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 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/

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/