twelve Standard Forms of Value in more detail.

This concept by the author: http://book.personalmba.com/12-standard-forms-of-value/

The Crusader Rule

The zealous display of the strength of their belief, while the judicious show the ground of it. – William Shenstone, eighteen-century poet and landscape designer.

Being a Crusader does not pay either. Every once a while, you will find an idea so fascinating it becomes hard to think about it objectively. The stars align, heavenly trumpets blare, and suddenly you have a distinct impression that you have found your calling.

In all the excitement, it is easy to forget that there is often a considerable difference between an interesting idea and a stable business. In your optimism, do not forget your prudence: changing the world is difficult if you cannot pay the bills.

Some ideas do not have enough of a market behind them to support a business, and that is fine. That does not mean you should ignore them: side projects can help you expand your knowledge, improve your skills, and experiment with new methods and techniques. I am a massive advocate of pursuing side projects as long as you do not count on them to reliably produce income. Once you have your financial bases covered, crusade all you want.

Before attempting to launch a business, take the time to do a thorough evaluation using the Ten Ways to Evaluate a Market. If you are finding it difficult to be objective, see a trusted colleague or adviser, then test it as quickly and as inexpensively as you can before you fully commit. A few hours spent in evaluation can prevent months (or years) of frustration and misplaced effort.

This concept by the author: http://book.personalmba.com/crusader-role/

The Mercenary Rule

Make money your god and it will plague you like the devil. – Henry Fielding, eighteenth-century novelist and satirist.

Becoming a Mercenary does not pay: do not start a business for the money alone. Here is why: starting and running a business always takes more effort than you first expect.

Even if you identify a business that will largely run itself, setting up the Systems (discussed later) necessary to run the business requires persistence and dedication. If the only thing that interests you about an opportunity is the money, you will probably give up well before you find the pot of gold at the bottom of the landfill.

Pay very close attention to the things you find yourself coming back over and over again. Building or finishing anything is mostly a matter of starting over and over again; do not ignore what pulls you. The trick is to find an attractive market that interests you enough to keep you improving your offering every single day. Finding that market is mostly a matter of patience and active exploration.

That said, do not ignore “boring” businesses until you investigate them; if you can find some aspect of the work that interests you and keeps you engaged, mundane markets can be quite attractive. “Dirty” businesses like plumbing and garbage collection certainly are not sexy, but they can be quite lucrative because there is a significant ongoing need combined with relatively few people willing to step up and meet the demand.

If you find a way to make a necessary but dull market interesting enough to pursue, you might have discovered a hidden vein of gold waiting to be mined.

This concept by author: http://book.personalmba.com/mercenary-rule/

 

The Hidden Benefits of Competition

The competitor to be feared is one who never bothers about you at all but goes on making his own business better all the time. – Henry Ford, founder of the Ford motor company and assembly-line pioneer,

One of the most common experiences of a first-time entrepreneur is discovering that your brilliant business idea is not as original as you would think: other businesses are already offering similar products or services. This would shake anyone’s confidence – after all, why bother when someone else is doing what you want to do?

Cheer up: there is The Hidden Benefits of Competition. When any two markets are equally attractive in other respects, you are better off choosing to enter the one with competition. Here is why: it means you know from the start there is a market of paying customers for this idea, eliminating your most significant risk.

The existence of a market means you are already on the right side of the Iron Law of the Market,  so you can spend more time developing your best offer instead of proving a market exists. If there are several successful businesses serving a market, you do not have to worry so much about investing in a dead end, since you already know that people are buying.

The best way to observe what your potential competitors are doing is to become a customer. Buy as much as you can of what they offer. Watching your competition from the inside can teach you an enormous amount about the market: what value the competitor provides, how they attract attention, what they charge, how they close sales, how they make customers happy, how they deal with issues, and what needs they are not yet serving.

As a paying customer, you get to observe what works and what does not before you commit to a particular strategy. Learn everything you can from your competition, and then create something even more valuable.

This concept by author: http://book.personalmba.com/hidden-benefit-of-competition/

Ten Ways to Evaluate a Market

So often people are working hard on the wrong thing. Working on the right thing is probably more important than working hard. – Caterina Fake, founder of flickr.com and hunch.com

If you are thinking of starting a new business or expanding an existing business into a new market, it pays to do some research before you leap.

The Ten Ways to Evaluate a Market provide a back-of-the-napkin method you can use to identify the attractiveness of any potential market. Rate each of the ten factors below on a scale of 0 to 10, where 0 is extremely unattractive and 10 is extremely attractive. When in doubt, be conservative in your estimate:

  1. Urgency – How badly do people want or need this right now? Renting an old movie is typically low urgency; seeing the first screening of a new movie on opening night is high urgency since it only happens once.
  2. Market Size – How many people are actively purchasing things like this? The market for underwater basket weaving courses is very small; the market for cancer cures is massive.
  3. Pricing Potential – What is the highest price a typical purchaser would be willing to spend on a solution? Lollipops sell for $0.05; aircraft carriers sell for billions.
  4. Cost of Customer Aquisition – How easy is it to acquire a new customer? On average, how much will it cost to generate a sale, in both money and effort? Restaurants built on high-traffic interstate highways spent little to bring new customers. Government contractors can spend millions landing major procurement deals.
  5. Cost of Value Delivery – How much would it cost to create and deliver the value offered, both in money and effort? Delivering files via the Internet is almost free; inventing a product and building a factory costs millions.
  6. The Uniqueness of Offer – How unique is your offer versus competing offerings in the market, and how easy is it for potential competitors to copy you? There are many hair salons, but very few companies that offer private space travel.
  7. Speed to Market – How quickly can you create something to sell? You can offer to mow a neighbour’s lawn in minutes, opening a bank can take years.
  8. Up-Front Investment – How much you will have to invest before you are ready to sell? To be a housekeeper, all you need is a set of inexpensive cleaning products. To mine for gold, you need millions to purchase land and excavating equipment.
  9. Upsell Potential – Are there related secondary offers that you could also present to purchasing customers? Customers who purchase razors need shaving cream and extra blades as well; buy a Frisbee, and you would not need another unless you lose it.
  10. Evergreen Potential – Once the initial offer has been created, how much additional work will you have to put into it in order to continue selling? Business consulting requires ongoing work to get paid; a book can be produced once, then sold over and over as is.

When you are done with your assessment, add up the score. If the score is 50 or below, move on to another idea – there are better places to invest your energy and resources. If the score is 75 or above, you have a very promising idea – full speed ahead. Anything between 50 and 75 has the potential to pay the bills, but won’t be a home run without a huge investment of energy and resources, so plan accordingly.

This concept by the author: http://book.personalmba.com/ten-ways-to-evaluate-a-market/

Status seeking

The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither proper plumbing nor good philosophy; neither its pipes nor its theories will hold water. – John W. Gardiner, former president of the Carnegie Corporation.

In addition to understanding Core Human Drives, it is essential to realise that humans are social creatures. Like many other mammals, humans evolved to have a “pecking order”, a relative ranking of power (discussed later) or status in a group. Competing with other people for status and power brought many benefits, including access to food, mates, resources, and the protection of other group members.

Status considerations are no longer as critical to survival, but our brains developed to place a very high priority on social status. As a result, status considerations influence the vast majority of a person’s decisions and actions.

Status seeking is a universal phenomenon: neurotypical human beings care intensely about what other people think of them, and they spend a significant amount of energy tracking their relative status compared to other members of their group. When opportunities to increase status appear, most people will seize them. When given a choice between different alternatives (discussed later), people will typically choose the option with the highest perceived status.

In general, we like to be associated with people and organisations that we think are powerful, important, or exclusive or that exhibit other high-status qualities or behaviours. We also love to ensure other people are aware of our status: for proof, examine what people post on their Facebook profiles.

Status seeking is a fact of human life: it is not necessarily bad or something to be avoided. On the contrary: status seeking can motivate people to accomplish amazing things. In words Alain de Botton, a philosopher and social critic, “If one felt successful, there’d be so little incentive to be successful”.

Unchecked, this can lead people to make poor decisions: think of someone who purchases a large house, luxury car, and designer clothing, only to end up bankrupt or in severe debt. As an individual, paying attention to how much you value status is useful when making buying decisions, mainly when other options can meet the same needs or desires at a lower cost.

As a business professional, it is important to understand those status considerations are present at every level of the core human drives. When you make an offer to a new prospect, they will automatically and unconsciously examine how your offer will influence their social status. Consciously building Social Signals (discussed later) into your offer is almost always an effective way to increase its appeal to your target market.

This concept by author: http://book.personalmba.com/status-seeking/

 

 

 

Core human drives

Understanding human drives needs is half the job of meeting them. – Adlai Stevenson, politician and former governor of Illinois.

If you are going to build a successful business, it is useful to have a basic understanding of what people want. The most well-known general theory of what people want is called “Maslov’s hierarchy of needs” proposed by the psychologist Abraham Maslov in 1943. Maslov’s theory was that people progress through five general stages in the pursuit of what they want: physiology, safety, belongingness/love, esteem, and self-actualisation. Physiology represents the “lowest” level of human needs, while self-actualisation (the exploration of a person’s innate potential) is the “highest“.

In Maslov’s hierarchy, each lower-level must be met before a person can focus on higher-order needs. If you do not have enough food, or you are in physical danger, you are probably not paying too much attention to how much other people like you or how much personal growth you are experiencing.

In practice, I prefer Clayton Alderfer’s version of Maslov’s hierarchy, which he called “ERG theory”: people seek existence, relatedness, and growth, in that order. When people have what they need to survive, they move on to making friends and finding mates. When they are satisfied with their relationship, they focus on doing things they enjoy and improving their skills in things that interest them. First existence, then relatedness, then growth.

ERG theory explains the general priority of human desires, but not the methods people use to satisfy them. For that, we must turn to other theories of human action. According to Harvard Business School professors Paul Lawrence and Nitin Nohria, the authors of Driven: How Human Nature Shapes Our Choices, all human beings have four Core Human Drives that have a profound influence on our decisions and actions:

  1. The drive to acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive.
  2. The drive to bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive.
  3. The drive to learn. The desire to satisfy our curiosity. Businesses built on the drive to learn to include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive.
  4. The drive to defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, o prevent bad things from happening connect to this drive.
  5. There is a fifth core drive that Lawrence and Nohria missed: The drive to feel. The drive for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connecting with this drive.

Whenever a group of people have an unmet need in one or more of these areas, a market will form to satisfy that need. As a result, the more drives your offer connects with, the more attractive it will be to your potential market.

At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure and excitement, The more clearly you articulate how your product satisfies one or more of these drives, the more attractive your offer will become.

This concept by author: http://book.personalmba.com/core-human-drives/

 

The Iron Law of the Market

Market matters most; neither a stellar team nor fantastic product will redeem a bad market. Markets that do not exist do not care how smart you are. – Marc Andreessen, venture capitalist and founder of Netscape and ning.com

What if you throw a party and nobody shows up? In business, it happens all the time.

Dean Kamen, and renowned and prolific inventor whose creations include the Sterling engine, the world’s first insulin pump, and water purification devices, poured over $100 million into the development of the Segway PT, a $5000, two-wheeled, self-balancing scooter that he claimed would revolutionise personal transportation “in the same way that the car replaced the horse and buggy”. When the Segway was made available to the public in 2002, the company announced that it expected to sell 50 000 units every year.

Five years into the business, the company had sold a total of 23 000 units – less than 10 percent of the initial goal. The company’s financial records are private, but it’s safe to say they do not look good.

The problem was not that the product was poorly designed – the technology that makes the Segway work is incredibly sophisticated, and the benefits are significant: the Segway is a convenient, green urban car replacement. The problem was that very few people cared enough to spend $5000 on a goofy looking alternative to walking or riding a bike – the massive market that Kamen expected did not exist.

The same thing happens to new businesses every day. Without enough revenue to sustain it, any company will fail. Your income is entirely dependent on people wanting what you have to offer.

Every business is fundamentally limited by the size and quality of the market it attempts to serve. The Iron Law of the Market is cold, hard, and unforgiving: if you do not have a large group of people who want what you have to offer, your chances of building a viable business are very slim.

The best approach is to focus on making things people want to buy. Creating something no one wants is a waste. Market research is the business equivalent of “look before you leap”. Books like The New Business Road Test by John Mullins can help you identify promising markets from the outset, increasing the probability that your new venture will be a success.

In the next few sections, we will explore how to figure out what people want and need before investing your time and hard-earned money into creating something new.

This concept by the author: http://book.personalmba.com/iron-law-of-the-market/

 

Economically Valuable Skills

Do not go around saying the world owes you a living. The world owes you nothing – it was here first. Mark Twain, great American novelist.

If you want to improve your value as a businessperson, focus on improving skills directly related to the Five Parts of Every Business.

Not every skill or area of knowledge is Economically Valuable, and that is okay – there are many things worth pursuing for the sake of relaxation and enjoyment alone.  You may enjoy whitewater rafting, but it is very unlikely anyone will pay you to shoot the rapids unless you apply your skills for the benefit of others. Make the leap from personal enjoyment to Products and Services (discussed later), however, and you will find yourself getting paid – plenty of adventurous souls are willing to pay for rafting equipment and guides.

As Michael Masterson suggests in Ready, Fire, Aim, do not expect skills that are not related to the Five Parts of Every Business to be economically rewarded. Find a way to use them to create Economic Value, and you will inevitably find a way to get paid.

Any skill or knowledge that helps you create value, sell, deliver value, or manage finances is Economically Valuable – accordingly, these are the topics we will discuss in this book.

This concept by author: http://boot.personalmba.com/economically-valuable-skills/

 

 

The five parts of every business

A business is a repeatable process that makes money. Everything else is a hobby. – Paul Freet, serial entrepreneur and commercialisation expert.

Roughly defined, a business is a repeatable process that:

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

It does not matter if you are running a solo venture or a billion-dollar brand. Take any of those five factors away, and you do not have a business – you have something else. A venture that does not create for others is a hobby. A venture that does not attract attention is a flop. A venture that does not sell the value it creates is a nonprofit. A venture that does not deliver what it promises is a scam. A venture that does not bring enough money to keep operating will inevitably close.

At the core, every business is fundamentally a collection of five Interdependent (discussed later) processes, each of which flows into the next:

  1. Value creation. Discovering what people need or want, then creating it.
  2. Marketing. Attracting attention and building demand for what you have created.
  3. Sales. Turning prospective customers into paying customers.
  4. Value delivery. Giving your customers what you have promised and ensured that they are satisfied.
  5. Finance. Bringing in enough money to keep going and make your effort worthwhile.

If these five things sound simple it is because they are. Business is not (and has never been) rocket science – it is simply a process of identifying a problem and finding a way to solve it that benefits both parties. Anyone who tries to make a business sound more complicated than this is either trying to impress you or trying to sell you something you do not need.

The Five Parts of Every Business are the basis of every good business idea and business plan. If you can clearly define each of these five processes for any business, you will have a complete understanding of how it works. If you are thinking about starting a new business, defining what these processes might look like is the best place to start. If you cannot describe or diagram your business idea in terms of these core processes, you do not understand it well enough to make it work.

This concept by the author: http://book.personalmba.com/5-parts-of-every-business/