Personal MBA

What are two major considerations when setting your prices with Price Transition Shock in mind:

(1) potential profitability and (2) ideal customer characteristics. The best strategy is to set your prices to appeal to the prospects that will ensure you work with your most desirable customers in a way that results in the highest profits.

What are the four ways to support a price on something of value? Why does it matter?

(1) replacement cost, (2) market comparison, (3) discounted cash flow/net present value, and (4) value comparison. Pricing Uncertainty Principle: all prices are arbitrary and malleable. Pricing is always an executive decision. The Pricing Uncertainty Principle has an important corollary: you must be able to support your asking price before a customer will actually accept it.

What's SPIN selling?

(1) understanding the situation, (2) defining the problem, (3) clarifying the short-term and long-term implications of that problem, and (4) quantifying the need-payoff, or the financial and emotional benefits the customer would experience after the resolution of their problem. Instead of barging in with a premature, boilerplate hard sell, successful salespeople focus on asking detailed questions to get to the root of what the prospect really wants.

The Ten Ways to Evaluate a Market

(Score from 0-10, 50+ = bad, 75+ = promising, 50-75 = requires huge investment of energy and resources) 1. Urgency: How badly do people want or need this right now? 2. Market Size: How many people are actively buying things like this? 3. Pricing Potential: What is the highest price a typical purchaser would be willing to spend for a solution? 4. Cost of Customer Acquisition: How easy is it to acquire a new customer? 5. Cost of Value Delivery How much would it cost to create and deliver the value offered, both in money and effort? 6. 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? 7. Speed to Market: how quickly can you create something to sell? 8. Up-Front Investment How much will you have to invest before you're ready to sell? 9. Upsell Potential Are there related secondary offers that you could also present to purchasing customers?

In order to provide value via a Lease, you must...

1. Acquire an asset people want to use. 2. Lease the asset to a paying customer on favorable terms. 3. Protect yourself from unexpected or adverse events, including the loss or damage of the leased asset. Most assets have a limited useful life, so you must charge enough to bring in more revenue than the purchase price before the asset loses its value. In addition, be sure to plan for repair and replacement costs to ensure you're charging enough money to cover you in the event your asset is lost or damaged in use.

In order to provide value via Insurance, you must...

1. Create a binding legal agreement that transfers the risk of a specific bad thing (a œloss) happening from the policy holder to you. 2. Estimate the risk of that bad thing actually happening, using available data. 3. Collect the agreed-upon series of payments (called œpremiums) over time. 4. Pay out legitimate claims upon the policy. The more premiums an insurer collects and the fewer claims the insurer pays, the more money it makes. Insurers have a vested interest in avoiding œbad risks, maximizing premiums, and minimizing payments on claims. Accordingly, insurers must be constantly vigilant to avoid fraudulent activity, both by preventing fraudulent claims and by refraining from defrauding purchasers by collecting premium payments without paying legitimate claims. If an insurer fails to pay legitimate claims, they're likely to find themselves in court as policy holders use the legal system to uphold their Insurance contract.

In order to create a successful Shared Resource, you must...

1. Create an asset people want to have access to. 2. Serve as many users as you can without affecting the quality of each user's experience. 3. Charge enough to maintain and improve the Shared Resource over time. The tricky part about offering a Shared Resource is carefully monitoring usage levels. If you don't have enough users, you won't be able to spread out the cost of the asset enough to cover up-front costs and ongoing maintenance. If you have too many users, overcrowding will diminish the experience so much that they'll become frustrated, stop using the resource, and advise others not to patronize your business, diminishing your Reputation

To run a Product-oriented business, you must...

1. Create some sort of tangible item that people want. 2. Produce that item as inexpensively as possible while maintaining an acceptable level of quality. 3. Sell as many units as possible for as high a price as the market will bear. 4. Keep enough inventory of finished product available to fulfill orders as they come in. Products tend to Scale better than other forms of value, since they can be Duplicated and/or Multiplied (all discussed later).

What are the nine common Economic Values that people typically consider when evaluating a potential purchase? What two categories can they be grouped into?

1. Efficacy How well does it work? 2. Speed How quickly does it work? 3. Reliability Can I depend on it to do what I want? 4. Ease of Use How much effort does it require? 5. Flexibility How many things does it do? 6. Status How does this affect the way others perceive me? 7. Aesthetic Appeal How attractive or otherwise aesthetically pleasing is it? 8. Emotion How does it make me feel? 9. Cost How much do I have to give up to get this? Kevin Maney discusses these common values in terms of two primary characteristics: convenience and fidelity. Things that are quick, reliable, easy, and flexible are convenient. Things that offer quality, status, aesthetic appeal, or emotional impact are high-fidelity. It's incredibly difficult to optimize for both fidelity and convenience at the same time, so the most successful offerings try to provide the most convenience or fidelity among all competing offerings.

In order to provide value via Agency, you must...

1. Find a seller who has a valuable asset. 2. Establish contact and trust with potential buyers of that asset. 3. Negotiate until an agreement is reached on the terms of sale. 4. Collect the agreed-upon fee or commission from the seller. The key to Agency is to ensure that your fee or commission is high enough to make the effort worth it. Since most Agency relationships are dependent upon closing a sale, spend your time on activities that will result in a completed transaction, and ensure that the commission or fee from that transaction compensates you for the time and effort you put into closing the deal.

What are 5 ways to maximize value of feedback?

1. Get it from real potential customers, not friends/family 2. Ask open ended questions 3. Resist the urge to be offended or defensive 4. Seek out valuable info in discouraging feedback. 5. Give customers the option to preorder

In order to provide value via Capital, you must...

1. Have a pool of resources available to invest. 2. Find a promising business in which you'd be willing to invest. 3. Estimate how much that business is currently worth, how much it may be worth in the future, and the probability that the business will go under, which would result in the loss of your Capital. 4. Negotiate the amount of ownership you'd receive in exchange for the amount of Capital you're investing. If the business brings in a lot of cash, investors may benefit from a regular dividend. If it's acquired by another company or is listed on a public stock exchange, investors may receive a percentage of the purchase price as a lump-sum payment or sell their shares of the company on the open market for a profit.

In order to create a successful Service, your business

1. Have employees capable of a skill or ability other people require but can't, won't, or don't want to use themselves. 2. Ensure that the Service is provided with consistently high quality. 3. Attract and retain paying customers. Services can be lucrative, particularly if the skills required to provide them are rare and difficult to develop, but the trade-off is that they're difficult to duplicate. Services typically depend on the Service provider's investment of time and energy, both of which are finite.

In order to provide value via Loans, you must...

1. Have some amount of money to lend. 2. Find people who want to borrow that money. 3. Set an interest rate that compensates you adequately for the Loan. 4. Estimate and protect against the possibility that the Loan won't be repaid. The process of identifying how risky a particular Loan is a process called underwriting, and is critically important for lenders, who often require some sort of asset as collateral to protect against the risks of a Loan gone sour. If the Loan is not repaid, ownership of the collateral is transferred to the borrower, then sold to recoup any funds lost in the transaction.

5 steps to address a system constraint i.e. improve the throughput of any System

1. Identification: examining the system to find the limiting factor. If your automotive assembly line is constantly waiting on engines in order to proceed, engines are your Constraint. 2. Exploitation: ensuring that the resources related to the Constraint aren't wasted. If the employees responsible for making engines are also building windshields, or stop building engines during lunchtime, exploiting the Constraint would be having the engine employees spend 100 percent of their available time and energy producing engines, and having them work in shifts so breaks can be taken without slowing down production. 3. Subordination: redesigning the entire system to support the Constraint. Let's assume you've done everything you can to get the most out of the engine production system, but you're still behind. Subordination would be rearranging the factory so everything needed to build the engine is close at hand, instead of requiring certain materials to come from the other end of the factory. Other subsystems may have to move or lose resources, but that's not a huge deal, since they're not the Constraint. 4. Elevation: permanently increasing the capacity of the Constraint. In the case of the factory, elevation would be buying another engine-making machine and hiring more workers to operate it. Elevation is very effective, but it's expensive you don't want to spend millions on more equipment if you don't have to. That's why Exploitation and Subordination come first: you can often alleviate a Constraint quickly, without resorting to spending more money. 5. Reevaluation: after making a change, reevaluating the system to see where the Constraint is located. Inertia is your enemy: don't assume engines will always be the Constraint: once you make a few Changes, the limiting factor might become windshields. In that case, it doesn't make sense to continue focusing on increasing engine production the system won't improve until windshields become the focus of improvement.

What is "a hook"?

A Hook is a single phrase or sentence that describes an offer's primary benefit. Sometimes the Hook is a title, and sometimes it's a short tagline. Regardless, it conveys the reason someone would want what you're selling. A classic example of a Hook in the publishing world is the title of Timothy Ferriss's book, The 4-Hour Workweek. E.g. Apple used a Hook for the launch of the iPod: 1,000 songs in your pocket. E.g. Take exit 25 and turn right for the best burgers in town

In order to provide value via Audience Aggregation, you must...

1. Identify a group of people with common characteristics or interests. 2. Create and maintain some way of consistently attracting that group's attention. 3. Find third parties who are interested in buying the attention of that audience. 4. Sell access to that audience without alienating the audience itself. As long as the sales bring in more money than the cost of the advertising plus the business's Overhead (discussed later), the advertising can be a valuable tool to bring in new customers, which means the advertiser can continue to support the aggregator by purchasing more advertising.

In order to provide value via Options, you must...

1. Identify some action people might want to take in the future. 2. Offer potential buyers the right to take that action before a specified deadline. 3. Convince potential buyers that the Option is worth the asking price. 4. Enforce the specified deadline on taking action. Options are often an overlooked form of value flexibility is one of the Three Universal Currencies (discussed later). Find a way to give people more flexibility, and you may discover a viable business model.

Four ways to increase your business's revenue:

1. Increase the number of customers you serve. 2. Increase the average size of each Transaction by selling more. 3. Increase the frequency of transactions per customer. 4. Raise your prices.

4 ways to add scarcity to an offer

1. Limited Quantities inform prospects that you're offering a limited number of units for sale. 2. Price Increases inform prospects that the price will go up in the near future. 3. Price Decreases inform prospects that a current discount will end in the near future. 4. Deadlines inform prospects that the offer is only good for a limited period of time.

In order to create a successful Subscription, you must...

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. Subscription is an attractive form of value because it provides more predictable revenue. Instead of having to resell to your existing customers every day, Subscriptions allow you to build a steady base of loyal customers over time. The key to Subscription offers is doing everything you can to keep customer attrition as low as possible.

In order to provide value as a reseller, you must...

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 keep inventory costs low. 4. Sell the product for as high a markup as possible, preferably a multiple of the purchase price. Sourcing good products at low prices and managing inventory levels are the keys to reselling. Without a steady supply of sellable product at a low enough price to turn a profit, a reseller will have a hard time bringing in enough revenue to keep going. Accordingly, most successful resellers establish close relationships with the businesses that supply their stock to ensure they continue to get a reliable supply of good assets at low prices.

The most valuable offers do one or more of the following 4 things:

1. Satisfy one or more of the prospect's Core Human Drives. 2. Offer an attractive and easy-to-visualize End Result (discussed later). 3. Command the highest Hassle Premium by reducing end-user involvement as much as possible. 4. Satisfy the prospect's Status Seeking tendency by providing desirable Social Signals (discussed later) that help them look good in the eyes of other people.

What are examples of hassles and why is it important to identify them?

1. Take too much time to complete. 2. Require too much effort to ensure a good result. 3. Distract from other, more important priorities. 4. Involve too much confusion, uncertainty, or complexity. 5. Require costly or intimidating prior experience. 6. Require specialized resources or equipment that's difficult to obtain. If you're looking for a new business idea, start looking for hassles. Where there's hassle, there's opportunity. The more hassle you eliminate for your customers, the more you'll collect in revenue.

Four Core Human Drives

1. The Drive to Acquire (money). The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. 2. The Drive to Bond (status/love). The desire to feel valued and loved by forming relationships with others, either platonic or romantic. 3. The Drive to Learn (knowledge). The desire to satisfy our curiosity. 4. The Drive to Defend (power). The desire to protect ourselves, our loved ones, and our property. 5. The Drive to Feel (pleasure/excitement). The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation.

What is a "minimum viable offer"?

A Minimum Viable Offer is an offer that promises and/or provides the smallest number of benefits necessary to produce an actual sale. A Minimum Viable Offer is essentially a Prototype that's been developed to the point that someone will actually pull out their wallet and commit to making a purchase. Since Feedback from prospective customers and paid-in-full orders are very different things, creating a Minimum Viable Offer allows you to start collecting data from real customers as quickly as possible, directly testing the idea's Critical Assumptions and reducing the risk of making a business-ending investment decision. (e.g. kickstarter)

Proposed 8 Symptoms of Bureaucratic Breakdown that appear in teams suffering from Communication Overhead:

1. The Invisible Decision No one knows how or where decisions are made, and there is no transparency in the decision-making process. 2. Unfinished Business Too many tasks are started but very few are carried through to the end. 3. Coordination Paralysis Nothing can be done without checking with a host of interconnected units. 4. Nothing New There are no radical ideas, inventions, or lateral thinking a general lack of initiative. 5. Pseudo-Problems Minor issues become magnified out of all proportion. 6. Embattled Center The center battles for consistency and control against local/regional units. 7. Negative Deadlines The deadlines for work become more important than the quality of the work being done. 8. Input Domination Individuals react to inputs i.e., whatever gets put in their in-tray as opposed to using their own initiative.

What are the 6 step of an iteration cycle (The WIGWAM method)?

1. Watch What's happening? What's working and what's not? 2. Ideate What could you improve? What are your options? 3. Guess Based on what you've learned so far, which of your ideas 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? Was the change positive or negative? Should you keep the change, or go back to how things were before this iteration? Iteration is a cycle once you measure the results of the change and decide whether or not to keep it, you go back to the beginning to observe what's happening, and the cycle repeats.

Clayton Alderfer's version of Maslow's hierarchy ("œERG theory")

1. existence, 2. relatedness, and 3. growth

Maslows 5 Stages

1. physiology 2. safety, 3. belongingness/love, 4. esteem, and 5. self-actualization.

Lifetime Value

Lifetime Value is the total value of a customer's business over the lifetime of their relationship with your company. The more a customer purchases from you and the longer they stay with you, the more valuable that customer is to your business.

What is a "prototype"?

A Prototype is an early representation of what your offering will look like. It may be a physical model, a computer rendering, a diagram, a flowchart, or a one-page paper that describes the major benefits and features. It doesn't have to be fancy: all your Prototype has to do is represent what you're offering in a tangible way, so that your potential customers can understand what you're doing well enough to give you good feedback.

Financial Ratio

A comparison of two important elements of your business. Financial Ratios are beneficial because they allow you to make comparisons very quickly. Instead of poring through the data in the financial reports manually, looking at a Financial Ratio helps you decide at a glance whether or not certain parts of the business are healthy. Looking at how these ratios change over time helps you see how the business is changing over time. Comparing the ratios to industry averages makes it easy to see if the company is performing like a typical company in the industry or if something is odd. Profitability ratios indicate a business's ability to generate Profit. The higher your revenue and the lower your costs, the higher your profitability ratios

What is a "call to action"?

A single, very clear, very short action to take next. E.g. visit a Web site. Enter an e-mail address. Call a phone number. Mail a self-addressed stamped envelope. Click a button. Purchase a product. Tell a friend.

Fixed cost

Fixed Costs are incurred no matter how much value you create. Your Overhead is a Fixed Cost: no matter what you do in any given month, you still have to pay your salaried employees and the lease on your office space. Variable Costs are directly related to how much value you create. If you're in the business of creating cotton T-shirts, the more T-shirts you produce, the more cotton fabric you'll need. Raw materials, usage-based utilities, and hourly workers are all Variable Costs.

Allowable Acquisition Cost

Allowable Acquisition Cost (AAC) is the marketing component of Lifetime Value. The higher the average customer's Lifetime Value, the more you can spend to attract a new customer, making it possible to spread the word about your offer in new ways.

What is "addressability"?

Addressability is a measure of how easy it is to get in touch with people who might want what you're offering. A highly Addressable audience can be reached quickly and easily. A non-Addressable audience can only be reached with extreme hardship, or isn't Receptive and doesn't want to be reached at all. Yoga is a good example of a highly Addressable market. Sensitive or embarrassing topics tend to have low Addressability, even if there's a huge need. Doctors, on the other hand, are more Addressable: they have publicly listed addresses and phone numbers and are willing and able to meet with drug company representatives about new offerings. Addressability is a huge concern when you are developing a new offer. If you have a choice, it's far better to focus on building something for an Addressable audience than it is to go around and hand sell or try to address an audience that is not naturally Addressable or doesn't want to be addressed. If you choose to serve an Addressable market before committing to an offer, it'll be significantly easier to market your offer without breaking the bank.

Amortization

Amortization is the process of spreading the cost of a resource investment over the estimated useful life of that investment. In the case of the faux dog factory, let's assume the factory is capable of producing 10 million units during its useful life. On a per-unit basis, that brings the cost per unit of the factory down to $10. If you sell every unit you produce for $100, that's a very healthy Profit Margin. Amortization doesn't work well if you don't sell what you produce or if your equipment wears out more quickly than expected.

target monthly revenue (TMR).

An estimate of the total worth of a company. The higher a business's revenues, the stronger the company's Profit Margins, the higher its bank balance, and the more promising its future, the higher its Valuation. If a company is private, having a high Valuation makes it easier to borrow money. If the company is public, a high Valuation leads to a high share price and a profit opportunity for the shareholders. If another business seeks to acquire the company, a high Valuation leads to a big payday for the business's owners or shareholders. Valuation is also important if you intend to take on investors. The amount of Capital you raise, as well as the total amount of ownership you give to your investors in exchange, depends on the business's current Valuation at the time of investment.

Angel Capital

Angel Capital is where we shift from Loans to Capital. An angel is an individual private investor someone who has excess wealth they'd like to invest in a private business, typically $10,000 to $1 million. In exchange, they'll own 1 to 10 percent of the business. Taking on an angel investor is a bit like taking on a silent partner they

Overhead

Overhead represents the minimum ongoing resources required for a business to continue operation. This includes all of the things you need to run your business every month, regardless of whether you sell anything: salaries, rent, utilities, equipment repairs, and so on.

What is "framing"?

Framing is the act of emphasizing the details that are critically important while de-emphasizing things that aren't, by either minimizing certain facts or leaving them out entirely. Proper use of Framing can help you present your offer persuasively while honoring your customer's time and attention. E.g. Treatments A and C are also statistically identical, but A was overwhelmingly preferred while C was not. Contemplating lives saved with fatalities significantly altered the preferences of the people making decisions, even though the expected outcomes were exactly the same.

Balance Sheet

Balance Sheet is a snapshot of what a business owns and what it owes at a particular moment in time. You can think of it as an estimate of the company's net worth at the time the Balance Sheet was created. Balance Sheets always cite a specific day and use this calculation: Assets Liabilities = Owner's Equity Assets are things the company owns that have value: products, equipment, stock, etc. Liabilities are obligations the firm hasn't yet discharged: loans, financing, etc. What's left over when you discharge all of the business's liabilities is Owner's Equity, the company's net worth.

Why shouldn't you be a mercenary or crusader?

Becoming a Mercenary doesn't pay: don't start a business for the money alone. Starting and running a business always takes more effort than you first expect. The trick is to find an attractive market that interests you enough to keep you improving your offering every single day. Being a Crusader doesn't pay either. Every once in a while, you'll find an idea so fascinating it becomes hard to think about it objectively. In all the excitement, it's easy to forget that there's often a huge difference between an interesting idea and a solid business.

What are market exit and entry points?

Certain markets have clearly defined entry and exit points. Learning a newborn is on the way is an example of a Point of Market Entry. Once you know you're expecting, you're suddenly much more receptive to information about products and services that will help you take care of a child. Discovering where Probable Purchasers start looking for information after crossing the interest threshold is extremely valuable. Before the advent of the Internet, most expecting parents immediately started devouring books and talking to more experienced family and friends. Today, newly minted moms and dads hit the Web first, which is why organic and paid search engine marketing is often so valuable. By optimizing for key words your prospective customers are likely to search for, you can ensure that they find you first.

Bonds

Bonds are debt sold to individual lenders. Instead of asking a bank for a loan directly, the business asks individuals or other companies to loan them money directly. Bond purchasers give money directly to the business, which is paid back at an agreed-upon rate for a certain amount of time. When the time expires (i.e., the Bond matures), the company must give back the original loan amount in addition to the payments already made.

Bootstrapping

Bootstrapping is the art of building and operating a business without Funding. Don't assume that the only way to create a successful business is by raising millions of dollars of Venture Capital it's simply not true. By limiting yourself to the use of Personal Cash, Personal Credit, the business's revenue, and a little ingenuity, you can build extremely successful businesses without seeking Funding at all. My business operates via a checking account, a savings account, and a business credit card, and I like it that way.

Breakeven

Breakeven is the point where your business's total revenue to date is equal to its total expenses to date"it's the point where your business starts creating wealth instead of consuming it.

What is "bundling"? Why is it valuable?

Bundling occurs when you combine multiple smaller (modular) offers into a single large offer. Typically, the more offers contained in the bundle, the higher the Perceived Value of the offer, and the more the business can charge. That's why mobile phone providers add things like more minutes, unlimited text messaging, and Internet service onto the basic service plan. The more benefits provided, the more a customer is typically willing to pay on a monthly basis for the entire package. Unbundling is the opposite of Bundling: it's taking one offer and splitting it up into multiple offers. A good example of Unbundling is selling MP3 downloads of a single album instead of the CD.

Paradox of Automation

Here's the Paradox of Automation: the more efficient the Automated system, the more crucial the contribution of the human operators of that system. When an error happens, operators need to identify and fix the situation quickly or shut the system down otherwise, the Automated system will continue to Multiply the error.

Commanders intent

Commander's Intent is a much better method of delegating tasks: whenever you assign a task to someone, tell them why it must be done. The more your agent understands the purpose behind your actions, the better they'll be able to respond appropriately when the situation changes.

Communication overhead

Communication Overhead is the proportion of time you spend communicating with members of your team instead of getting productive work done.

Iron Law of the Market

If you don't have a large group of people who really want what you have to offer, your chances of building a viable business are very slim.

Accrual accounting

In accrual accounting, revenue is recognized immediately when a sale is made (i.e., a product is purchased, a service is rendered, etc.), and the expenses associated with that sale are incurred in the same time period. Accountants call this the matching principle, and

What is reciprocation?

Reciprocation is the strong desire most people feel to œpay back favors, gifts, benefits, and resources provided. If you've ever had the experience of receiving a holiday gift from someone you didn't send anything to, you know how uncomfortable this feels. If someone benefits us, we like to benefit them in return.

What are "Critical Assumptions"?

Critical Assumptions are facts or characteristics that must be true in the real world for your business or offering to be successful. Every new business or offering has a set of Critical Assumptions, and if any Critical Assumptions turns out to be false, the business idea will be vastly less promising than it appears.

Leverage ratios

Leverage ratios indicate how your company uses debt. Debt-to-Equity ratios, which are calculated by dividing total liabilities by shareholders' equity, tell you how many dollars a company has borrowed for every $1 in owner's equity. If the ratio is high, it's a signal the company is highly Leveraged, which could be a bad sign.

Direct-to-user distribution VS Intermediary distribution

Direct-to-user distribution works across a single channel: from the business directly to the end user. Services are a classic example: when you get a haircut, the value is provided by the business itself directly to you, with no intermediary. Intermediary distribution works across multiple channels. When you purchase a Product from a store, that store is acting as a Reseller. The store (in most cases) doesn't manufacture the Products it purchases them from another business. The business that created the Product can sell it to as many stores as it wants, a process called securing distribution. Trusting another business to deliver your offer to your customers frees up your limited time and energy, but it also increases Counterparty Risk the risk that your partner will screw up and diminish your Reputation.

What is duplication, multiplication, and amplification in the business context?

Duplication is the ability to reliably reproduce something of value. Factory production is the quintessential example of Duplication: one design, many copies. Multiplication is Duplication for an entire process or System. McDonald's began as a single restaurant in California; Starbucks began as a single coffee shop in Seattle. The easier it is to Duplicate or Multiply the value provided, the more scalable the business. Contrast the handmade quilt business with a Scalable business like Starbucks. As a general rule, the less human involvement required to create and deliver value, the more Scalable the business. Amplification: making a small change to a scalable System produces a huge result. E.g. Necking a can has two major effects first, it makes it easier to drink from, which users like. Second, it reduces the amount of metal necessary to produce a structurally sound can: the walls of a typical beverage can are now around ninety micrometers thick

What does "modular" mean?

Each offer is handled separately, and the customer can pick and choose which offers they want to take advantage of. By making offers Modular, the business can create and improve each offer in isolation, then mix and match offers as necessary to better serve their customers.

What 5 things does every business do?

Every successful business (1) creates or provides something of value that (2) other people want or need (3) at a price they're willing to pay, in a way that (4) satisfies the purchaser's needs and expectations and (5) provides the business sufficient revenue to make it worthwhile for the owners to continue operation. Put differently: 1. value creation, 2. customer demand, 3. transactions, 4. value delivery, 5. profit sufficiency

Whats exclusivity?

In most sales situations, it's in your best interest to maintain Exclusivity: creating a unique offer or quality that other firms can't match. If you're the only person or company that offers what your prospect wants, you're in a very strong position to negotiate on favorable terms. If you want to purchase an iPhone, you have to buy it through Apple: it is the sole source. Exclusivity is easiest to maintain when you've created something new, which means an exclusivity strategy makes the most sense for Products and Services

Cons of getting significant outside funding

In order to obtain access to Funding, it's often necessary to give up a certain amount of control over the business's operations. Businesspeople won't give you money for nothing they always ask for something in return. Remember, providing Capital is a form of value for many businesses. In exchange for resources, your lenders or investors are looking for value in return interest, lease payments, or a share of your company's profits. They're also looking for a way to decrease their risk of losing everything if the business goes under. To alleviate this risk, they ask for control: the ability to influence the operations of the business. The more money you ask for, the more control they'll want.

What is "incremental augmentation"?

Incremental Augmentation is the process of using the Iteration Cycle to add new benefits to an existing offer. The process is simple: keep making and testing additions to the core offer, continue doing what works, and stop doing what doesn't. The process of customizing cars is an example of Incremental Augmentation.

large inventory stocks vs small

Large Stocks have the most Slack, but that flexibility comes at a cost. If you have five hundred engines waiting around to be installed, you'll have a lot of funds tied up in inventory, which reduces your cash flow. You'll also have to pay for space to store the engines so they aren't lost or damaged, which increases your costs and decreases your Profit Margin. Small Stocks are more efficient but have less Slack. If you only have a Stock of two or three engines, you won't have a huge amount of resources tied up in inventory, but the probability of running out of engines is much higher if the assembly line speeds up or there's a problem with the engine manufacturing system.

Liquidity ratios

Liquidity ratios indicate the ability of a business to pay its bills. Running out of cash is a serious issue, so ratios like the Current Ratio (current assets divided by current liabilities) and the Quick Ratio (current assets minus inventory divided by current liabilities) make it easy to determine how close a company is to bankruptcy, or if the business is sitting on cash instead of investing money in growth or improvement. Efficiency ratios indicate how well a business is managing assets and liabilities. The most common use is inventory management: having too little inventory is a bad thing, but having too much is also bad. Calculating the average number of days an item is in inventory, how long it takes to sell out current inventory, and Day Sales Outstanding, a measure of how long it takes to collect the cash from sales, are helpful when making changes in production, managing inventory on hand, and planning

Free cash flow

Many investors use a metric called free cash flow when evaluating companies. This metric comes from the Cash Flow Statement: it's the amount of cash a business collects from operations minus cash spent for capital equipment and assets, which are necessary to keep the company operating. The higher a company's free cash flow, the better: it means the business doesn't have to keep investing huge amounts of capital in order to continue bringing in money. If the business manages an inventory or extends credit to customers, a simple cash flow analysis can be misleading. In order to determine whether or not your sales are profitable, you need to be able to track which sales and expenses are related.

What is the "desired end result"?

Marketing is most effective when it focuses on the desired End Result, which is usually a distinctive experience or emotion related to a Core Human Drive. Most drivers don't buy expensive off-road-capable vehicles because they actually drive off the road. They buy them because off-road capability makes them feel adventurous and bold, capable of meeting any driving challenge. Most women don't buy a $20 tube of lipstick for its color alone. They buy it because they believe it will make them more beautiful and desirable.

Hedging

Most large businesses use Scenario Planning as the basis of a practice called hedging: purchasing various forms of Insurance to reduce the Risk of unfavorable future events. For example, manufacturers care about oil prices because they increase the cost of importing raw materials and shipping finished products to their customers, both of which can suddenly and dramatically decrease their Profit Margins. By purchasing financial instruments called futures, the businesses can make money if the price of oil goes up, which helps to offset the losses they would incur if oil prices increase.

What is "Persuasion Resistance"?

One of the things that makes prospects uncomfortable around salespeople is the feeling that they're going to get the œhard sell or be tricked into agreeing to something that's not in their best interest. This experience is called Persuasion Resistance, and it's a major barrier to making sales. If a prospect feels that you're desperate to make a sale, it diminishes their interest in a matter of seconds. Desperation is a subtle signal that other people don't find your offer desirable, and Social Proof (discussed later) starts working against you. If a prospect senses you're chasing them, their first impulse will be to move away from you. œChasing and œbeing chased are evolutionary patterns that our primal minds recognize very quickly.

What is "Perceived Value"?

Perceived Value determines how much your customers will be willing to pay for what you're offering.

What is "preoccupation" in marketing?

Preoccupation is a fact of life for modern marketers: at the beginning of the marketing process, your prospects are paying attention to something else, not you. In order to attract Attention to your offer, what you're doing must be more interesting The best way to break a potential prospect's Preoccupation is to provoke a feeling of curiosity, surprise, or concern. The stronger and more emotionally compelling the stimuli, the easier it is to attract Attention. If the prospect is bored, restless, or looking for entertainment or distraction, it'll be easier to attract their Attention.

Pricing Power

Pricing Power is related to a concept economists call price elasticity. Pricing power is an economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product. Pricing power ties in with the "Price Elasticity of Demand." If customers are very sensitive to the price of your offer, you'll lose many customers with even a slight increase in price, meaning demand is elastic. Established semi-commodity markets like toothpaste are good examples.

What is "profit margin"?

Profit Margin (often abbreviated to margin) is the difference between how much revenue you capture and how much you spend to capture it, expressed in percentage terms. Here's the formula for Profit Margin: ((Revenue Cost) / Revenue) × 100 = % Profit Margin which represents how the price of an offer compares to its total cost. Here's the formula for markup: ((Price Cost) / Cost) × 100 = % Markup

Public Stock Offering

Public Stock Offering involves selling partial ownership of the company to investors on the open market. This is typically done via investment banks: companies that will provide a business with enormous amounts of Capital in exchange for the shares of that company to sell on the public stock market. The investment banks make money by selling the shares they've purchased at a premium to individual investors on the open market. An initial public offering (IPO) is simply the first Public Stock Offering a company offers on the open market. Any investor who purchases

What is "qualification"?

Qualification is the process of determining whether or not a prospect is a good customer before they purchase from you. By evaluating a prospect before they buy, you can minimize the chance of wasting your time dealing with a customer who's not a good fit for your business. Progressive Insurance has turned Qualification into a profitable business strategy. When you request a quote, Progressive asks you a set of basic questions:

What is customer reactivation?

Reactivation is the process of convincing past customers to buy from you again. If you've been in business for a while, you'll inevitably have some œlapsed customers people who have already purchased from you but haven't purchased for quite some time. E.g. Netflix

Receivables Financing

Receivables Financing is a special type of secured lending unique to businesses. Receivables Financing can make millions of dollars in credit available, but at a cost: the collateral for the loan is control over the business's receivables. Since the bank controls the receivables, they can ensure their loan is paid before anything else, including employee salaries and vendor commitments.

Receivables

Receivables are promises of payment you've accepted from others. Receivables are attractive, because they feel like a sale someone has promised to give you money, which is great. There's a catch, however: Receivables don't translate into cash until the promise is fulfilled. IOUs are not cash the more quickly that promise is translated into payment, the better your cash flow. Many businesses have closed with millions of dollars of sales on the books.

What is "Receptivity"?

Receptivity has two primary components: what and when. People tend to be receptive only to certain categories of things at certain times. I love hearing about great new business books, but I never want to be on the receiving end of a 3:00 a.m. phone call from a publicist. If the form of your message suggests that it was created just for them, you're far more likely to get your prospect's attention. (e.g. Almost everyone will ignore postal junk mail but most people will at least open a hand-addressed envelope,

Return on Investment

Return on Investment (ROI) is the value created from an investment of time or resources. Most people think of ROI in terms of currency: if you invest $1,000 and you collect $100 in profit, that's a 10 percent return on your investment: ($1,000 + $100) / $1,000 = 1.10, or 10 percent. If your ROI is 100 percent, you've doubled your initial investment. Return on Investment can help you decide between competing alternatives.

Whats "risk reversal?"

Risk Reversal is a strategy that transfers some (or all) of the risk of a Transaction from the buyer to the seller. Instead of making the purchaser shoulder the risk of a bad Transaction, the seller agrees in advance to make things right if for whatever reason things don't turn out as the purchaser expected.

What is "shadow testing"?

Shadow Testing is the process of selling an offering before it actually exists. As long as you're completely up front with your potential customers that the offering is still in development, Shadow Testing is a very useful strategy you can use to actually test your Critical Assumptions with real customers quickly and inexpensively. E.g. fitbit

Income Statement

Sometimes called a Profit and Loss Statement, Operating Statement, or Earnings Statement. Regardless of the label, the Income Statement contains an estimate of the business's Profit over a certain period of time, once revenue is matched with the related expenses. The general format for an Income Statement looks like this: Revenue Cost of Goods Sold Expenses Taxes = Net Profit That said, it's important to recognize that Income Statements, by nature, include many estimates and assumptions. They have to: large expenses like equipment purchases may involve a huge cash outlay, but the Income Statement attributes a small piece of the expense to each sales period, a practice called Amortization (discussed later).

Testimonials

Testimonials are an effective form of Social Proof often used in business to close more sales. There's a reason why Amazon.com and other online retailers prominently feature user reviews: stories about people who have been pleased with a purchase send a clear signal that an item is safe to buy, so more people purchase.

The Cash Flow Statement

The Cash Flow Statement is straightforward: it's an examination of a company's bank account over a certain period of time. Think of it like a checking account ledger: deposits of cash flow in and withdrawals of cash flow out. Ideally, more money flows in than flows out, and the total never goes below zero.

Loss Leader

The first sale is sometimes called a loss leader: an enticing offer intended to establish a relationship with a new customer. E.g. Timmies lunch menu

Why is visualization so powerful?

The most effective way to get people to want something is to encourage them to Visualize what their life would be like once they've accepted your offer. As we'll discuss later in Mental Simulation, our minds are designed to automatically imagine the consequences of our actions. E.g. Once you're actually behind the wheel of a car the emotional parts of your mind take control. You start to imagine what your life would be like if you owned this vehicle. E.g. In B&H Photo Video, roaming the aisles of their Manhattan superstore is an intense sensory experience. You can feel the weight of the camera you're considering, watch how quickly it focuses, and hear the snap of the shutter.

Whats value based selling?

Value-Based Selling is the process of understanding and reinforcing the Reasons Why your offer is valuable to the purchaser. In the previous section, we discussed how the Value Comparison method is often the best way to support a high price on your offer. Value-Based Selling is how you support that price. By understanding and reinforcing the Reason Why a Transaction will be valuable to the customer, you simultaneously increase the likelihood of a Transaction as well as the price the buyer will be willing to pay.

Studies of effective teamwork usually recommend working in groups of how many?

Three to eight people

What is throughput?

Throughput is a measure of the effectiveness of your Value Stream. Throughput is measured in the formula [units/time]. The more results you create per unit of time, the higher the Throughput. In order to measure Throughput, you need a clearly defined objective: Dollar Throughput is a measure of how quickly your overall business system creates a dollar of profit. Unit Throughput is a measure of how much time it takes to create an additional unit for sale.

What is value capture? What are the two dominant philosophies behind it?

Value Capture is the process of retaining some percentage of the value provided in every Transaction. If you're able to offer another business something that will allow them to bring in $1 million of additional revenue and you charge $100,000, you're capturing 10 percent of the value created by the Transaction. There are two dominant philosophies behind Value Capture: maximization and minimization. Maximization (the approach taught in most business schools) means that a business should attempt to capture as much value as possible. Accordingly, the business should attempt to capture as much revenue in each Transaction as possible capturing less than the maximum amount of value possible is unacceptable. In the short run, it's easy to see the appeal of maximization more Profit is a good thing for the owners of a company. Unfortunately, the maximization approach tends to erode the reason customers purchase from a business in the first place.

Venture Capital

Venture Capital takes over where angels leave off. Venture Capitalists (VCs) are extremely wealthy investors (or groups of investors who pool their funds) with very large sums of Capital available: tens (or hundreds) of millions of dollars in a single investment. Funding via Venture Capital happens in rounds that start small, then grow as more Capital is needed. Later rounds can dilute the ownership percentage of current shareholders, so there's typically a great deal of negotiation involved. VCs also require

What is an example of a "remarkable" product?

Vibram FiveFingers are shoes that look like a cross between a sock and a glove. Wearing them makes you look a bit like a frog: each toe has its own little pocket, giving your feet a slightly amphibian look odd enough to be noticed. FiveFingers are designed to overcome the number one problem every new offering faces: if no one knows you exist, no one will buy what you have to sell. Every customer who wears a pair of FiveFingers inevitably provides Vibram all of the advertising they need to keep growing for free. From a business perspective, the Attention-grabbing design of FiveFingers is working beautifully.

What are the Benefits of Competition?

You know from the start there's a market of paying customers for this idea, eliminating your biggest risk. The existence of a market means you're already on the right side of the Iron Law of the Market, so you can spend more time developing your offer instead of proving a market exists.

What is a "probable purchaser"?

Your Probable Purchaser is the type of person who is perfectly suited to what you're offering. E.g. Harley's most profitable customer is the œweekend warrior middle-aged men with disposable income who want to feel powerful and dangerous while cruising around in their spare time. E.g. Oprah's Probable Purchasers are middle-aged women who want to improve themselves and enjoy listening to intimate confessions and emotional stories.