The Personal MBA

Introduction

Skip business school. Educate yourself.

MBA programs have three major systemic issues:

“MBA programs have become so expensive that you must effectively mortgage your life to pay the price of admission.”
“MBA programs teach many worthless, outdated or even outright damaging concepts and principles.”
“MBA programs won’t guarantee you a high-paying job, let alone make you a skilled manager or leader with a shot at the executive suite.”

Value Creation

The Five Parts of Every Business

Roughly defined, a business is a reliably repeatable process that:

Value creation: Create and deliver something of value
Customer demand: Other people must want or need it
Transactions: People must be willing and able to pay for it.
Value delivery: It must satisfy the purchaser’s needs and expectations
Profit sufficiency: It must provide the owners a way to make a profit sufficient to justify the continued operation.

These correspond to five business processes:

Value creation: Discovering what people need or want, and then creating it.
Marketing: Attracting attention and building demand for what you’ve created.
Sales: Turning prospective customers into paying customers.
Value delivery: Giving your customers what you’ve promised and ensuring they’re satisfied.
Finance: Bringing in enough money to keep your effort going and make your effort worthwhile.

If you can clearly define each of these five processes for any business, you have a complete understanding of how it works.

The Iron Law of the Market

The Iron Law of the Market: If you don’t have a large group of people who really want what you offer, your chances of building a viable business are really slim.

The best approach is to focus on making things people want to buy.

Core Human Drives

ERG Theory: People seek existence, relatedness and growth in that order.

This explains the priority of human desires, but not the methods. All human beings have core human drives that have a profound influence on our decisions and actions:

Desire to acquire: Obtaining and collecting physical objects, as well as immaterial qualities like status, power and influence.
Desire to bond: The desire to feel valued and loved by forming relationships with others, either platonic or romantic.
Desire to learn: The desire to satisfy our curiosity.
Desire to defend: The desire to protect ourselves, our loved ones and our property.
Desire to feel: The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment and anticipation.

Whenever a group of people has an unmet need in one or more of these areas, a market will form to satisfy that need.

Status Seeking

Human beings seek status. We care what other people think of us, and we spend an inordinate amount of time tracking our relative status compared to other members of our groups.

When given a choice between different alternatives, people will typically choose the option with the highest perceived status.

Ten Ways to Evaluate a Market

This is a back-of-the-napkin approach for identifying the attractiveness of a market. Rate each factor below on a scale of 0 to 10. When in doubt, be conservative.

Urgency: How bad do people need or want this right now?
Market size: How many people are actively purchasing things like this?
Pricing potential: What’s the highest price a typical purchaser would be willing to spend for a solution?
Cost of customer acquisition: How easy is it to acquire a new customer? On average, how much will it cost to generate a new sale, in both time and effort?
Cost of value delivery: How much would it cost to create and deliver the value offered, both in money and effort?
Uniqueness of offer: How unique is your offer versus competing offers in the market, and how easy is it for potential competitors to copy you?
Speed to market: How quickly can you create something to sell?
Up-front investment: How much will you have to invest before you’re ready to sell?
Upsell potential: Are there related secondary offerings you could present to customers?
Evergreen potential: Once the initial offer is created, how much additional work would you have to put in to continue to sell.

If the final score is above 75, you have a very promising market. Anything between 50 and 75 will pay the bills, but probably won’t be a home run.

The Hidden Benefits of Competition

When any two markets are equally attractive, you’re better off choosing to enter the one with competition. Here’s why: it means you know from the start there’s a market of paying customers for this idea, eliminating your biggest risk.

Twelve Standard Forms of Value (Expanded)

Product: Create a single tangible item or entity, then sell and deliver it for more than what it cost to make. Products are valuable because they can be duplicated.
Service: Provide help or assistance, then charge a fee for the benefits rendered. Services depend on the owner's investment in time and energy, both of which are finite. Because of this, services do not scale easily.
Shared Resource: Create durable assets that can be used by many people, then charge for access.
Subscription: Offer a benefit on an ongoing basis, and in charge a recurring fee.
Resale: Acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee.
Lease: Acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee.
Agency: Market and sell an asset or service that you don’t own on behalf of a third party, then collect a percentage of the transaction price as a fee.
Audience Aggregation: Get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience.
Loan: Lend a certain amount of money, then collect payments over a predefined period of time equal to the original loan plus a predefined interest rate.
Option: Offer the ability to take a predefined action for a fixed period of time in exchange for a fee.
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 bad thing actually happens.
Capital: Purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend.

Products are valuable because they can be duplicated.
Services depend on the service provider’s investment of time and energy, which are finite resources.
Subscriptions are attractive because they provide predictable revenue. You can build a steady base of customers over time instead of having to constantly resell your product.
To successfully provide value via leases, you must ensure the revenue from the lease covers the purchase price of the asset before it wears out or is lost.
Sellers benefit from an agency because it generates sales that might not otherwise have happened.
The process of underwriting, or predicting how risky a loan is, is critically important to lenders.
Options are valuable because they allow a person to perform an action without requiring them to do so.
Instance works because it spreads the risk over a large number of individuals. As long as the insurer brings in more payments than it pays in claims, the insurer makes money.

Hassle Premium

People are almost always willing to pay for things they believe are too much of a pain to take care of themselves. Where there’s a hassle, there’s a business opportunity.

Some examples of hassle:

Takes too much time.
Requires too much effort.
Distracts from other priorities.
Involves too much confusion, uncertainty, or complexity.
Requires experience or specialization.
Requires resources or equipment.

Perceived Value

Perceived value determines how much your customers will be willing to pay for what you’re offering. The more valuable a prospect believes your offer is, the more likely they’ll be to buy it, and the more they’ll be willing to pay.

Nothing matters except perception. The converse of the above statement is also true. (If your customers do not perceive value, they are unlikely to pay for what you’re offering.)

Prototype

On their own, ideas are largely worthless—discovering whether or not you can actually make them work in reality is the most important job of any entrepreneur.

“Stealth” mode diminishes any learning opportunities, putting you at a huge early disadvantage. It’s almost always better to focus on getting early feedback from real customers as quickly as you possibly can.

Prototypes are valuable because they allow you to get good feedback from real people without investing a huge amount of time, money and effort into the project.

The Iteration Cycle

Nobody—no matter how smart or talented—gets it right the first time.

The WIGWAM method:

Watch: What’s happening? What’s working and what’s not?
Ideate: What could you improve? What are your options?
Guess: Based on what you’ve learned so far, which of your ideas do you think will make the biggest impact?
Which?: Decide what change to make.
Act: Actually make the change.
Measure: What happened? Was the change positive or negative? Should you make the change, or go back to how things were before this iteration?

This feels like a lot of extra work because it is a lot of extra work. However, if an idea is a dud, it’s better to find out quickly and inexpensively.

Feedback

Useful feedback from real prospects helps you understand how well your offer meets their needs before development is complete, which allows you to make changes before you start selling.

Get feedback from real customers, not friends and family.
Listen more than you talk.
Keep calm. This process requires thick skin.
The worse response you can get isn’t dislike, it’s apathy. If no one cares, you don’t have a viable business idea.
Give potential customers the opportunity to preorder. Are people willing to put their money where their mouse is?

If no one is willing to preorder, then you have more work to do. Ask why they’re not willing to purchase.

Trade-Offs

A trade-off is a decision that places a higher value on one of several competing offers.

Economic Value

Every time your customers purchase from you, they’re deciding that they value what you have to offer more than they value anything else their money could buy at that moment.

There are nine types of common economic value that people typically consider when evaluating a potential purchase:

Efficacy: How well does it work?
Speed: How quickly does it work?
Reliability: Can I depend on it to do what I want?
Ease of use: How much effort does it require?
Flexibility: How many things does it do?
Status: How does it affect the way others perceive me?
Aesthetics: How attractive or aesthetically pleasing is it?
Emotion: How does it make me feel?
Cost: How much do I have to give to get this?

Products can be roughly split into two categories:

Convenient: Things that are quick, reliable, easy and flexible.
High-fidelity: Things that offer quality, status, aesthetic appeal or emotional impact.

It’s incredibly difficult to optimize both convenience and fidelity at the same time. You should try to provide the most of one amongst competing offers.

Relative Importance Testing

As a rule, people never accept trade-offs unless they’re forced to make a decision. If the perfect option existed, they’d buy it.

The best way to discover what people value is to ask them to make explicit trade-offs during research. This can be accomplished using a research methodology known as relative importance testing.

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 offer has a set of critical assumptions, and if any critical assumptions turn out to be false, the business idea will be vastly less promising than it appears.

The more accurately you can identify these [critical assumptions] in advance and actually test whether or not they’re true, the less risk you’ll be taking and the more confidence you’ll have in the wisdom of your decisions.

Shadow Testing

Shadow testing is the process of selling an offering before it actually exists. As long as you’re completely upfront 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.

Shadow testing allows you to get a critical piece of customer feedback you can get in no other way: whether or not people will actually pay for what you’re developing.

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.

It’s important to note that an MVO is only done when someone actually buys it.

Creating a minimum viable offer is useful because it’s impossible to predict 100% accurately what will work in advance. You don’t want to invest a ton of time and money into something that doesn’t have any chance of working, and the faster you can figure out if your idea will work or not, the better off you’ll be.

Incremental Augmentation

Pick three attributes or features, get these very, very right and then forget about everything else… By focusing on only a few core features in the first version, you are forced to find the true essence and value of the product.