Welcome to your gateway to business!
This series is not only useful for entrepreneurs or wantrepreneurs but also for people who are corporate-driven and want a kick in the butt for their careers. By the end of it, you will understand how every business works, allowing you to view your career from another perspective.
Why not business schools may not be the best idea and the core tenants of every business
We’ve always been sold the idea that if you want to learn about business you should go to a fancy business school and that business is one of the most complicated things to understand. The truth is business is both complex and simple. Business is simple in its foundations. It is a combination of common sense, simple math and other important core principles. It gets complicated once you start getting lost in the specific tools and how-tos that constantly change and are hard to keep up with.
I am not here bashing business schools. They can offer you a more structured environment which may make it easier for you to learn. And the financial investment you make by going through one (which for an MBA is around 100 000$ if you pick an elite school) puts that little pressure on you to focus and get the most out of it. But at the core, most business owners who practised business and learned about it alone and then decided to pursue an MBA, see no real added value from it. If you want to start a successful business, the wisest thing to do is invest the money you were willing to put into the pockets of the business school in your own business and self-learn along the way. The more you practice business, the better you get at it.
This series is mainly inspired by the personal MBA written by Josh Koffman. We summarized the main ideas from each pillar of the business and added additional insights from other resources.. By grasping these concepts, you’ll develop the fundamental business mental models on top of which you can add in other specific industry business knowledge.
We highly encourage you to purchase the whole book. It is the business dictionary you need in your bookshelf.
The core tenants of every business
All businesses, big or small, old or new, in high-tech or FMCGs do the following (as defined by Josh in the personal MBA
- Provides something of value that
- other people want or need
- at a price they’re willing to pay in a way that
- satisfies the customer’s needs and expectations so that
- the business brings in sufficient profit to make it worthwhile for the owner to continue operations.
In this series, we detail these 5 core tenants:
- Value creation: what you’ll be offering to your clients.
- Marketing: how to attract people’s attention to what you’re offering.
- Sales: how to convince people who paid attention to buy your offer at a certain price.
- Value delivery: how to deliver your offer to your customer to ensure they’re happy with their purchase.
- Finances: how to ensure your business makes enough money.
To not make it too long, each tenant will be detailed in a separate article. Bring in your pen and notebook and let’s get down to business.
TENANT 1: VALUE CREATION
Why value creation is the core of any business:
“ Are you creating something people will actually pay for ?”
Value creation is what the French call “Donant, donant”. It is simply discovering what people want and making it available to them.
It is what your business is about and it is what connects you to your customer.
It is crucial to put in mind that value creation is a two way process. You create something of value to your customers who then provide value to you by buying what you offer.
To tap into the value-creation process, we will focus on 4 aspects
- Your business: some core ideas to keep in mind before beginning the value creation process.
- The market: the universal core human desires and some key concepts that can help you understand the psychology behind what makes people “want” things.
- Value offer: where we will discuss the standard forms of values, how you can craft them, how to know if your ideas will work
- Value creation process: we will discover the importance of this process and its steps.
YOUR BUSINESS
THE MERCENARY AND THE CRUSADER RULE :
MERCENARY RULE
“ Don’t start a business for the money alone because it always takes more effort than you first expect.”
In all businesses, the sheer amount of hard work you have to put in at first is enormous. If money is your sole motivation and you are not seeing it coming in at first, you will easily lose motivation. You need something else other than money to motivate you, you need something that interests you. This doesn’t mean that you should always go for the shiny markets that appear attractive at surface level, you can find interesting business ideas in the dullest markets. The non-secret secret is to keep actively exploring markets until you find your golden mine. This will keep you moving and improving your value offer gradually and consistently.
CRUSADER RULE
“ Don’t be fooled by your calling, you still have to pay the bills”
There’s a big difference between an appealing idea and a successful business. A successful business makes at least enough money to run itself and an appealing idea might not. Before you blindly jump into your “fool-proof and unprecedented business idea”, you need to make sure you are evaluating it well and we’ll cover this later on in this series. Do not let love blind you as they say. You may be too emotionally attached to your idea, that you find it so hard to evaluate it objectively. It may be time to call that friend and ask for an outsider’s objective opinion.
KEY TAKEAWAY: Just like in deciding to get married, do not marry your business for the love alone and do not marry it for the money alone.”
THE IRON LAW OF THE MARKET
This is the cold, harsh and most unforgiving concept in business
“ The market is harsh and unforgiving. If no one wants what you offer, you are out of the game”
If your business idea is so amazing and appealing but no one wants it, you do not have a business you only have an idea. So many people get caught up in blaming the market for not responding to their business idea when that’s the number one rule of the entrepreneurs’ workbook they did not abide by: “the market doesn’t care”.
The best example Josh gives in the book is the Segway product. The idea of the Segway belongs to the famous inventor of many pioneering products: Stirling engine, water purification devices … He came up with Segway, a two-wheeled self-balancing scooter, that would revolutionize the world of transportation. Millions of dollars were spent in R&D and people working on it were so confident it would be a success. It has sophisticated technology, is easy to use, practical, and protects the environment … Why would anyone not want it? When it was released, the company sold less than 10% of what they had initially predicted. People didn’t care. It is Harsh, cruel and painful, but this is the reality of business.
The healthy and sound approach to business is making something people want. Otherwise, you’ll be far out of business before you step deep. It is like looking right and left before you cross the road, you do not want to get hit by a car.
KEY TAKEAWAY: If people don’t want to purchase your business idea, you don’t have a business, you only have an idea.
COMPETITION IS YOUR FRIEND SOMETIMES
There are two types of people: those who love living dangerously and throwing caution to the wind and those who like staying safe and having their risks mitigated. Similarly, there are two currents when it comes to competitive strategies: M.Porter’s competitive advantage strategy which focuses on competition and figuring out ways to beat them. And the blue ocean strategists, who believe in not paying attention to it and trying to find the little crack where competition does not exist. In my opinion, there’s no right or wrong way of doing business. You only need to be aware of the risks and lack of opportunity in each of these philosophies.
It is, however, better for your first business to leverage the competition. Why? because the percentage of people in the world who are very risk-tolerant and superhumanly resilient to failure is very small. Leveraging competition means entering an already existing market that is willing to pay for your offer. That way instead of focusing your energy on creating a market, you will focus on perfecting your offer for a market that already exists. To do so, you have to study your competitors extremely well and there’s no better way to do it than what Josh Kaufman suggests, to become their customer. When you do it, you get to test their offer, study what works and what doesn’t and find ways to offer better and more.
KEY TAKEAWAY: Leverage your competition, become their customer, evaluate what is needed to improve the offer and do it
THE MARKET
If there’s one thing you might have picked up from the first section is that knowing your market is a non-negotiable. To do so, you need to be knowledgeable of what people do and what they are driven by.
WHAT DO PEOPLE WANT
The core human drives
Our old Homosapien friends and we have a lot more in common than you think. We both like the same things. The human brain is wired in a specific way that shapes our behaviours. When you first hear about human desires, the first thing that might pop into your mind is Maslow’s famous pyramid of needs. Josh, however, suggested a simpler and more actionable framework taken from the book “Driven: how human nature shapes our choices”
What makes people act is the drive to:
- Acquire: which entails collecting either material objects or intangible ones such as status or power.
- Bond: which means the desire to connect with others and feel valued.
- Defend: the need to protect ourselves from potential risks and dangers
- Learn: the need to feed our curious instincts of discovering, exploring and understanding matters of the world.
- Feel: the need for emotional acquisitions through experiences. It can be pleasure, thrill, excitement, joy…..
Think for a second about businesses you know and which desire(s) they fulfil.
Examples of businesses that fulfil the core human drives
| Desire to acquire | Retailers – coaching programs – financial advisors |
| Desire to Bond | Restaurants – networking events – dating apps – associations |
| Desire to defend | Insurance companies – legal services – Theft protection companies |
| Desire to learn | Books – Academic programs |
| Desire to feel | Games – Concerts – Movies – Travel |
In general, most businesses offer a blend of these desires. The more a business does, the more it is attractive. Whenever there’s an unmet need that connects to the core human desires, there’s a solid market.
STATUS SEEKING
Humans are social animals. We all live in a certain form of group: family group, friends group, work group, …. With the social aspect comes the desire for a higher status.. In the old days, the higher you were ranked, the more access you had to food, protection and mates.
It was a survival mechanism that is still deeply rooted in our lizard brains even if it is not as explicitly visible nowadays. We all feel the need to be associated with powerful and important people or organizations and like to share our highlights with others on social media to prove the same point.
The importance of status-seeking lies in the fact that it underlays all the human desires we’ve mentioned above. Subconsciously, we often automatically consider how a product will affect our status before making the purchase decision. This is why it is important to include it in your value offer to make it more attractive.
HASSLE PREMIUM
As humans and as biological creatures, we all look for ways to minimize the energy input needed to perform a task. We always look for easy and convenient ways to fulfil our needs. And where there’s a convenience need, there’s a business opportunity referred to by Josh as the “Hassle premium”.
The hassle comes in many different forms. It can be that the task
- Requires so much time and/or energy
- Is so complex and confusing
- Requires resources that are costly and/or hard to obtain
- The more hassle and pain there’s in a task, the more they are willing to pay to get it done by someone else.
KEY TAKEAWAY: if you are trying to come up with business idea or are looking for a better way to improve your value offer, always come back to the basics. Humans are driven by the core desire to acquire, to bond, to learn, to feel and to defend. On top of which, Lays the concern about their social status regardless of the core desire. Humans are lazy by nature, if you can offer them a form of convenience, they will be willing to pay for it.
MARKET EVALUATION
Now that you have an idea of what people want and if you have an idea of your potential market, let’s see how you can evaluate it.
Josh suggests a framework in his book of 10 levers you should evaluate from 1 to 10 to get your average market score in the end.
- Urgency: how badly do people need this right now?
- Market size: how many people are purchasing a similar product or would potentially purchase your product?
- Pricing potential: what is the highest price people are willing to pay for your product?
- Customer Acquisition cost: how much money and effort do you have to put into bringing more customers? This includes how much you have to spend on marketing and sales to be more visible and attract more customers. A gas station on a highway or a grocery shop on a high-traffic street wouldn’t have to spend a lot to get new customers in.
- Cost of value delivery: how much money and effort is required to create and deliver your value. Digital products for example do not require any delivery cost. Airplanes are very costly to make, require expensive raw material, manufacturing factories and equipment ….
- The uniqueness of your offer: How easy is it for your competition to copy you? How easy is it for someone to become a competition for you?
- Speed to market: How fast can you get your product to the market?
- Up-front investments: How much money do you need before you start to sell?
- Upsell potential: Are there related products you can offer with your current products? (think hair shampoos and hair moisturizers)
- Evergreen potential: how much energy you will have to spend later on to continue selling after your business starts? A consulting company will have to continuously work to generate sales, a book can be written only once.
CRAFTING YOUR VALUE OFFER:
Do you have an idea or a potential market? Let’s now see how you can craft your value.
12 STANDARD TYPES OF VALUE
An economic value aka what people are willing to pay for can be found in one of these 12 forms
1- Product:
Product is a tangible form of value. Tangible doesn’t necessarily mean material and physical; an ebook is an example of a product as well. The benefits of having products are that they are easily scalable. This means you only get to do the value creation and then multiply and/or duplicate it way easier than other forms of value-like services.
2- Services:
A service is any benefit or help where you offer personal time and energy in exchange for a fee.
Consultants and hair salons are examples of service-based businesses, where you pay a worker for the time and energy he spent doing a task.
Services are hard to duplicate. We all have finite time and energy. But they can be very lucrative, especially in niche and highly demanded fields.
3- Shared resources
A shared resource is a durable asset that allows clients to use it in exchange for a fee. Coworking spaces, Gyms and wedding venues are examples of a shared resources business. This type of value offer gives the benefit to the client to have the experience of the place without having to purchase it themselves. The more users you have the more profit you’ll make. However, if the number of users starts to affect the quality of the user experience you offer, you may not be able to retain or attract as many clients. The challenge is to achieve that sweet spot between having the right high number of clients that don’t come at the expense of the quality of experience offered.
4- Subscription
Subscription is offering a benefit (product, service, shared resource, …) on an agreed-on frequency (weekly, monthly, yearly, …) in exchange for a recurring fee. This model is so beneficial because it “guarantees” in a periodic way. The challenge in these types of businesses is customer retention. Netflix is a perfect example of a subscription-type business and the efforts they make in retaining their customers are outstanding. Just try to cancel your subscription and see how many emails you will receive.
5- Resale
Resale is buying an asset (usually in bulk) from a wholesale seller and then selling it at a higher price. It is the most common business model of most retailers. This model is beneficial for wholesalers as well because they can focus on production and selling and not on selling to individuals. Think of all the biggest retail chains you know of, they all try to find the best deals from wholesalers and sell the products individually to their customers.
6- Lease / Rent
Renting or leasing is acquiring an asset and letting another person use it for some time in exchange for a fee. It can be applied to houses, cars, clothing pieces,.. Leasing allows the client to benefit from the product without having to pay its full ownership price. There are similarities between leasing and shared resources but they differ in that the latter can be used by more than one customer unlike renting.
To have a successful leasing business model, you need to make sure the rental price of your asset covers the purchasing price before it deteriorates and becomes unusable.
7- Agency
Having an agency type of business means that your main activity is marketing and selling an asset you don’t own. The revenue from this model comes usually in the form of commission after finding the right seller to the buyer or the right buyer to the seller. The seller benefits from the agency’s expertise, time and energy to find them the best deal for their asset and the buyer gets to have the best deals from offers he couldn’t have found on his own.
To have a successful agency, you need to make sure that the commission is high enough and is worth the effort.
8- Audience aggregation
Audience aggregation focuses on capturing the attention of a group of people with similar interests and selling access to that audience to a third party. Or to put it in one word: advertising. Website owners, influencers on social media and magazines all operate on an audience aggregation type of business model.
It is beneficial for the audience because it provides them with something of interest that they want to consume and is beneficial for the client you want to advertise for because you give access to potential prospects’ attention which he may not have access to.
The more attention you can create, the more prospects and leads you can generate and the more sales you can make. For it to be successful, the money made from the sales has to exceed the cost of the advertising and the business’s overhead.
9- Loan
A loan is letting your client use a certain amount of resources. In return, the borrower pays it back in the form of regular payments over a period of time in addition to interest fees.
The borrower has immediate access to assets which are very expensive to purchase right away. Mortgages and auto loans are examples of common loans people take.
The lender benefits from the loan by leveraging the excess capital he has, especially in terms of compounded interests. The revenues in terms of interest he gets from a first loan can be used in a second loan on which another interest rate is applied and so on. This allows gains to grow rapidly in a short amount of time.
The lender requires an asset as collateral to minimize the risk of a loan not getting paid. In that case, the ownership of the asset gets transferred to him and he can sell it to recover the funds lost in the transaction. This process is called “underwriting”.
10- Option
An option is offering the right to a valuable future action in exchange for a fee. Tickets (movies, airplane travels, concerts, …) are the most common examples of an option. When buying a movie ticket, you buy yourself the right to occupy a seat in the movie theatre all along the duration of the movie. It is called “option” because you don’t have to take action right away. If you buy the ticket but when the day comes you don’t feel like watching the movie, you have the flexibility to do so. Coupons are also a good example of options. You don’t have to buy something right away to benefit from it, you can use it anytime during its validity period.
11- Insurance
Insurance is the transfer of risk from a purchaser to a seller in exchange for a periodic fee.
Insurance benefits the purchaser by protecting him from a risk he cannot mitigate on his own. And the insurer gets to keep the money if nothing bad happens.
Insurance is one of the successful forms of value because it spreads risk over a large number of individuals. The more individuals, assets or businesses they ensure, the lower the probability of having something bad happen to all of them at the same time. This means that from all the money collected from the insurers, they only have to pay a few claims. The challenge is, however, knowing how much to charge as a cost for insurance and being able to pay the client’s claims.
12- Capital
Capital is purchasing an ownership or a part of a business. This can be in the form of angel investing, venture capital or purchasing publically available shares. Businesses benefit from the capital to grow and expand and make more revenues and investors get in the end part of the revenue depending on their initial investment. Instead of leaving dormant money in the bank account, investors can allocate it to promising companies which may provide a high rate of return.
HOW IS VALUE PRESENTED
The 12 standard forms of value are not all presented separately. Most of the time you’ll find most businesses offer a mix of standard forms of value. Gyms for example offer a shared resources model by allowing you to use the space and equipment and a subscription model by charging you periodically a fee to benefit from the Gym. Some Gyms can also offer training classes which is a service type of value and some sell energy drinks and protein bars which is a resale activity.
This variety of value offers is referred to as modularity. Having modular offers helps structure the business by having each one handled and improved separately. Then, they can mix and match to create an offer that appeals best to the customer.
Modularity allows businesses to benefit from bundling and unbundling. Bundling is combining different offers into one big offer. This commonly exists in package offers, where you offer multiple products or services as a package at a lower price than if you were to buy them separately. Unbundling is the opposite of bundling. It is splitting your offer into mini-offers.
“There are only two ways to make money in business: one is to bundle; the other is unbundle.” Jim Barksdale, former CEO and President of Netscape
THE MARKET VS VALUE OFFER
If you have an idea, how will the market value it?
ECONOMIC VALUE
When a customer decides to buy your value offer, he doesn’t think if this is a product or a shared resources type of value. There are what we call economically valuable features for your offer and it is what your customer sees.
- 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 this affect the way others perceive me?
- Aesthetic Appeal — how attractive or otherwise aesthetically pleasing is it?
- Emotion — how does it make me feel?
- Cost — how much do I have to give up to get this?
Josh specifies that these economically valuable features can be organized into two perspectives fidelity & convenience:
| Fidelity | Convenience |
| Quality | Quick |
| Status seeking | Reliable |
| Aesthetics appeal | Easy |
| Emotional impact | Flexible |
Having both high fidelity and high convenience businesses is extremely difficult if impossible. If you’re trying to improve your offer, you’re mostly optimizing in either fidelity or convenience. Most fast food restaurants do not have the most outstanding quality or aesthetics appeal but they are very quick and reliable. Fashion brands also adopt this strategy. Instead of having a single brand that’s easy and cheap, of superb quality and high aesthetics appeal, they come up with baby brands and each brand better serves either convenience or fidelity.
PERCEIVED VALUE
How much customers are willing to pay for your product? That’s the perceived value.
“ The value is in the eye of the beholder”.
Perceived value by this definition is very subjective. it changes from person to person depending on their values, life needs, and personality ….. The key rule to keep in mind, however, is someone will give you money in exchange for your product, if they value your product more than they value that money.
There are key elements you can work on to ensure that your offer can be valuable for some prospects:
- Feed one of the prospect’s core human drives.
- Satisfy the status-seeking tendency by showing the prospects how your offer will make them be perceived by people.
- Make them see what the end result looks like.
- Aim for the hassle premium by minimizing the user’s involvement
TRADE-OFF & RELATIVE IMPORTANCE
Unfortunately, you cannot do it all.. We have only 24 hours a day, and limited energy and resources, which just makes it impossible to improve in everything in life. You have to then prioritize and choose the elements on which to focus your energy and resources.
Similarly in business, you have to make trade-offs all the time. You cannot please every client. And your clients, being humans, make trade-offs all the time. What they value today may be different tomorrow. As a business, it is important to pay attention to the patterns your audience represents by analyzing what they tend to value in certain contexts. This way you’ll make a better decision in what to include in your offer and what to leave out.
Here’s another universal truth. People want everything and they will never make a choice unless they are forced to. If you ask someone about the product they want, they would probably say it’s something of high quality, cheap, looks good, easy to use and lasts forever. And such products cannot exist. This is why they tend to settle for the next best alternative depending on what characteristics they value the most. This is the concept of trade-off. It is accepting that perfect doesn’t exist and focusing on the best of the options we’re faced with.
As a business owner, you will have to make trade-offs as well. Instead of chasing improving every aspect of your product with the limited resources and energy that you have, focus on the key elements your prospects tend to value the most. This way you will make a better decision on what to include in your offer and what to leave out.
THE VALUE CREATION PROCESS
Now, you might have this marvellous business idea that you want to bring to life and show people how great it is. The best way to do it is through the value creation process.
As much as you wish you can spend time crafting the most thorough and meticulous business plan, you just cannot get it right the first time. You need to start with what we call a minimum viable offer (MVP) or a prototype which is an imperfect, primal version of your offer. You bring it out in the market to test it, you then assess what needs to be improved, you work on it and you repeat the cycle. This is the best way to achieve what we call “product market fit (PMF)”. This iteration cycle allows you to move fast towards the perfect offer for your customer.
PROTOTYPE -> LAUNCH ->TEST -> FEEDBACK
PROTOTYPE / MVP
A prototype is the first physical manifestation of your idea. If your value offer is a product, the prototype can be a simple sketch or a more functional and interactive 3D model. The more realistic it is, the better it will be understood by your customers. The key is to find a fine line between producing a prototype good enough to portray your product idea.
A minimum viable offer or product is a sellable prototype. It offers the minimum services or features necessary to produce an actual sale.
SHADOW & FIELD TESTING
Shadow testing is selling a product before it exists. It allows you to get the feedback necessary to know whether your product/service will sell. Kickstarter for example is an amazing tool to shadow test your business. You upload a description of the product, a 3D mockups or some other information and test how many people will engage with it. Pre-ordering is another amazing shadow-testing tool. The number of pre-orders you get is a good indicator on how well your product will do when it launches officially.
Field testing is testing your product before even giving it to your customers. You see if it works to the extent you were promising or not. This is common among car and airplane manufacturers who have to drive/fly their products in sometimes extreme conditions to test their performance and robustness. But this concept is used as well in all industries. Using your product every day the way an actual customer will is the best way to predict how it will do once it hits the market.
FEEDBACK
Probably the scariest part of the iteration process is getting feedback. No one likes being told their product sucks. But we have to learn to love it. Feedback is crucial to continuously improving your value offer. Josh gives the following recommendations on seeking feedback
- Listen to real potential customers instead of friends and family
- Ask open-ended questions and listen more than you talk and encourage the other person to keep talking.
- Steady yourself, keep calm and try not to get defensive.
- Take what you hear with a grain of salt. The worst response isn’t empathetic dislike; it’s total apathy. If no one cares about your product, you have no product.
- Give potential customers the chance to preorder. Pre-orders are important feedback to collect. If their number is low, maybe you need to review your offer.
The most successful companies run this iteration cycle as quickly as possible. Josh refers to this concept as Iteration Velocity.
