By Josh Kaufman
My Personal Takeaways →You do not need formal business school to think like a strong operator. The Personal MBA gives you the core mental models of business in plain language: value creation, marketing, sales, delivery, finance, systems, and decision-making. Its biggest payoff is clarity. When you can name what is happening inside a business, you can fix problems faster, communicate better, and choose more wisely under uncertainty.
Read this if you want practical business competence without unnecessary complexity. Implement it by applying one model each week: sharpen an offer, test a pricing assumption, remove process friction, or improve a decision framework. Treat the book as a working reference, not a one-time read. Over time these concepts compound into strategic judgment. Whether you are building a side business, leading a team, or running a company, this book helps convert effort into intelligent execution.
By Josh Kaufman
Clear language engenders clear thought, and clear thought is the most important benefit of education.
The Personal MBA is an introductory business primer. Its purpose is to give you a clear, comprehensive overview of the most important business concepts in as little time as possible.
Most “MBA alternative” books try to replicate the curricula of top-tier business school programs. That’s not the focus of The Personal MBA. My aim is to help you build a solid understanding of general business practice from scratch, regardless of your current level of education or business experience.
Over the past five years, I’ve read thousands of business books, interviewed hundreds of business professionals, worked for a Fortune 500 corporation, started my own businesses, and consulted with businesses ranging from solo operations to multinational corporations with hundreds of thousands of employees and billions of dollars in revenue. Along the way, I’ve collected, distilled, and refined my findings into the concepts presented in this book.
ACCURATE MENTAL MODEL:
“If you put the same amount of time and energy you’d spend completing an MBA into doing good work and improving your skills, you’ll do just as well.”
Many who are self-taught far excel the doctors, masters, and bachelors of the most renowned universities. —LUDWIG VON MISES, AUSTRIAN ECONOMIST AND AUTHOR
As time went on, however, I realized three very important things: 1. Large companies move slowly. Good ideas often died on the vine simply because they had to be approved by too many people. 2. Climbing the corporate ladder is an obstacle to doing great work. I wanted to focus on getting things done and making things better, not constantly positioning myself for promotion. Politics and turf wars are an inescapable part of the daily experience of working for a large company. 3. Frustration leads to burnout. I wanted to enjoy the daily experience of work, but instead I felt like I was running a gauntlet each day. It began to affect my health, happiness, and relationships. The longer I stayed in the corporate world, the more I realized I wanted out. I desperately wanted to work on my own terms, as an entrepreneur.
Whoever best describes the problem is the one most likely to solve it. —DAN ROAM, AUTHOR OF THE BACK OF THE NAPKIN
By basing their investment decisions on their extensive knowledge of how businesses work, how people work, and how systems work, Buffett and Munger created a company worth over $195 billion—an astounding track record for a meteorologist-turned-lawyer from Omaha with no formal business education.
You wasted $150,000 on an education you could have got for a buck fifty in late charges at the public library. —MATT DAMON AS WILL HUNTING
There is a difference between (A) what an MBA does to help you prove your abilities to others and (B) what getting an MBA actually does to improve your abilities. They are two different things.
The primary question is not whether attending a university is a positive experience: it’s whether or not the experience is worth the cost.
The reputation of a business school is built on the success of its graduates, so the top schools only admit those students intelligent and ambitious enough to make it through the rigorous selection process—the ones who are already likely to succeed, MBA or no MBA. Business schools don’t create successful people. They simply accept them, then take credit for their success.
According to Pfeffer and Fong’s study, it doesn’t matter if you graduate at the top of your class with a perfect 4.0 or at the bottom with a barely passing grade—getting an MBA has zero correlation with long-term career success. None. There is scant evidence that the MBA credential, particularly from non-elite schools, or the grades earned in business courses—a measure of the mastery of the material—are related to either salary or the attainment of higher level positions in organizations. These data, at a minimum, suggest that the training or education component of business education is only loosely coupled to the world of managing organizations.
It gets worse: getting an MBA doesn’t even have an impact on your total lifetime earnings. It takes decades of work simply to dig yourself out of the debt you took on to get the degree. Christian Schraga, the Wharton MBA, estimated that the ten-year “net present value” (a financial analysis technique used to estimate whether or not an investment is worthwhile) of a top MBA program is approximately negative $53,000 (that’s bad). This assumes a pre-MBA base salary of $85,000, a post-MBA salary of $115,000 (a 35 percent increase), marginal tax rate increases (which you’ll pay if your job requires moving to a major city), and a discount rate of 7 percent to account for opportunity cost (the opportunities you give up by spending money on business school instead of investing it in something else). In plain English: Schraga used a technique business schools teach to prove that getting an MBA from a top-tier school is a bad financial decision. Assuming Schraga’s assumptions are accurate, it takes twelve years of solid effort just to break even—and that’s assuming everything goes according to plan. If you graduate into a bad job market, you’re screwed.
If you look at the curriculum of any business school, you’ll notice a few assumptions about what you’ll do after you graduate: you’ll either be a C-level executive at a large industrial manufacturing or retail operation, become a consultant, become a corporate accountant, or work as a financier at an investment bank. Accordingly, the coursework is implicitly structured around keeping your massive operation running and/or doing sophisticated quantitative analysis—not doing any of the other critically important things that 99 percent of working business people do in any given day.
Learning how to use complicated financial formulas isn’t the same as learning how to run a business. Understanding what businesses actually do to create and deliver value is essential knowledge, but many business programs have de-emphasized value creation and operations in favor of finance and quantitative analysis.
According to the U.S. Small Business Administration, small businesses represent 99.7 percent of all employer firms in the United States, employ half of all private-sector workers, have generated 64 percent of net new jobs over the past fifteen years, and create more than 50 percent of U.S. nonfarm gross domestic product (GDP). You wouldn’t know that from looking at b-school curricula: based on current standards, it seems that most MBA programs believe huge businesses are the only ventures worth managing.
Upon graduating from a top-tier business school, you’ll find it much easier to get an interview with a corporate recruiter who works for a Fortune 500, investment bank, or consulting firm. The effect is strongest immediately after graduation, then largely wears out within three to five years. After that, you’re on your own: hiring managers no longer care so much about where you went to school—they care more about what you’ve accomplished since then.
If you do a good job, you’ll become an executive, get a raise, and have the privilege of working one hundred–plus hours a week. You’d better not mind enjoying the fruits of your labor alone: top executives consistently have the highest rates of divorce and family relationship issues.
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles—generally three to twelve of them—that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
Fortunately, there’s no need to reinvent the wheel: great books on finance and accounting already exist. If you’re interested in exploring these topics in more detail after completing chapter 5, I recommend the following books: Financial Intelligence for Entrepreneurs by Karen Berman and Joe Knight. Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree Accounting Made Simple by Mike Piper. How to Read a Financial Report by John A. Tracy.
If you’re interested in learning more about statistical analysis after reading chapter 10, I recommend: Thinking Statistically by Uri Bram. How to Lie with Statistics by Darrell Huff. Turning Numbers into Knowledge by Jonathan G. Koomey, PhD. For an examination of more advanced methods of analysis, Principles of Statistics by M. G. Bulmer is a useful reference.
Review this book regularly. Keep it close to where you work so you can refer to it often, particularly before starting a new project. Repetition inevitably leads to mastery, and the better you internalize these concepts, the more you’ll improve your results. I also recommend setting a reminder in your calendar to review this book or your notes every few months to reinforce your understanding and spark new ideas.
Make something people want… There’s nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you’ve found a gold mine. —PAUL GRAHAM, FOUNDER OF Y COMBINATOR
The world is full of opportunities to make other people’s lives better in some way, and your job as a businessperson is to identify things that people don’t have enough of, then find a way to provide them. The value you create can take on one of several different forms, but the purpose is always the same: to make someone else’s life a little bit better.
Some businesses thrive by providing a little value to many, and others focus on providing a lot of value to only a few people.
Roughly defined, a business is a repeatable process that: 1. Creates and delivers something of value… 2. That other people want or need… 3. At a price they’re willing to pay… 4. In a way that satisfies the customer’s needs and expectations… 5. So that the business brings in enough profit to make it worthwhile for the owners to continue operation. It doesn’t matter if you’re running a solo venture or a billion-dollar brand. Take any one of these five factors away, and you don’t have a business—you have something else. A venture that doesn’t create value for others is a hobby. A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a nonprofit. A venture that doesn’t deliver what it promises is a scam. A venture that doesn’t bring in enough money to keep operating will inevitably close.
At the core, every business is fundamentally a collection of five Interdependent processes, each of which flows into the next: 1. Value Creation. Discovering what people need or want, then creating it. 2. Marketing. Attracting attention and building demand for what you’ve created. 3. Sales. Turning prospective customers into paying customers. 4. Value Delivery. Giving your customers what you’ve promised and ensuring that they are satisfied. 5. Finance. Bringing in enough money to keep going and make your effort worthwhile.
Not every skill or area of knowledge is Economically Valuable, and that’s okay—there are many things worth pursuing for the sake of relaxation or enjoyment alone. You may enjoy whitewater rafting, but it’s very unlikely anyone will pay you to shoot the rapids unless you apply your skills for the benefit of others. Make the leap from personal enjoyment to Products and Services, however, and you’ll find yourself getting paid—plenty of adventurous souls are willing to pay for rafting equipment and guides.
Market matters most; neither a stellar team nor fantastic product will redeem a bad market.
Understanding human needs is half the job of meeting them.
In practice, I prefer Clayton Alderfer’s version of Maslow’s hierarchy, which he called “ERG theory”: people seek existence, relatedness, and growth, in that order. When people have what they need to survive, they move on to making friends and finding mates. When they’re satisfied with their relationships, they focus on doing things they enjoy and improving their skills in things that interest them. First existence, then relatedness, then growth.
According to Harvard Business School professors Paul Lawrence and Nitin Nohria, the authors of Driven: How Human Nature Shapes Our Choices, all human beings have four Core Human Drives that have a profound influence on our decisions and actions: 1. The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive. 2. The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive. 3. The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive. 4. The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive. There’s a fifth core drive that Lawrence and Nohria missed: 5. The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation.
At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement. The more clearly you articulate how your product satisfies one or more of these drives, the more attractive your offer will become.
When given a choice between different Alternatives, people will typically choose the option with the highest perceived status. In general, we like to be associated with people and organizations that we think are powerful, important, or exclusive or that exhibit other high-status qualities or behaviors. We also like to ensure other people are aware of our status: for proof, examine what people post on their Facebook profiles.
In the words of Alain de Botton, a philosopher and social critic, “If one felt successful, there’d be so little incentive to be successful.”
So often people are working hard at the wrong thing. Working on the right thing is probably more important than working hard.
The Ten Ways to Evaluate a Market provide a back-of-the-napkin method you can use to identify the attractiveness of any potential market. Rate each of the ten factors below on a scale of 0 to 10, where 0 is extremely unattractive and 10 is extremely attractive. When in doubt, be conservative in your estimate: 1. Urgency—How badly do people want or need this right now? (Renting an old movie is typically low urgency; seeing the first showing of a new movie on opening night is high urgency, since it only happens once.) 2. Market Size—How many people are actively purchasing things like this? (The market for underwater basket weaving courses is very small; the market for cancer cures is massive.) 3. Pricing Potential—What is the highest price a typical purchaser would be willing to spend for a solution? (Lollipops sell for $0.05; aircraft carriers sell for billions.) 4. Cost of Customer Acquisition—How easy is it to acquire a new customer? On average, how much will it cost to generate a sale, in both money and effort? (Restaurants built on high-traffic interstate highways spend little to bring in new customers. Government contractors can spend millions landing major procurement deals.) 5. Cost of Value Delivery—How much would it cost to create and deliver the value offered, both in money and effort? (Delivering files via the Internet is almost free; inventing a product and building a factory costs millions.) 6. Uniqueness of Offer—How unique is your offer versus competing offerings in the market, and how easy is it for potential competitors to copy you? (There are many hair salons, but very few companies that offer private space travel.) 7. Speed to Market—How quickly can you create something to sell? (You can offer to mow a neighbor’s lawn in minutes; opening a bank can take years.) 8. Up-Front Investment—How much will you have to invest before you’re ready to sell? (To be a housekeeper, all you need is a set of inexpensive cleaning products. To mine for gold, you need millions to purchase land and excavating equipment.) 9. Upsell Potential—Are there related secondary offers that you could also present to purchasing customers? (Customers who purchase razors need shaving cream and extra blades as well; buy a Frisbee, and you won’t need another unless you lose it.) 10. Evergreen Potential—Once the initial offer has been created, how much additional work will you have to put into it in order to continue selling? (Business consulting requires ongoing work to get paid; a book can be produced once, then sold over and over as is)
When you’re done with your assessment, add up the score. If the score is 50 or below, move on to another idea- there are better places to invest your energy and resources. If the score is 75 or above, you have a very promising idea-full speed ahead. Anything between 50 and 75 has the potential to pay the bills, but won’t be a home run without a huge investment of energy and resources, so plan accordingly.
The best way to observe what your potential competitors are doing is to become a customer. Buy as much as you can of what they offer. Observing your competition from the inside can teach you an enormous amount about the market: what value the competitor provides, how they attract attention, what they charge, how they close sales, how they make customers happy, how they deal with issues, and what needs they aren’t yet serving.
Learn everything you can from your competition, and then create something even more valuable.
Make money your god and it will plague you like the devil. —HENRY FIELDING, EIGHTEENTH-CENTURY NOVELIST AND SATIRIST
Becoming a Mercenary doesn’t pay: don’t start a business for the money alone. Here’s why: 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. Finding that market is mostly a matter of patience and active exploration.
In all the excitement, it’s easy to forget that there’s often a huge difference between an interesting idea and a solid business. In your optimism, forget ye not prudence: changing the world is difficult if you can’t pay the bills.
Twelve Standard Forms of Value
Form of Value #1: Product
Form of Value #2: Service
Everyone can be great because everyone can serve. — MARTIN LUTHER KING, JR
In order to create a successful Service, your business must: 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.
Form of Value #3: Shared Resource
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.
Gyms and fitness clubs are a classic example of a Shared Resource.
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. Finding the sweet spot between too few members and too many is the key to making a Shared Resource work.
Form of Value #4: Subscription
Form of Value #5: Resale
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.
To a farmer, selling apples to millions of individuals would be time-intensive and inefficient: it’s far better to sell them all to a grocery chain and focus on growing more apples. The grocery then takes the apples into inventory and sells them to individual consumers at a higher price.
Sourcing good products at low prices and managing inventory levels are the keys to reselling.
Form of Value #6: Lease
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.
Leasing benefits the customer by allowing the use of an asset for less than the outright purchase price.
To successfully provide value via Leases, you must ensure that the revenue from the Lease covers the purchase price of the asset before it wears out or is lost.
Form of Value #7: Agency
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.
Sellers benefit from an Agency relationship because it generates sales that might not otherwise happen. Literary agents are a classic example: a potential author may have an idea for a book, but may not know anyone in publishing. By working with an agent who has preexisting connections in the publishing industry, it’s far more likely the author will land a publishing contract. In exchange for finding a publisher and negotiating the deal, the agent gets a percentage of the book’s advance and royalties.
Form of Value #8: Audience Aggregation
Audience Aggregation revolves around collecting the attention of a group of people with similar characteristics, then selling access to that audience to a third party. Since attention is limited and valuable, gathering a group of people in a certain demographic is quite valuable to businesses or groups that are interested in getting the attention of those people.
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.
Audience Aggregation benefits the audience because it provides something worthy of their attention. Magazines and advertising-supported Web sites are great examples: readers benefit from the information and entertainment these sources provide in exchange for being exposed to some level of advertising. If the advertising becomes obnoxious, they’ll leave, but most people are willing to be exposed to a certain amount of advertising if the content is good.
Form of Value #9: Loan
Form of Value #10: Option
An Option is the ability to take a predefined action for a fixed period of time in exchange for a fee.
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.
The deposit ensured that the landlord wouldn’t rent the apartment to someone else before we moved. Once we signed the official rental agreement, the deposit became a standard rental security deposit. If we had decided not to move forward, the landlord would have kept the deposit in compensation for holding the apartment for us and would have been free to find another tenant. Thus, the Option was beneficial for both of us.
Form of Value #11: Insurance
Insurance involves the transfer of risk from the purchaser to the seller.
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 “loss”) 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 “premiums”) over time. 4. Pay out legitimate claims upon the policy.
Insurance works because it spreads risk over a large number of individuals. If an insurer writes policies for thousands or millions of homes, it’s highly unlikely that every single one will burn to the ground at once—only a certain number of claims will have to be paid.
Form of Value #12: Capital
Hassle Premium: People are almost always willing to pay for things that they believe are too much of a pain to take care of themselves. Where there’s a hassle, there’s a business opportunity. Hassles come in many forms. The project or task in question may: Take too much time to complete. Require too much effort to ensure a good result. Distract from other, more important priorities. Involve too much confusion, uncertainty, or complexity. Require costly or intimidating prior experience. Require specialized resources or equipment that’s difficult to obtain. The more hassle a project or task involves, the more people are generally willing to pay for an easy solution or for someone to complete the job on their behalf.
The most valuable offers do one or more of the following: Satisfy one or more of the prospect’s Core Human Drives. Offer an attractive and easy-to-visualize End Result. Command the highest Hassle Premium by reducing end-user involvement as much as possible. Satisfy the prospect’s Status Seeking tendency by providing desirable Social Signals that help them look good in the eyes of other people.
Focus on providing the most significant benefits and the highest status in a way that requires the least amount of end-user effort and frustration, and you’ll increase the Perceived Value of your offer.
Keep in mind that the Twelve Standard Forms of Value aren’t mutually exclusive: you can offer any number or combination of these forms to your potential customers to see which ones they like best. Most successful businesses offer value in multiple forms. Take the magazine industry, for example. Magazines charge a monthly or annual Subscription fee in exchange for a printed magazine delivered by mail on a periodic basis. Simultaneously, they use Audience Aggregation to sell access to their subscribers via advertising, which is included in the magazine alongside the content.
In most companies, each of these offers 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.
The benefit of making your offers small and Modular is that it allows you to take advantage of a strategy called Bundling. Bundling allows you to repurpose value that you have already created to create even more value.
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. Customers may not be willing to pay $10 for an entire album, but they may be willing to pay a dollar or two for the songs they particularly like. Unbundling the album into individual units opens the way to sales that wouldn’t otherwise happen. Bundling and Unbundling can help you create value for different types of customers without requiring the creation of something new. By combining offers and forms in various configurations, you can offer your customers exactly what they want.
“Stealth mode” diminishes your early learning opportunities, putting you at a huge early disadvantage. It’s almost always better to focus on getting feedback from real customers as quickly as you possibly can.
For best results, create your prototype in the same form as the finished product. If you’re creating a physical product, make a tangible model. If you’re making a Web site, create a working Web page with the basic components. If you’re creating a service, create a diagram or flowchart of everything that happens in the process, then act it out.
Prototypes are valuable because they allow you to get good feedback from real people before you invest a huge amount of time, money, and effort into the project.
Iteration has six major steps, which I call 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?
The Iteration Cycle often feels like additional work because it is additional work. That’s why so few people do it: it’s very tempting to skip all of these “extra” steps and attempt to create the final offering outright. The major problem with the direct approach is risk: you’re sinking a great deal of time, energy, and resources into creating something that may not ultimately sell. If the idea’s a dud, it’s far better to figure that out quickly and inexpensively via a few quick Iteration Cycles than to bet the farm on an idea or market that just won’t work. Iteration may take some additional effort up front, but after you’ve gone through a few cycles, you’ll have a deeper understanding of the market, direct knowledge of what people actually want enough to pay for, and a clear understanding of whether or not you have a viable offer to give them.
Here are a few tips to maximize the value of the Feedback you receive: 1. Get Feedback from real potential customers instead of friends and family. Your inner circle typically wants you to succeed and wants to maintain a good relationship with you, so it’s likely that they’ll unintentionally sugarcoat their Feedback. For best results, be sure to get plenty of Feedback from people who aren’t personally invested in you or your project. 2. Ask open-ended questions. When collecting Feedback, you should be listening more than you talk. Have a few open-ended questions prepared to give the conversation a bit of structure, but otherwise encourage the other person to do most of the talking. Short who/what/when/where/why/how questions typically work best. Watch what they do, and compare their actions with what they say. 3. Steady yourself, and keep calm. Asking for genuine Feedback (the only useful kind) requires thick skin—no one likes hearing their baby is ugly. Try not to get offended or defensive if someone doesn’t like what you’ve created; they’re doing you a great service. 4. Take what you hear with a grain of salt. Even the most discouraging Feedback contains crucial pieces of information that can help you make your offering better. The worst response you can get when asking for Feedback isn’t emphatic dislike: it’s total apathy. If no one seems to care about what you’ve created, you don’t have a viable business idea. 5. Give potential customers the opportunity to preorder. One of the most important pieces of Feedback you can receive during the iteration process is the other person’s willingness to actually purchase what you’re creating. It’s one thing for a person to say that they’d purchase something and quite another for them to be willing to pull out their wallet or credit card and place a real order. You can do this even if the offer isn’t ready yet—a tactic called Shadow Testing.
Examining the possible Alternatives and considering the customer’s perspective results in better choices. As you make decisions about what to include and what to leave out, it’s essential to appreciate the Alternatives that your potential customers face when they decide whether or not to purchase your offering. Once you’re aware of the options, you can examine the combinations and permutations of those Alternatives to present an attractive offer.
Predicting how people will make certain Trade-offs is tricky—values change quickly, given the environment and context. Values are preferences—how much we want, desire, or place importance on one particular object, quality, or state of being versus another. What you value this morning may be different from what you value this afternoon or this evening. What you want today may be different from what you want tomorrow. When making decisions about what to include in your offering, it pays to look for Patterns.
As you develop your offering, one of your first priorities should be to find out what your potential customers value more than the buying power of the dollars in their wallets.
Assuming the promised benefits of the offering are appealing, there are nine common Economic Values that people typically consider when evaluating a potential purchase. They are: 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?
Things which matter most must never be at the mercy of things which matter least. —JOHANN WOLFGANG VON GOETHE
The tricky thing about trying to figure out what people want is that people want everything. Here’s proof: bring together a group of potential customers for a focus group. Ask each participant to rate the importance of each of the nine Economic Values for your offering on a scale of 0 to 10. What will the results look like? Regardless of your product or service, the results will be the same: your customers want products that provide exceptional results instantly, every time, with absolutely no effort. Simultaneously, they want the offer to make them rich, famous, attractive, and eternally blissful. They also want it to be free. If you ask them what they’d be willing to give up, they’ll answer that everything is critically important, and they won’t be happy with less. The reality outside of the focus group is always quite different. Shortly after the group adjourns, each of those participants will go out and purchase something that’s not free and not perfect, and they’ll be happy with their decision. Why? As a rule, people never accept Trade-offs unless they’re forced to make a Decision.
Since there’s no such thing as the perfect offering, people are happy to settle for the Next Best Alternative. The best way to discover what people actually value is to ask them to make explicit Trade-offs during the research process. The problem with the hypothetical focus group was that it didn’t ask the participants to make any real Decisions—the participants could have everything, so they wanted everything. Relative Importance Testing—a set of analysis techniques pioneered by statistician Jordan Louviere in the 1980s —gives you a way to determine what people actually want by asking them a series of simple questions designed to simulate real-life Trade-offs. Here’s how it works. Let’s assume we’re conducting a Relative Importance Test for the diner previously mentioned. Instead of asking the participant to rank each benefit from 0 to 10, we show the participant something like the following: A. Orders delivered to table in five minutes or less. B. Most entrée prices under $20. C. Appealing restaurant décor. D. Large variety of menu options.
After this set is shown, the participant is asked the following questions: 1. Which of these items is most important? 2. Which of these items is least important? Once the participant answers the questions, another set is shown: E. Unique entrées I can’t get anywhere else. F. Knowing I can always order my favorite dishes. G. People are impressed that I dine here. H. Large portions. Random question sets containing four or five criteria are provided until there are no more possible combinations or the participant’s attention wanders, which will typically occur around the five- to ten- minute mark.
Relative Importance Testing can help you quickly determine which benefits you should focus on to make your offering maximally attractive.
Every business or offering has a set of Critical Assumptions that will make or break its continued existence. The more accurately you can identify these 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.
It’s much smarter to minimize your risk by testing your offering with real paying customers before you fully commit to making it real. 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. Real paying customers are always different from hypothetical customers. 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. In order to minimize the risk you’re taking on in committing to the project, your objective should be to start gathering data from real paying customers as soon as possible.
It’s a neat concept, but creating new hardware is time-consuming, expensive, and fraught with risk, so here’s what Friedman and Park did. The same day they announced the Fitbit idea to the world, they started allowing customers to preorder a Fitbit on their Web site, based on little more than a description of what the device would do and a few renderings of what the product would look like. The billing system collected names, addresses, and verified credit card numbers, but no charges were actually processed until the product was ready to ship, which gave the company an out in case their plans fell through. Orders started rolling in, and one month later, investors had the confidence to pony up $2 million dollars to make the Fitbit a reality. A year later, the first real Fitbit was shipped to customers. That’s the power of Shadow Testing.
In order to conduct a Shadow Test, you need something to sell. Fortunately, you don’t have to create the entire offer before you start selling. 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. It doesn’t have to be complicated: Fitbit’s Minimum Viable Offer was a Prototype, a description, and a few computer renderings. All you need to do is convey enough information to convince a real potential customer to buy.
Step 1: Create a simple Web site describing the studio in detail, including location, tentative schedule, teaching staff, sketches of the space, and membership fees. The site includes a sign-up form for visitors to preorder memberships by submitting their credit card information. By signing up, members commit to a twelve-month membership when the studio opens, but they have the opportunity to cancel within the first month if they don’t like it. If the studio doesn’t open, all preorders are canceled without charge. Total cost: a few hundred dollars. Step 2: Direct prospective customers to the Web site. This can be done inexpensively in any number of ways: flyers, door-to-door inquiry, direct mail, and local search engine advertising. Total cost: a few hundred dollars. Step 3: Track how many individuals sign up for preopening memberships at the full rate via the Web site or request additional information. Total cost: a few hours of analysis. This method of testing is simple, fast, and inexpensive. Services like Kickstarter (www.kickstarter.com) are making tests like these easy: all it takes to allow potential customers to preorder is a video, a few sketches or renderings, and basic sales copy. Spending a few hours and a few hundred dollars testing your Critical Assumptions is a very good use of money, particularly if your findings indicate your business idea won’t work. The purpose of starting with a Minimum Viable Offer is to minimize your risk. By keeping the investments small, incremental, and learning oriented, you’ll be able to quickly discover what works and what doesn’t. If the idea is promising, you’re in a great position to make it happen. If your assumptions don’t hold true, you’re able to cut your losses without losing your shirt or your dignity.
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. Starting with a stock car, the “tuner” steadily replaces and upgrades parts: a better engine, spoiler, tinted windows, and chrome hubcaps. The intent of every change is to make the car just a little bit better, until it’s the best it can be. When the car is finished, it’s a different machine. Incremental Augmentation helps you improve your offering while minimizing the risk that any single iteration will fail catastrophically.
Using what you make every day is the best way to improve the quality of what you’re offering. Nothing will help you find ways to make your offer better than being its most avid and demanding customer.
The cardinal marketing sin is being boring.
Without Marketing, no business can survive—people who don’t know you exist can’t purchase what you have to offer, and people who aren’t interested in what you have to offer won’t become paying customers.
Marketing is the art and science of finding “prospects”—people who are actively interested in what you have to offer. The best businesses in the world find ways to attract the attention of qualified prospects quickly and inexpensively.
High-quality attention must be earned. When you’re seeking someone’s attention, it’s useful to take a moment to remember that you’re competing against everything else in their world. In order to be noticed, you need to find a way to earn that attention by being more interesting or useful than the competing alternatives.
It’s nice to be the center of attention, but business is about making profitable sales, not winning a popularity contest. Being featured on national television or on a huge Web site is a wonderful thing, but very often this kind of broad publicity fails to deliver actual sales.
If you want your message to be heard, the medium matters. The form of your message has a big influence on how receptive people are to the information that message contains. 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. Here’s an example: Almost everyone will ignore postal junk mail—if it looks blatantly commercial or mass-produced, there’s a 99 percent chance the recipient will throw it away without a second thought. Change the form, however, and Receptivity changes as well.
Advertising is the tax you pay for being unremarkable.
Being Remarkable is the best way to attract Attention. In the classic marketing book Purple Cow, Seth Godin uses a wonderful metaphor to illustrate this principle. A field full of brown cows is boring. A purple cow violates the viewer’s expectations, which naturally attracts Attention and interest. If you design your offer to be Remarkable—unique enough to pique your prospect’s curiosity—it’ll be significantly easier to attract attention.
Attempting to appeal to everyone is a waste of time and money: focus your marketing efforts on your Probable Purchaser. By spending your limited resources reaching out to people who are already interested in the types of things you offer, you’ll maximize the effectiveness of your attention-grabbing activities.
You wouldn’t worry so much about what others think of you if you realized how seldom they do. —ELEANOR ROOSEVELT
The best way to break a potential prospect’s Preoccupation is to provoke a feeling of curiosity, surprise, or concern.
There’s a reason marketers use evocative imagery, words, and sounds: our brains are wired to stop what we’re doing to evaluate them.
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. The actual function of the purchase is important, but the End Result is what the prospect is most interested in hearing about. It’s often far more comfortable to focus on the features: you know what your offer does. Even so, it’s far more effective to focus on the benefits: what your offer will provide to customers.
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.
If you’re the type of person Progressive wants as a customer, they’ll quote you a price and encourage you to purchase an insurance policy immediately. If you’re not, Progressive will tell you that you can get a better price elsewhere and actively encourage you to purchase insurance from one of their competitors.
The more clearly you define your ideal customer, the better you can screen out the prospects who don’t fit that description, and the more you’ll be able to focus on serving your best customers well.
Attracting your Probable Purchaser’s Attention immediately after they’ve reached the Point of Market Entry is hugely valuable. Companies like Procter&Gamble, Kimberly-Clark, Johnson & Johnson, and Fisher-Price pay an enormous amount of attention to Points of Market Entry, since they have a huge impact on the effectiveness of every baby-product-related marketing activity. It’s not uncommon for new moms and dads to come home from the hospital with a complimentary “care package” from one or more of these companies containing samples of diapers, diaper rash ointment, formula, and other newborn-care basics. If you can get a prospective customer’s attention as soon as they become interested in what you’re offering, you become the standard by which competing offers are evaluated. That’s a remarkably powerful position that increases the likelihood the prospect will ultimately purchase from you.
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.
Sensitive or embarrassing topics tend to have low Addressability, even if there’s a huge need. Chronic medical conditions are a good example: it’s difficult to find and reach a large group of people who suffer from an uncomfortable and potentially embarrassing condition like psoriasis or ulcerative colitis. People suffering from these conditions typically don’t gather in the same place or read the same things, and many will avoid being publicly identified as sufferers by joining organizations, so it’s hard to find and talk to them directly.
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.
Here’s the reality: it’s almost impossible to make someone want something they don’t already desire. Yes, it’s possible to be scammy and manipulative if you misrepresent what you’re offering or promise something you can’t deliver. Don’t mistake that for brainwashing: the quickest way to waste a multimillion-dollar advertising budget is to try to force people to want something they don’t already want. The human mind simply doesn’t work that way—we only purchase what we already desire on some level. The essence of effective marketing is discovering what people already want, then presenting your offer in a way that intersects with that preexisting Desire. The best marketing is similar to Education-Based Selling: it shows the prospect how the offer will help them achieve what they desire. Your job as a marketer isn’t to convince people to want what you’re offering: it’s to help your prospects convince themselves that what you’re offering will help them get what they really want.
Once you’re actually behind the wheel of a car, however, the emotional parts of your mind take control. You start to imagine what your life would be like if you owned this vehicle. Instead of dispassionately comparing horsepower and acceleration metrics, you can actually feel the power of the engine and the ease of handling, and you can imagine the respect (or envy) of your neighbors as you pull your attractive new vehicle into the driveway. You’ve stopped comparing and started wanting. Once you start wanting, you’ll probably buy—it’s only a matter of time.
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.
You can use this natural tendency to your advantage by helping your prospects imagine the positive experiences they’ll have. If you encourage your prospects to Visualize what their life will look like after purchasing, you increase the probability that they’ll purchase from you. The best way to help your customers Visualize is to expose them to as much sensory information as possible—the information their mind uses to conclude, “I want this.”
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.
If you want to attract Attention quickly, give something valuable away for Free. People love the promise of getting something for nothing. You’ve probably seen Free samples of food being given away at the supermarket, or received an offer to try a product or service for a certain time at no obligation. Chances are, at least a few of those free offers have led you to purchase more. Offers of Free value continue to exist because they work—the Free value is subsidized by the additional sales that are made because of the offer.
By giving your prospects something useful at no cost up front, you earn their attention and give your potential customers a chance to actually experience the value you provide. Done well, this strategy will net you sales you wouldn’t have made otherwise. Giving Free value attracts attention, but always remember that attention alone doesn’t pay the bills.
Selling to people who actually want to hear from you is more effective than interrupting strangers who don’t. —SETH GODIN
Unfortunately, many businesspeople assume that the spam approach is the best way to get Attention. Unsolicited phone calls, press releases, mass-market advertising, and “resident”-addressed direct mail are the most common legal equivalents of spam: blanketing a huge, undifferentiated group of people with a standard message in the hopes that a tiny fraction will respond.
Asking for Permission to follow up after providing Free value is more effective than interruption. Offering genuine value earns your prospect’s Attention, and asking for Permission gives you the opportunity to focus on communicating with people you know are interested in what you have to offer.
The best way to get Permission is to ask for it. Whenever you provide value to people, ask them if it’s okay to continue to give them more value in the future. Over time, your list of prospective customers will grow, and the larger it grows, the higher the likelihood you’ll start landing more sales. Use Permission once you have it, but don’t abuse the privilege.
Before asking your prospects for Permission to follow up, make it clear what they’ll be getting and how it’ll benefit them.
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.
The most effective marketing messages give the recipient or prospect a single, very clear, very short action to take next.
A Call-To-Action directs your prospects to take a single, simple, obvious action. 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. The key to presenting an effective Call-To-Action is to be as clear, simple, and obvious as you possibly can. The more clearly you present your proposal, the higher the probability your prospect will actually do what you suggest.
The best Calls-To-Action ask directly either for the sale or for Permission to follow up. Making direct sales is optimal, since it makes it easy to figure out whether or not your marketing activities are cost-effective. Asking for Permission is the next best thing, since it allows you to follow up with your prospects over time, dramatically decreasing your marketing costs and increasing the probability of an eventual sale.
A good story will make even the best offer even better.
The more vivid, clear, and emotionally compelling the story, the more prospects you’ll attract. Tell your prospective customers the stories they’re interested in hearing, and you’ll inevitably grab their Attention.
It’s okay to disagree with someone, or to call someone out, or to position yourself against something, because Controversy provokes a discussion. Discussion is Attention, which is a very good thing if you want to attract people who will benefit from what you’re doing. That’s not to say all Controversy is good Controversy: there’s a fine line between being constructively controversial and creating a soap opera. Controversy with a purpose is valuable.
Always remember that the marketplace is the final arbiter of your Reputation, and that it’s always watching what you do. When you build a great Reputation, your customers will continue to do business with you and will refer you to others because they think highly of you (and because referring friends to good products and services is a way to build their own Reputations). Building your Reputation takes time and effort, but it’s the most effective kind of marketing there is.
No one wants to make a bad decision or be taken advantage of, so sales mostly consists of helping the prospect understand what’s important and convincing them you’re capable of actually delivering on what you promise.
This may seem obvious, but it’s amazing how many prospective businesspeople enter the market without something the market wants. That’s why developing and testing a Minimum Viable Offer is so important: it’s the best way to determine whether or not you’ve created something valuable enough to sell before you invest your life savings.
Without a certain amount of Trust between parties, a Transaction will not take place.
Building a trustworthy Reputation over time by dealing fairly and honestly is the best way to build Trust.
A compromise is the art of dividing a cake in such a way that everyone believes he has the biggest piece. —LUDWIG ERHARD, POLITICIAN AND FORMER CHANCELLOR OF WEST GERMANY
Ideally, you should want exactly what your prospects want: the satisfaction of their desire or the resolution of their problem. The more your interests are aligned with your prospect’s, the more they’ll Trust your ability to give them what they want.
There are four ways to support a price on something of value: (1) replacement cost, (2) market comparison, (3) discounted cash flow/net present value, and (4) value comparison. These Four Pricing Methods will help you estimate just how much something is potentially worth to your customers. The Replacement Cost method supports a price by answering the question “How much would it cost to replace?” In the case of the house, the question becomes “What would it cost to create or construct a house just like this one?”
The Market Comparison method supports a price by answering the question “How much are other things like this selling for?” In the case of the house, this question becomes “How much have houses like this, in this general area, sold for recently?”
The Discounted Cash Flow (DCF) / Net Present Value (NPV) method supports a price by answering the question “How much is it worth if it can bring in money over time?” In the case of your house, the question becomes “How much would this house bring in each month if you rented it for a period of time, and how much is that series of cash flows worth as a lump sum today?”
The Value Comparison method supports a price by answering the question “Who is this particularly valuable to?” In the case of the house, this question becomes “What features of this house would make it valuable to certain types of people?”
By looking at the unique characteristics of what you’re offering and the corresponding worth of those characteristics to certain individuals, you can often support much higher prices.
Economists love to draw downward-sloping pricing curves that show demand increasing as prices decrease. The trouble with the traditional pricing curve is that it can be misleading when the offer isn’t a commodity. In practice, raising your prices can increase demand by appealing to a more attractive type of customer. Automobiles are a classic example of this type of price sensitivity: some cars are desirable because they’re expensive. The typical customer who purchases a Bentley Continental GT is very different from the type of customer who purchases a Toyota Camry.
As you test different pricing strategies, you’ll notice certain thresholds where you stop appealing to certain types of customers and start appealing to customers with very different characteristics.
There 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.
Value-Based Selling is not about talking—it’s about listening.
In reality, the best salespeople are the ones who can listen intently for the things the customer really wants. Asking good questions is the best way to identify what your offer is worth to your prospect. In the classic sales book SPIN Selling, Neil Rackham describes the four phases of successful 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. By encouraging your prospects to tell you more about what they need, you reap two major benefits. First, you increase the prospect’s confidence in your understanding of the situation, increasing their confidence in your ability to deliver a solution. Second, you’ll discover information that will help you emphasize just how valuable your offer is, which helps you in Framing the price of your offer versus the value it will provide.
If you discover why, how, and how much your offer will benefit the customer, you’ll be able to explain that value in terms they’ll understand and appreciate. Understanding the value you can provide your customers is the golden path to a profitable sale.
Education-Based Selling is the process of making your prospects better, more informed customers. As a sales consultant, Kelsey worked to do two things: (1) make the bride feel comfortable and relaxed, then (2) help the bride become more knowledgeable about gowns in terms of how they are made and what to look for when buying one.
In every negotiation, the power lies with the party that is able and willing to walk away from a bad deal.
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.
The first thing to decide before you walk into any negotiation is what to do if the other fellow says no. —ERNEST BEVIN, FORMER BRITISH SECRETARY OF STATE FOR FOREIGN AFFAIRS
The Three Dimensions of Negotiation are setup, structure, and discussion.
By creating an Environment that’s conducive to a deal and preparing your strategy in advance, you can dramatically increase the probability of finding a mutually acceptable solution. The first phase of every negotiation is the Setup: setting the stage for a satisfying outcome to the negotiation. The more you can stack the odds in your favor before you start negotiating, the better the deal you’ll be able to strike: Who is involved in the negotiation, and are they open to dealing with you? Who are you negotiating with, and do they know who you are and how you can help them? What are you proposing, and how does it benefit the other party?
The second dimension of negotiation is Structure: the terms of the proposal. In this phase, you put together your draft proposal in a way they’re likely to appreciate and accept: What exactly will you propose, and how will you Frame your proposal to the other party? What are the primary benefits of your proposal to the other party? What is the other party’s Next Best Alternative, and how is your proposal better? How will you overcome the other party’s objections and Barriers to Purchase? Are there Trade-offs or concessions you’re willing to make to reach an agreement?
The third dimension of negotiation is the Discussion: actually presenting the offer to the other party. The Discussion is where you actually talk through your proposal with the other party.
Buffers can also be useful in order to add some time or space to a high-intensity negotiation. It’s often quite useful not to be the party who has the final say. Being able to say, “I need to discuss this with my agent/accountant/attorney” before giving final approval on a deal is a valuable check-step that prevents hasty or unwise decisions.
One of the things that makes prospects uncomfortable around salespeople is the feeling that they’re going to get the “hard 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. When a prospect senses that someone is trying to convince or compel them to do something they’re not sure about, they automatically resist and attempt to move away from the conversation.
The harder the salesperson pushes, the more the prospect resists. That’s why hard-sell approaches usually fail to generate sustainable results. The more effective strategy, in the words of the renowned sales expert Zig Ziglar, is to present yourself to the prospect as an “assistant buyer.” Your job is not to sell the prospect a bill of goods: it’s to help them make an informed decision about what’s best for them.
Salespeople need to be aware of two additional signals that can trigger Persuasion Resistance: desperation and chasing. Sending either signal during any part of the sales process will reduce the number and size of the Transactions you close. 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 starts working against you. In the same way that people don’t want to date a person who desperately wants to be in a relationship, prospects don’t want to do business with a person who desperately wants or needs their money.
Chasing a prospect to make a sale is counterproductive, a waste of time and energy. Instead, find ways to Frame the situation in a way that encourages the prospect to feel like they’re chasing you. If your prospect feels like they need to justify why they’re good enough to work with you, you’re in a very strong position to make a sale on favorable terms.
Reciprocation is the strong desire most people feel to “pay 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.
The more legitimate value you can provide to others up front, the more receptive they’ll be when it’s time for your pitch. Providing Free value builds your social capital, making it more likely the people you benefit will Reciprocate when you make an offer down the road. Being generous is one of the best things you can do to improve your results as a salesperson. By giving away value and helping others as much as you can, they’ll respect you; it will build your Reputation, but it will also increase the probability that they will be interested enough when you do present your Call-To-Action.
We confess our little faults to persuade people that we have no large ones. —FRANÇOIS DE LA ROCHEFOUCAULD
Counterintuitively, making a Damaging Admission like this to your prospects can actually increase their Trust in your ability to deliver what you promise.
To help alleviate our concerns, the dealership that listed the car, Masters Auto Collection in Denver, went out of their way to photograph every detail—including a small chip in the paint on the left side, which wasn’t a big deal. Because they were willing to include even the small flaws in their description before we purchased, we felt more confident that they had thoroughly described the vehicle.
If an offer appears abnormally good, your prospects will start asking themselves, “What’s the catch?” Instead of making them wonder, tell them yourself. By being up front with your prospects regarding drawbacks and Trade-offs, you’ll enhance your trustworthiness and close more sales.
Your primary job as a salesperson is to identify and eliminate barriers standing in the way of completing the Transaction. Eliminate your prospect’s objections and barriers, and you’ll close the deal.
There are five standard objections that appear in sales of all kinds: 1. It costs too much. Loss Aversion makes spending money feel like a loss—by purchasing, the prospect is giving something up, and that naturally makes people hesitate. (Some people even experience this sense of loss after they make a purchase decision, a condition called “buyer’s remorse.”) 2. It won’t work. If the prospect thinks that there’s a chance the offer won’t (or can’t) provide the promised benefits, they won’t purchase. 3. It won’t work for ME. The prospect may believe that the offer is capable of providing benefits to other people but that they’re different—a special case. 4. I can wait. The prospect may believe they don’t have a problem worth addressing right now, even if it’s very clear to you that they do. 5. It’s too difficult. If the offer takes any effort whatsoever on their part, the prospect may believe that their contribution will be too hard to manage.
To overcome these objections as quickly as possible, it makes sense to build them into the structure of your initial offer. Since these objections are very common, anything that you can do to alleviate them before the prospect considers the offer will make the sales process much easier.
Objection #1 (“it costs too much”) is best addressed via Framing and Value-Based Selling. If you’re selling a piece of software to a business that can save them $10 million a year, and you’re asking $1 million a year for a license, your software isn’t expensive—it’s effectively Free. If it’s clear that the value of your offer far exceeds the asking price, this objection is moot. Objections #2 and #3 (“it won’t work” / “it won’t work for me”) are best addressed via Social Proof—showing the prospect how customers just like them are already benefiting from your offer. The more like your prospect your stories and testimonials are, the better. That’s why Referrals are such a powerful sales tool—customers tend to refer people who have similar situations and needs, and the Referral itself helps break down these objections. Objections #4 and #5 (“I can wait” / “it’s too difficult”) are best addressed via Education-Based Selling. Often, your prospects haven’t fully realized they have a problem, particularly in the case of Absence Blindness. If the business doesn’t realize it’s losing $10 million in the first place, it’s it’s difficult to convince them that you can help. The best way to get around this is to focus your early sales efforts on making your customers smarter by teaching them what you know about their business, then helping them Visualize what their involvement would look like if they decide to proceed.
Once you have the prospect’s Attention and Permission, there are two possible tactics if they still have these objections: (1) convince the prospect that the objection isn’t true, or (2) convince the prospect that the objection is irrelevant. The approach you’ll use depends on the objection raised, but some combination of Framing, Value-Based Selling, Education-Based Selling, Social Proof, and Visualization will usually do the trick.
If the prospect still doesn’t buy, that typically means there’s a Power issue—your negotiating partner may not have the budget or the budget or the authority to agree to your proposal.
When it comes to closing sales, you are that risk. In every transaction, the purchaser is taking on some risk. What if this doesn’t work as promised? What if it doesn’t meet their needs? What if purchasing from you is a waste of money? These questions are always in the back of your prospect’s mind as they’re considering purchasing from you. If you don’t eliminate these questions, it’s very likely they’ll ruin the sale. 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.
Reactivation campaigns are consistently the easiest and most profitable marketing activities you’ll ever try. Make it a priority every three to six months to contact your lapsed customers with another offer to see if you can encourage them to start buying again, and you’ll be amazed by the results.
The more happy customers a business creates, the more likely it is that those customers will purchase from the company again. Happy customers are also more likely to tell others about what you do, improving your Reputation and bringing in even more potential customers.
Great design is eliminating all unnecessary details.
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.” The more distribution a Product has, the more sales the business is likely to make—the more stores selling the Product, the more opportunities for sales. Intermediary distribution can increase sales, but it requires giving up a certain amount of control over your Value Delivery process.
Zappos could easily advertise “free expedited shipping,” but they don’t—the surprise is far more valuable. A customer’s perception of quality relies on two criteria: expectations and performance. You can characterize this relationship in the form of a quasi-equation, which I call the Expectation Effect: Quality = Performance - Expectations.
The best way to consistently surpass expectations is to give your customers an unexpected bonus in addition to the value they expect.
There are three primary factors that influence the Predictability of an offer: uniformity, consistency, and reliability. Uniformity means delivering the same characteristics every time.
Consistency means delivering the same value over time.
Reliability means being able to count on delivery of the value without error or delay.
Throughput is a measure of the effectiveness of your Value Stream.
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.
Satisfaction Throughput is a measure of how much time it takes to create a happy, satisfied customer.
The best way to begin increasing Throughput is to start measuring it. How long does it take for your business system to produce a dollar of profit? How long does it take to produce another unit to sell, or a new happy customer? If you don’t know your Throughput, make it a priority to find out—measuring Throughput is the first step toward improving it.
McDonald’s knows how to Duplicate Big Macs. Starbucks knows how to Duplicate triple soy vanilla lattes. Here’s what McDonald’s and Starbucks have in common: both businesses can Duplicate entire stores, which is why there are thousands of each all over the world. Multiplication is Duplication for an entire process or System.
Scale is the ability to reliably Duplicate or Multiply a process as volume increases. Scalability determines your maximum potential volume. The easier it is to Duplicate or Multiply the value provided, the more scalable the business.
Assume the average Starbucks has the capacity to serve a hundred beverages an hour—any demand above that, and the store starts getting overcrowded. The solution? Build another Starbucks—even if it’s right across the street, not an uncommon sight in cities like New York.
At this very moment, a Toyota engineer somewhere in the world is making a very small change to the Toyota Production System, one of the most efficient manufacturing Systems in the world. Alone, the change may not look like much—a small tweak, a slight restructure, a bit of material or effort saved. Taken together, however, the effects are huge—Toyota employees implement over 1 million improvements to the Toyota Production System every year. It’s little wonder that Toyota is now the world’s largest and most valuable automotive manufacturer.
Eating a single candy bar isn’t a big deal, but eating hundreds of candy bars is. Fortunately, the opposite is true as well: small improvements in your diet, a little more exercise, and a little more sleep can have major effects on your health over time.
Making a small change to a scalable System produces a huge result. The effect of any improvement or system optimization is Amplified by the size of the system. The larger the system, the larger the result.
The best way to identify Amplification opportunities is to look for things that are constantly Duplicated or Multiplied.
Small changes to Scalable systems produce massive results.
Don’t focus on competing—focus on delivering even more value. Your competition will take care of itself.
Investing in Force Multipliers makes sense because you can get more done with the same amount of effort. If you need to dig the foundation to build a new house, a $10 shovel from your local hardware store will certainly work, but a backhoe will get the job done faster and easier. If building homes is your business, buying or leasing a backhoe is worth the cost.
Always choose the best tools that you can obtain and afford. Quality tools give you maximum output with a minimum of input. By investing in Force Multipliers, you free up your time, energy, and attention to focus on building your business instead of simply operating it.
The primary benefit of creating a system is that you can examine the process and make improvements. By making each step in the process explicit, you can understand how the core processes work, how they’re structured, how they affect other processes and systems, and how you can improve the system over time.
If you’re feeling overloaded, the best thing you can do to solve the issue is spend time creating good systems.
Finance is the art and science of watching the money flowing into and out of a business, then deciding how to allocate it and determining whether or not what you’re doing is producing the results you want. Accounting is the process of ensuring the data you use to make financial decisions is as complete and accurate as possible.
Business is not about what you make—it’s about what you keep. Profit is a very simple concept: it’s bringing in more money than you spend.
The more profitable the business, the better it will be able to handle Uncertainty and Change, and the more options it has to respond to the unforeseeable.
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) divided by Revenue) multiplied by 100= % Profit Margin.
Profit Margin is not the same as markup, which represents how the price of an offer compares to its total cost. Here’s the formula for markup: ((Price – Cost) divided by Cost) multiplied by 100= % Markup.
You can get anything you want in this life if you help enough other people get what they want. —ZIG ZIGLAR
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.
The minimization approach means that businesses should capture as little value as possible, as long as the business remains Sufficient. While this approach may not bring in as much short-term revenue as maximization, it preserves the value customers see in doing business with the company, which is necessary for the business’s long-term success. When something is a “good deal,” customers tend to continue to patronize the business and spread the word to other potential customers. When a business tries to maximize revenue by “nickel-and-diming” their customers or trying to capture too much value, customers flee.
Once, a powerful executive went on vacation—his first in fifteen years. As he was exploring a pier in a small coastal fishing village, a tuna fisherman docked his boat. As the Fisherman lashed his boat to the pier, the Executive complimented him on the size and quality of his fish. “How long did it take you to catch these fish?” the Executive asked. “Only a little while,” the Fisherman replied. “Why don’t you stay out longer and catch more?” the Executive asked. “I have enough to support my family’s needs,” said the Fisherman. “But,” asked the Executive, “what do you do with the rest of your time?” The Fisherman replied, “I sleep late, fish a little, play with my children, take a siesta with my wife, and stroll into the village each evening, where I sip wine and play guitar with my friends. I have a full and busy life.” The Executive was flabbergasted. “I’m a Harvard MBA, and I can help you. You should spend more time fishing. With the proceeds, you could buy a bigger boat. A bigger boat would help you catch more fish, which you could sell to buy several boats. Eventually, you’d own an entire fleet. “Instead of selling your catch to a middleman you could sell directly to the consumers, which would improve your margins. Eventually, you could open your own factory, so you’d control the product, the processing, and the distribution. Of course, you’d have to leave this village and move to the city so you could run your expanding enterprise.” The Fisherman was quiet for a moment, then asked, “How long would this take?” “Fifteen, twenty years. Twenty-five, tops.” “Then what?” The Executive laughed. “That’s the best part. When the time is right, you’d take your company public and sell all of your stock. You’d make millions.” “Millions? What would I do then?” The Executive paused for a moment. “You could retire, sleep late, fish a little, play with your children, take a siesta with your wife, and stroll into the village each evening to sip wine and play the guitar with your friends.” Shaking his head, the Executive bade the Fisherman farewell. Immediately after returning from vacation, the Executive resigned from his position.
Profits are important, but they’re a means to an end: creating value, paying expenses, compensating the people who run the business, and supporting yourself and your loved ones. Dollars aren’t an end in themselves: money is a tool, and the usefulness of that tool depends on what you intend to do with it.
Sufficiency is the point where a business is bringing in enough profit that the people who are running the business find it worthwhile to keep going for the foreseeable future. Paul Graham, venture capitalist and founder of Y Combinator (an early-stage venture capital firm), calls the point of sufficiency “ramen profitable”—being profitable enough to pay your rent, keep the utilities running, and buy inexpensive food like ramen noodles.
You can track financial sufficiency using a number called “target monthly revenue” (TMR). Since employees, contractors, and vendors are typically paid on a monthly basis, it’s relatively simple to calculate how much money you’ll need to pay out each month. Your target monthly revenue helps you determine whether or not you’ve reached the point of Sufficiency: as long as you bring in more than your TMR, you’re Sufficient. If not, you have work to do.
Cash tends to move in three primary areas: operations (selling offers and buying inputs), investing (collecting dividends and paying for capital expenses), and financing (borrowing money and paying it back). Cash Flow Statements usually track these sources separately to make it easy to see where the cash flows come from.
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. By matching each sale with the expenses incurred in the process of making that sale, it’s possible to see if you’re making a profit immediately, without unpleasant surprises. First, the company must change the way it accounts for expenses. Instead of recording revenue when cash flows in, and an expense when cash flows out, the company begins tracking revenue and expenses on what’s called an accrual basis. 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 one of the primary jobs of an accountant is to match revenue and expenses as accurately as possible. This is harder than it sounds: an incredible amount of judgment is required, and ambiguous areas are common. (If you’ve ever wondered what accountants do all day, this is a big part of the job.) The end result of this effort is an Income Statement, which is sometimes called a “Profit and Loss Statement,” “Operating Statement,” or “Earnings Statement.”
Income Statements are very useful: there’s a reason businesses go to the trouble of creating them. By matching expenses with revenue, it’s easier to look at the company’s profitability and make decisions that will improve the company’s bank account in the weeks and months to come.
A 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.
Profitability ratios indicate a business’s ability to generate Profit. The higher your revenue and the lower your costs, the higher your profitability 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. Other ratios, like “Interest Coverage,” calculate how much of the business’s profit goes to pay off interest on debt. 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 future capital investments.
The purpose of financial analysis isn’t to produce impressive-looking spreadsheets: it’s to make better decisions. If the data you’re examining doesn’t lead to changes that improve your business, you’re wasting your time.
Cost-Benefit Analysis is the process of examining potential changes to your business to see if the benefits outweigh the costs.
When conducting a Cost-Benefit Analysis, it’s important to include costs and benefits that aren’t purely financial. Noneconomic costs, like enjoyment, can play a large role in whether or not a project is worth pursuing. Google’s famous cafeteria benefits are a good example: the company provides free, high-quality food to employees around the clock. This policy looks like a huge cost until you consider the benefit: by providing breakfast, lunch, dinner, and snacks, the company is encouraging employees to be at work as much as possible. The cost is offset by the increase in productivity and team cohesion, which is very significant.
Believe it or not, there are only four ways to increase your business’s revenue: Increase the number of customers you serve. Increase the average size of each Transaction by selling more. Increase the frequency of transactions per customer. Raise your prices.
Remember the lesson of Qualification: not every customer is a good customer. Some customers will sap your time, energy, and resources without providing the results that you’re looking for.
Always focus the majority of your efforts on serving your ideal customers. Your ideal customers buy early, buy often, spend the most, spread the word, and are willing to pay a premium for the value you provide.
Pricing Power is important because raising your prices allows you to overcome the adverse effects of inflation and increased costs.
If you have a choice, choose a market in which you’ll have Pricing Power—it’ll be much easier to maintain Sufficiency over time.
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.
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. Having a high Lifetime Value even allows you to lose money on the first sale.
The first sale is sometimes called a “loss leader”—an enticing offer intended to establish a relationship with a new customer. Many Subscription businesses use loss leaders to build their subscriber base.
To calculate your market’s Allowable Acquisition Cost, start with your average customer’s Lifetime Value, then subtract your Value Stream costs—what it takes to create and deliver the value promised to that customer over your entire relationship with them. Then subtract your Overhead divided by your total customer base, which represents the Fixed Costs you’ll need to pay to stay in business over that period of time. Multiply the result by 1 minus your desired Profit Margin (if you’re shooting for a 60 percent margin, you’d use 1.00 − 0.60=0.40), and that’s your Allowable Acquisition Cost.
Beware of little expenses; a small leak will sink a great ship. —BENJAMIN FRANKLIN
That’s why investors and savvy entrepreneurs watch the business’s “burn rate” very closely—the slower the burn, the more time you have to create a successful business. The lower your Overhead, the more flexibility you’ll have and the easier it will be to sustain your business operations indefinitely.
Reductions in Fixed Costs Accumulate; reductions in Variable Costs are Amplified by volume.
Cutting costs that are wasteful or unnecessary is certainly a good idea, but Diminishing Returns always kick in—be careful not to throw the baby out with the bath water. Creating and delivering more value is a much better way to enhance your bottom line.
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.
Your Breakeven point will change constantly. Revenue naturally fluctuates, as do expenses.
Amortization is the process of spreading the cost of a resource investment over the estimated useful life of that investment.
Amortization can help you determine whether or not a big expense is a good idea. As long as you have a reliable estimate of how much it will cost and how much you can produce, Amortization helps you figure out whether or not investing large amounts of Capital makes sense.
Amortization depends on an accurate assessment of useful life, which is a prediction. Amortization doesn’t work well if you don’t sell what you produce or if your equipment wears out more quickly than expected.
Purchasing Power is the sum total of all liquid assets a business has at its disposal. That includes your cash, credit, and any outside financing that’s available.
The Cash Flow Cycle describes how cash Flows through a business.
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.
To bring cash in more quickly, it’s best to speed up collections and reduce the extension of credit. The faster you get paid, the better your cash flow situation. Ideally, try to get paid immediately, even before buying raw materials and delivering value. It’s common in many industries to extend credit to customers, but that doesn’t mean you have to as well. Always remember that you’re a business, not a bank (unless your business involves Loans)—collect any outstanding payments as quickly as possible.
Let’s say you decide to quit your $50,000-a-year job and start a business. Starting the business will certainly have costs of its own, but it will also cost you the $50,000 you would have made had you stayed at your job.
Whenever you invest time, energy, or resources, you’re implicitly choosing not to invest that time, energy, or resources in any other way. The value that would have been created by your next best alternative is the Opportunity Cost of that decision.
Calculating the Time Value of Money is a way of making Decisions in the face of Opportunity Costs. Assuming you have various options of investing funds with various returns, the Time Value of Money can help you determine which options to choose and how much you should spend, given the alternatives.
The central insight that a dollar today is worth more than a dollar tomorrow can be extended to apply to many common financial situations.
Improve by 1% a day, and in just 70 days, you’re twice as good.
A simple example of Compounding is a savings account. Let’s say your bank account earns 5 percent interest. After a year, $1 in your bank account is going to be worth $1.05. In year two, you don’t start with $1—you start with $1.05. In year three, you’ll have $1.10. In year four, you’ll have $1.15. Fourteen years after you make the initial deposit, you’ll have $2. That doesn’t sound like much until you consider that this relationship Scales. If you start with $1 million, you’ll have $2 million after fourteen years. Not bad at all.
Compounding is the secret that explains how small companies that reinvest their profits become large companies in a few short years.
The trick is to be patient enough to wait for the reward.
Leverage is the practice of using borrowed money to magnify potential gains. Here’s an example: let’s assume you have $20,000 you’d like to invest in real estate. You could use that money as a 20 percent down payment on a $100,000 property, borrowing $80,000, but that ties up all of your money in a single investment. Instead of using the $20,000 for a single down payment, you could take the same pool of money and invest in four $100,000 properties, each with a down payment of $5,000. That strategy requires borrowing $95,000 four times—a total of $380,000 in loans. Here’s where the magic happens. Let’s assume all of the properties double in value, and you sell them. In the first scenario, you’d make $100,000 on a $20,000 investment—a 5x return on your $20,000 down payment. In the second scenario, you’d make $400,000 on the very same $20,000 down payment—a 20x return on investment. Leverage seems like a no-brainer, right? Not so fast—what will happen if the value of each property drops dramatically, and you sell them all to get back as much money as possible? Assuming the property value drops by 50 percent, in the first scenario you’d lose $50,000. In the second scenario, the use of Leverage will magnify your losses to $200,000—four times as much. Leverage is a form of financial Amplification—it magnifies the potential for both gains and losses. When your investment pays off, Leverage helps it pay off more. When your investment tanks, you lose more money than you would otherwise. One of the major contributing factors of the recession of 2008–9 was the use of enormous amounts of Leverage by investment banks. It wasn’t uncommon for banks to Leverage their investments by a factor of thirty or forty.
Funding is the business equivalent of rocket fuel. If your business needs additional capacity and is already pointed in the right direction, judicious use of financing can help you accelerate the operation’s growth. If the business has structural issues, it will explode, and not in a good way. In order to obtain access to Funding, it’s often necessary to give up a certain amount of control over the business’s operations.
Personal Cash is by far the best form of financing. Investing cash you already own is quick, easy, and requires no approval or paperwork. Most entrepreneurs begin by financing themselves out of cash as much as possible. Personal Credit is another low-cost method of financing. As long as your needs don’t exceed a few thousand dollars, it’s easy to finance expenses via Personal Credit. Approval is generally quick if you have good credit, and payment over time helps increase your cash flow.
Personal Loans are typically made by friends and family. If you need more money than you can cover via Personal Cash and Personal Credit, loans from friends and family are not uncommon. Just be wary: the risk that you won’t be able to pay them back is very real and can have a devastating effect on important personal relationships.
Unsecured Loans are typically made by banks and credit unions. You fill out an application, ask for a certain amount of money, and the bank will evaluate your ability to pay the loan back with interest over a certain time period. The loan can be either a lump sum or a line of credit that can be used at any time. The bank doesn’t ask for collateral for smaller amounts (a few thousand dollars), so the interest rate will probably be a bit higher than a credit card or secured loan.
Secured Loans require collateral. Mortgages and automotive loans are good examples of secured loans: if you don’t make the payments, the lender can legally seize the property promised as collateral. Because the lender can then sell that property to recoup their funds, Secured Loans are much larger than unsecured Loans: tens or hundreds of thousands of dollars.
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.
The legal and regulatory process that surrounds the Bond market can be extremely complicated, so Bond issues are typically conducted through an investment bank.
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.
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.
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 here’s typically a great deal of negotiation involved.
Investors increase Communication Overhead, which can adversely affect your ability to get things done quickly.
(Happy is he who owes nothing.) —ROMAN PROVERB
How much financing you need depends largely on what you’re trying to do. If you’re grasping for the brass ring—becoming obscenely wealthy by building a massive public company—you’ll probably need financing. If your intent is to be self-sufficient and free to make your own decisions, it’s much better to avoid financing in favor of retaining control.
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.
For best results, Bootstrap as far as you can go, then move up the Hierarchy of Funding only as needed.
“Return on Invested Time” is an extremely useful way to analyze the benefits of your effort. If you were forced to work twenty-four hours a day nonstop for a year in exchange for $1 million, would you do it? When you look at the return versus the cost to your time and sanity, it’s not worth it.
Sunk Costs are investments of time, energy, and money that can’t be recovered once they’ve been made. No matter what you do, you can’t get those resources back. Continuing to invest in a project to recoup lost resources doesn’t make sense—all that matters is how much more investment is required versus the reward you expect to obtain. Sunk Cost is easy to understand conceptually but much harder to put into practice.
In reality, there’s nothing you can do about your past investment—it’s gone. All you can do is act based upon the information you have now.
Don’t continue to pour concrete into a bottomless pit—if it’s not worth the additional investment, walk away. You never have to earn back money in the same way you lost it. If the reward isn’t worth the investment required to obtain it or the risk, don’t invest.
Internal Controls are a set of specific Standard Operating Procedures a business uses to collect accurate data, keep the business running smoothly, and spot trouble as quickly as possible.
Auditing is necessary to find and correct errors, particularly in large businesses with many moving parts. Auditing helps ensure the quality of the company’s data and can increase the confidence of lenders, investors, shareholders, and regulatory bodies regarding the business’s practices. In all cases, the auditing party should have no interest in the outcome: this “separation of concerns” helps ensure the results are accurate, particularly if they’re not pretty.
Industry groups can also be a useful source of data. Many markets have trade associations that collect and share information about successful businesses. By comparing your business’s data to that of other companies in your market, you can get a better picture of how well you’re performing and where your business could use improvement.
Once you have a clear picture of how the human mind works, it’s easy to find better ways to get things done and work more effectively with others.
Don’t be too hard on yourself—you simply weren’t built for the type of work you’re currently responsible for. No one is—we’re all running demanding new software on ancient hardware.
If you want to do good work, taking care of yourself isn’t optional. If you don’t give your body what it needs to run, you’ll run out of gas long before you reach your goals. Your mind is first and foremost a physical system. Oftentimes, what we experience as mental fatigue or emotional distress is simply a signal from our body that we’re not getting enough of something we physically need: nutrients, exercise, or rest.
Use caffeine in moderation—herbal tea is a good substitute for soda, and carrying a water bottle makes it much easier to stay hydrated.
Exercise regularly. According to Brain Rules by John Medina, even low-intensity physical activity increases energy, improves mental performance, and enhances your ability to focus. Going for a walk or run, jumping rope, or doing a bit of yoga can help clear the cobwebs in your mind and give you more energy for the rest of the day.
Get at least seven to eight hours of sleep each night. Sleep helps consolidate the results of Pattern Matching and Mental Simulation, as well as reverse the effects of Willpower Depletion —so don’t skimp on rest. I find it useful to set an alarm to remind me to go to bed, giving me enough time to wind down before retiring for the night.
Getting as little as ten minutes of sunlight in the morning is a very easy way to improve both your sleep and your mood.
Fortunately, “you” are not that voice. “You” are only a small part of your brain. The voice in your head is just a radio announcer, commenting on what your brain is doing automatically. It is not you—your consciousness is actually what your brain uses to solve problems it can’t handle on autopilot.
Most of the time, our midbrain and hindbrain run the show—we’re operating on instinct and autopilot. That changes, however, when we face something unexpected or unfamiliar, which confounds the midbrain’s ability to predict what will happen next. That’s when the forebrain kicks into gear, gathering data and considering options.
One of the best things you can do to get more done is to dissociate yourself from the voice in your head. The radio announcer has the attention span of a two-year-old after drinking a triple espresso. Its job is to highlight things in your environment you may be interested in paying attention to—things that may fulfill one of your Core Human Drives or present some danger. That doesn’t mean the voice is always right, or that you must take everything it says as gospel truth. Meditation is a simple practice that can help you separate “you” from the voice in your head. There’s nothing mystical or magical about meditation—you simply breathe and watch what your “monkey mind” does without associating yourself with it. After a while, the voice becomes quieter, improving your ability to keep yourself on the course you choose.
If you’re interested in learning to meditate, I recommend Mindfulness in Plain English by Bhante Henepola Gunaratana.
Control is not planning—it’s adjusting to changes in the Environment as they actually happen.
A good example of why the stimulus/response model doesn’t paint the whole picture is the classic incentive of many employers: paid overtime. If you want your hourly employees to work more, you should pay more overtime, right? Not necessarily. Workers who are controlling for income (i.e., they don’t have enough and want more) will probably work more overtime, but what about workers who already feel they’re making enough money or have priorities that are more important than work? A few of those workers will work exactly the same amount of time, and some will actually work less—they’re controlling for a certain amount of income, then spending their time doing other things that are important to them, like being with their family or pursuing a side project. Raising overtime pay will allow them to reach that point more quickly, so they’ll spend less time at work. The overtime incentive produces three different results, two of which are complete opposites-working more and working less. So much for behaviorism.
Once you understand that people act to control their perceptions, you’ll be better equipped to influence how they act.
Action comes about if and only if we find a discrepancy between what we are experiencing and what we want to experience.
If you’re aware that your expenses will be three times what they were last month because you’re launching a huge marketing campaign, your finances are no longer out of control. If you’re in the process of getting a tattoo, pain receptors firing is an acceptable situation. The perceptions themselves haven’t changed, but you’ll no longer act to bring the perception under control because it already is under control. Changing the Reference Level changes the behavior of the system.
If you think your weight, health, and physique are just fine, you probably won’t change your diet or start exercising spontaneously. If you’re comfortable with your social circle and confidence, you probably won’t do much to improve your social skills or expand your circle of acquaintances. If you think you’re making enough money, you probably won’t do much to earn more.
Your environment will eat your goals and plans for breakfast. —STEVE PAVLINA, AUTHOR OF PERSONAL DEVELOPMENT FOR SMART PEOPLE
Guiding Structure means the structure of your Environment is the largest determinant of your behavior. If you want to successfully change a behavior, don’t try to change the behavior directly. Change the structure that influences or supports the behavior, and the behavior will change automatically.
If your mind hasn’t already learned what to do in a certain situation, the best way to solve the problem is to try new things in an effort to gather data. That’s what Reorganization is for-it’s the impulse to consider or try new things to see what works.
What’s particularly frustrating are the times we know we have time to get something done in advance, but we just don’t feel like doing it right now. Part of us wants to work, and part of us wants to not work. If you try to force yourself to work, you find that you’re so easily distracted that not much gets done. If you try to rest, part of you feels bad that you’re not working, which means you’re not really resting. Entire days can pass where you neither really work nor really rest, but you feel exhausted from the effort of getting nothing done. What gives? Conflicts occur when two control systems try to change the same perception. When you’re procrastinating, one of your brain’s subsystems is trying to control “getting things done,” while another is trying to control “getting enough rest.”
Attempting to resolve a Conflict by simply calling attention to unacceptable behavior is ineffective in the same way that willpower can’t change behavior directly—it’s not addressing the root cause of the Conflict.
In the case of procrastination, Conflict can be ended by scheduling firm times for work and rest, ensuring enough of each. In The Now Habit, Neil Fiore recommends creating an “unschedule” that prioritizes rest over work. When your brain is sure that you’ll be receiving all of the relaxation and enjoyment you need, and that you only have a certain amount of time to get things done, it’s easier to focus on doing productive work.
Humans learn patterns primarily via Experimentation.
Pattern Matching is one of the primary reasons experienced people tend to make better decisions than inexperienced people—they’ve learned more accurate patterns via their experience. Having a larger mental database to draw from is what gives experts their expertise.
Without supplying a Goal, the system can’t operate. The same rule applies to Mental Simulation— no destination, no simulation. Mental Simulation is particularly powerful if you learn how to harness it consciously.
Reinterpret your past, and you’ll enhance your ability to make great things happen in the present.
You can break down the experience of Motivation into two basic desires: moving toward things that are desirable and moving away from things that aren’t.
In general, “moving away” takes priority over “moving toward.” The reason comes back to Caveman Syndrome—running away from a lion automatically takes priority over cooking lunch.
In the same vein, you can’t “motivate” other people by yelling at them to work faster—all the drill-sergeant approach accomplishes is making them want to move away from you. They may comply with you temporarily if they perceive some threat to themselves if they don’t, but you can bet that they’ll move away from working with you at the first available opportunity. Eliminate the inner conflicts that compel you to move away from potential threats, and you’ll find yourself experiencing a feeling of Motivation to move toward what you really want.
Whenever we inhibit our natural responses to our Environment, Willpower is at work. Our midbrain and hindbrain are the autopilot, and the forebrain is the override.
If you don’t want to slip, don’t go where it’s slippery.
Our ability to successfully use Willpower for self-control tasks is dependent on a physiological fuel: blood glucose. Acts of Willpower Deplete relatively large amounts of glucose, and when those stores run low, we have a hard time using Willpower to inhibit behavior. That’s why it’s difficult to resist dishing up a bowl of ice cream at 8:30 p.m. when you’re on a diet—by then, your stores of Willpower are long gone.
Instead of constantly relying on my Willpower to get this book done, I used a small amount of Willpower to alter my Environment by installing an application called Freedom on my Mac. The program temporarily disables Internet connectivity on my laptop, making it impossible for me to connect to the Internet for a few hours.
Save your Willpower: focus on using it to change your Environment, and you’ll have more available to use whenever Inhibition is necessary.
People respond twice as strongly to potential loss as they do to the opportunity of an equivalent gain.
Loss Aversion explains why threats typically take precedence over opportunities when it comes to Motivation.
The mere possibility of bad things happening grinds businesses to a halt at the very time increased productivity is needed to keep the firm in good shape. Instead of focusing on doing good work, employees spend most of their time and energy worrying about what the future holds and gossiping about who’s next on the chopping block, decreasing the overall amount of value created and increasing the likelihood that the firm’s future will get worse. Threat Lockdown can easily become a vicious cycle. If you’re ever in the unfortunate situation of having to lay off workers, it’s best to do it quickly, cleanly, and all at once. It’s best to make cuts swiftly, then reassure remaining employees that no more cuts will be made. Rumors of layoffs or workers constantly wondering “if I’ll be next” is a recipe for Threat Lockdown.
Sometimes it’s difficult to defuse Threat Lockdown, particularly if you’ve been in it for a long time. Because protective mode is physiological, it’s often best to use physiological means to calm yourself down. Exercise, sleep, and meditation can help calm your mind by metabolizing or counteracting the stress hormones that have been flooding your body. When you’re feeling overwhelmed, going for a quick run or lifting weights can do wonders for your state of mind.
“Dunbar’s number” is a theoretical cognitive limit on the number of stable social relationships humans can maintain at one time. According to Robin Dunbar, a British anthropologist, humans have the cognitive capacity to keep track of somewhere around 150 close personal connections. Beyond this limited circle, we start treating people less like individuals and more like objects, and groups of people beyond this limit are likely to splinter off into subgroups over time.
There’s some controversy regarding the actual quantity of connections where Cognitive Scope Limitation kicks in (the Bernard-Killworth median, a competing estimate, is 231), but there’s little doubt that such a limit exists. When a disaster strikes somewhere around the world that affects millions of people, we may feel bad, but we don’t feel a million times what we would feel if that disaster directly affected a close friend or family member. The more remote the connection, the less such an impact affects us individually. The tourists in Times Square aren’t evil—they’re just overwhelmed. Over 364,000 people pass through Times Square every day, and our minds simply aren’t capable of handling that much information at once. Abstractly, these people still realize that you’re a human being, but there’s so much going on in the area that it’s difficult to treat you like one. The mind gets overwhelmed, so it starts simplifying reality to compensate. The same thing happens to executives of large companies. Rationally, they may be aware that they’re responsible for hundreds of thousands of employees and millions of shareholders, but no matter how intelligent they are, their brains simply aren’t capable of processing the magnitude of that reality.
Instead of abstractly considering the issue, personalizing it makes it easier to feel the effects of the decision viscerally, which makes it easier to make better decisions.
The “newspaper rule” and “grandchild rule” are effective ways of personalizing the results of your decisions. The “newspaper rule” is a simulation of the following: assume your decision was publicized on the front page of tomorrow’s New York Times, and your parents and/or significant other read it. What would they think? Imagining the personal consequences of your decisions in this way is a much more accurate way to evaluate the impact of short-term decisions. The “grandchild rule” is a way of evaluating decisions with long-term consequences. Imagine that, thirty or forty years from now, your grandchild gives you feedback on the results of your decision. Will they laud you for your wisdom or reprimand you for your stupidity?
The problem is, no one sees all of the bad things that the great manager prevents. Less skilled managers are actually more likely to be rewarded, since everyone can see them “making things happen” and “moving heaven and earth” to resolve issues—issues they may have created themselves via poor management.
The only reliable way I’ve found to overcome Absence Blindness is Checklisting. By thinking in advance what you want something to look like and translating that into visible reminders you can refer to while making decisions, checklists can help you remember to look for the absence of qualities in the moment.
Framing is a way to control the perception of Contrast. For example, I often use the phrase “$149,000 less than a top-tier business program” when marketing my business courses. Compared with buying a book, my course looks expensive; compared with the cost of an MBA program, it’s a bargain.
The way to love anything is to realize it might be lost.
Here are a few ways you can add an element of Scarcity to your 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.
Scarcity that appears blatantly artificial can backfire. For example, putting an artificial limit on sales of e-books, downloadable software, or electronic music files makes no sense—everyone knows electronic files can be Duplicated infinitely at essentially no cost, so the scarcity feels manipulative, which makes people want to buy from you less.
Here’s what Mackworth found: after ten minutes of staring at the clock, the quality of the subject’s attention went down dramatically. The maximum period of sustained attention even highly motivated operators (who were given substantial bonuses for performance) were able to sustain was thirty minutes—any longer, and they’d inevitably zone out.
One of the reasons people can focus on playing games or surfing the Internet for hours at a time is novelty—every new viral video, blog post, Facebook update, Twitter post, and news report reengages our ability to pay attention.
In Brain Rules, John Medina shares how he’s able to keep the attention of his students effectively in classes that last more than an hour: he plans his class in modules that last no more than ten minutes. Each module starts with a Hook—an interesting story or anecdote, followed by a brief explanation of the key concept. Following this format ensures that his audience retains more information and doesn’t zone out. (That’s the primary reason this book is organized in short sections that take less than ten minutes to read.) Even the most Remarkable object of attention gets boring over time. Human attention requires novelty to sustain itself.
Learning how to work effectively and efficiently can be the difference between a fulfilling career and a draining one.
All of us have had the experience of knowing or feeling that we should do something or that an action would be in our best interest…but we don’t do it. The term for that experience is Akrasia.
Most people experience Akrasia when considering changing Habits they no longer want (“I should quit smoking”), taking a new action (“I should donate to that nonprofit”), or contemplating an uncomfortable topic (“I should look into life insurance and talk to a lawyer to write a will”). The “should” feeling sticks around, but never leads to action, generating intense frustration.
In my experience, Akrasia has four general parts: a task, a desire/want, a “should,” and an emotional experience of resistance. Within this framework, there can be many potential sources of resistance:
Turning off my Internet connection while I’m writing also makes it much easier for me to maintain a Monoideal state. Otherwise, I’m way too likely to browse the Web when the going gets tough.
Kick-start the Attention process by doing a “dash.” Since it can take ten to thirty minutes to get into the zone, setting aside ten to thirty minutes for a quick burst of focused work can make it much easier to get into the zone quickly. If you’re not productive by the time the dash is over, you have permission to stop and do something else.
Here’s how the technique works: Set a kitchen timer for twenty-five minutes. Your job is to focus on a single task for the entire duration—if you get stuck, just keep focusing until the timer goes off. After the twenty-five-minute work period is over, you can take a five-minute break, bringing the total duration to half an hour—a block of time any of us can fit into our schedule here and there. What I love about the Pomodoro Technique is that it accomplishes two goals at once: it makes it easy to get started, and it gives you permission to ignore distractions.
The best approach to avoid unnecessary cognitive switching is to group similar tasks together. For example, I find it difficult to make progress on creative tasks (like writing or shooting training videos) between client calls. Instead of attempting to juggle both responsibilities at the same time, I batch them together. I typically focus on writing for a few uninterrupted hours in the morning, then batch my calls and meetings in the afternoon. As a result, I can focus on both responsibilities with my full Attention.
Eliminate unproductive context switching, and you’ll get more done with less effort.
I am only one, but I am one. I cannot do everything, but I can do something. And because I cannot do everything, I will not refuse to do the something I can do. What I can do, I should do. And what I should do, by the grace of God, I will do. —EDWARD EVERETT HALE, NINETEENTH-CENTURY UNITARIAN CLERGYMAN AND WRITER
There are really only four ways to “do” something: completion, deletion, delegation, and deferment.
If you don’t have anyone to delegate routine tasks to, working with a virtual assistant company can be quite useful. For less than $100 a month, you can enlist the help of a team of professionals to help you get things done. If you have little experience with delegation, it’s an experiment worth trying.
A Most Important Task (MIT) is a critical task that will create the most important results you’re looking to achieve. Everything on your plate is not critically important, so don’t treat everything on your task list equally. By taking a few minutes to identify a few tasks as particularly important, you’ll make it easier to focus on achieving them first. At the beginning of every day, create a list of two or three MITs, then focus on getting them done as quickly as possible. Keep this list separate from your general to-do list or task tracking system.
Combining this technique with Parkinson’s Law by setting an artificial deadline is extremely effective. If you set a goal to have all of your MITs done by 10:00 a.m., you’ll be amazed at how quickly you can complete the day’s most important tasks.
Well-formed Goals accomplish two things: they help you visualize what you want and make you excited about achieving it. A Goal is a statement that clarifies precisely what you want to achieve, which makes it easy for your brain to use Mental Simulation to Visualize what achieving that Goal looks like.
Goals like “losing twenty pounds” are soul crushing because they’re not directly under your control—losing weight is a result, not an effort. If your weight randomly moves up a few pounds on a given day, it’s easy to feel defeated, even though you had no choice in the matter. For best results, make your Goals actions that are within your Locus of Control, like doing a minimum of thirty minutes of exercise every day and controlling the number of calories you consume.
A State of Being is a quality of your present experience. Emotional experiences aren’t achievements because they fluctuate over time—you can be happy right now and upset an hour from now. Accordingly, “being happy” is not an achievement—it’s a quality of your present experience.
Breaking down “happiness” into its component parts helps me ensure I’m doing things that will help me experience it more fully and more often.
Habits are easier to install if you look for triggers that signal when it’s time to act.
Once you’ve Primed your mind to notice important concepts, you can work your way through the entire book at lightning speed. As you read, your brain automatically filters out unimportant material and homes in on the material you’re particularly interested in learning.
One of the ways people “get lucky” when they’re working toward a particular Goal is via Priming.
Take some time to consciously Prime your brain to notice what’s important to you, and you’ll inevitably find it.
The Five-Fold Why is a technique to help you discover what you actually want. Instead of taking your desires at face value, examining the root cause of what you want can help you define your core desires more accurately.
The Five-Fold How is a way to connect your core desires to physical actions. Let’s use the previous example: the core desire is to feel free. How would you go about doing that? 1. Paying off an outstanding debt 2. Reducing your work hours, finding another position, or becoming an entrepreneur 3. Moving to a new city or country 4. Breaking off a restricting personal relationship
Connect your big Goals to small actions you can take now, and you’ll inevitably achieve what you set out to accomplish.
The Next Action is the next specific, concrete thing you can do right away to move a project forward.
David Allen, the author of Getting Things Done, coined the term to describe one of the core steps of his “fundamental process”: 1. Write down a project or situation that is most on your mind at this moment. 2. Now describe in a single written sentence your intended desired outcome for this problem or situation. What needs to happen to mark this “done”? 3. Next, write down the very next physical action step required to move the situation forward. 4. Put those answers in a system you trust. According to Allen, these questions help you clarify exactly what “done” and “doing” look like. If you define what “done” looks like, you can focus your attention and energy on “doing” the things that will get you to “done.”
Focus on completing the Next Action, and you’ll inevitably complete the entire project.
Words are a lens to focus one’s mind. —AYN RAND, PHILOSOPHER AND AUTHOR OF ATLAS ATLAS SHRUGGED
One of the quirks about how your mind works is that it handles information from outside your head better than the thoughts that are rattling around inside your head. If you’ve ever worked with a personal trainer or coach, you know what I mean. When exercising by yourself, it’s very easy to listen to the little voice inside your head that says, “This really hurts—you should stop”—even if you’ll get better results by continuing. When working with someone else, the little voice goes away, since there’s a person in your Environment who’s encouraging you to push yourself just a little bit more. As a result, you get a better workout.
Since we respond more easily to stimuli in our Environment than our own internal thoughts, there’s a simple method we can use to improve our productivity—we can convert our internal thoughts into an external form our minds can use more effectively.
By converting our internal thought processes into an external form, Externalization essentially gives us the ability to reinput information into our own brains via a different channel, which gives us access to additional cognitive resources we can use to process the same information in a different way. There are two primary ways to Externalize your thoughts: writing and speaking.
Not only does writing give you the ability to store information in a form you can reference later, it gives your mind the opportunity to examine what you know from a different angle. Challenges and issues that seem insurmountable while they’re bouncing around in your frontal lobe can often be solved surprisingly quickly after they’re put on paper.
Notebooks and journals, regularly used are worth their weight in gold.
Speaking—to yourself or to another person—is another effective method of Externalization. Vocal Externalization explains why most of us have had the experience of solving our own problems while talking with a friend or colleague. By the time you’re done talking, you’re likely to have more insight into your problem—even if your listener didn’t say a word. The key to vocal Externalization is to find an audience who is Willing to listen patiently and avoid interrupting you as you talk through an issue.
Self-Elicitation is the practice of asking yourself questions, then answering them. By asking yourself good questions (or working with someone who asks good questions), you can grasp important insights or generate new ideas very quickly.
By recording answers to the following questions in a journal, logging when specific behaviors occur, and noting the frequency or duration of those behaviors, it’s possible to discover patterns in your behavior or thought processes. Once you know the pattern, it’s easier to change the behavior. ANTECEDENT —When did it happen? —Whom were you with? —What were you doing? —Where were you? —What were you saying to yourself? —What thoughts were you having? —What feelings were you having? BEHAVIOR —What were you saying to yourself? —What thoughts did you have? —What feelings were you having? —What actions were you performing? CONSEQUENCES —What happened as a result? —Was it pleasant or unpleasant?
Once you have a working list of questions, you can follow up with related questions that will help you find answers, like “Who can I ask?” “What could I read?” and “What could I try?”
Counterfactual—“what if”—questions allow you to directly access your brain’s simulation capabilities. You can think of Counterfactual Simulation as applied imagination—you’re consciously posing a “what if” or “what would happen if” question to your mind, then sitting back and letting your brain do what it does best.
All you have to do is suspend judgment, pose the question, and wait for the answer. Counterfactual Simulation is one of our most powerful (and underused) capabilities. Instead of waiting for your brain to simulate a potential course of action, Counterfactual Simulation allows you to “force” your brain to run the simulations you want it to run.
When you actually examine your worst fears, you’ll discover that things won’t be as bad as you fear. Creating a Doomsday Scenario is the equivalent of giving a small child who is afraid of monsters under their bed a flashlight—by shedding some light on the subject of their fears, they realize there’s nothing to be afraid of. By intentionally Externalizing and defining your worst fears, you’re exposing them as what they really are: irrational overreactions. More often than not, you’ll discover that you were scared of something that doesn’t really matter. Even if something bad goes wrong, it’s not really going to be as bad you think. As soon as you realize you’re not going to die, you’re free to do much more than you previously dared to do.
The more incompetent a person is, the less they realize they’re incompetent. The more a person actually knows, the better their ability to self-assess their capabilities, and the more likely they are to doubt their capabilities until they have enough experience to know they’ve mastered the subject.
A certain amount of humility is a valuable self-correcting quality. Overconfidence sometimes produces greatness, but it’s a high-risk bet—without guidance, you’re far more likely to find yourself in a bad situation. Cultivating a healthy amount of humility can keep you from assuming you know everything there is to know about everything, then painfully discovering otherwise.
Padding your team with yes-men is deadly because people who always agree with you can’t help you correct for this tendency—people who always support your decisions won’t prevent you from making huge mistakes. Cultivate relationships with people who aren’t afraid to tell you when you’re making questionable assumptions or going down the wrong path—they’re valuable friends indeed.
Paradoxically, one of the best ways to figure out whether or not you’re right is to actively look for information that proves you’re wrong. Confirmation Bias is the general tendency for people to pay Attention to information that supports their conclusions and ignore information that doesn’t. No one particularly likes to learn they’ve made a bad decision, so we tend to filter the information we pay Attention to.
Don’t feel bad about things that you “should have seen” or “should have done.” Changing the past is outside of your Locus of Control, so there’s no sense in wasting energy on self-doubt, wondering what might have been. Hindsight Bias becomes destructive if you negatively judge yourself or others for not knowing the unknowable. As the saying goes, “Hindsight is 20-20.” Reinterpret your past mistakes in a constructive light, and focus your energy on what you can do right now to move in a positive direction.
If you want to be productive, you must set limits. Juggling hundreds of active tasks across scores of projects is not sustainable: you’re risking failure, subpar work, and burnout. Remember Parkinson’s Law: if you don’t set a limit on your available time, your work will expand to fill it all. If you don’t draw the line somewhere, work will consume all of your energy, and you’ll inevitably burn out.
The default mind-set of many modern businesses is that “downtime” is inefficient and wasteful—workers should be busy all the time. Unfortunately, this philosophy ignores the necessity of handling unexpected events, which always occur. Everyone only has so many hours in a day, and if your agenda is constantly booked solid, it’ll always be difficult to keep up with new and unexpected demands on your time and energy.
The implicit assumption of time management systems is that every hour is fungible—equivalent to any other.
Your body has natural rhythms during the day, which I call Energy Cycles. Most people are familiar with the twenty-four-hour circadian rhythm, which wakes you up in the morning and makes you feel tired at night. Lesser known is the ninety-minute ultradian rhythm, which is described in The Power of Full Engagement by Jim Loehr and Tony Schwartz. The ultradian rhythm influences bodily systems, controlling the flow of hormones throughout your body. When your energy is on an upswing, you’re capable of focusing deeply and getting a lot accomplished. When it’s on a downswing, all your mind and body want to do is rest and recover. There’s nothing abnormal about these changes in energy during the day, but we often act as though being on a downswing is somehow a problem that needs to be fixed.
Here are four simple ways to work with your body instead of against it: 1. Learn Your Patterns, Maximize Your Peak Cycles, Take a Break When You’re In a Down Cycle, and Get Enough Sleep.
If Churchill could find time to paint in the middle of a world war, you can find time in your busy schedule to rest and recover doing something you enjoy.
The most happy and productive people I know all have something in common: they’re always trying new things to see what works.
Here’s a simple structure that will help you plan and track your Experiments: Observations—What are you observing in your life or business that you want to improve? Knowns—What have you learned from past Experiments that might be related to your observations? Hypotheses—Based on what you’ve observed, what situations or factors might cause or contribute to your observations? Tests—What will you try or change to improve your situation? Which hypotheses will this experiment Test? Results—What happened after each Test? Does it support or disconfirm the hypothesis?
No job, project, or position is flawless—every course of action has Trade-offs. Learning what they are in advance gives you a major advantage:
If thou wilt make a man happy, add not unto his riches but take away from his desires. —EPICURUS, ANCIENT GREEK PHILOSOPHER
The Hedonic Treadmill is a major problem if you’d like to experience a feeling of success or achievement for an extended period of time. It’s possible to work hard, invest, sacrifice, and push your way to the top of your field, only to find yourself restless and despondent. You’d be surprised at how many “successful” people aren’t happy with their lives, even after they’ve achieved everything they set out to do.
There are, however, a few things we can focus on that tend to lead to sustained levels of life satisfaction. Based on the available research, here are five priorities that will contribute to your long-term happiness in a way that minimizes hedonic adaptation: 1. Work to make “enough” money. Money contributes to happiness, but only to a certain point. According to a 2010 study by Daniel Kahneman and Angus Deaton, money has a positive correlation with reported levels of happiness up to an annual household income of approximately $75,000 per year, which represents an income in the top third of U.S. households in 2008–09, the years of the study. Reaching this level of income requires effort, but it’s very achievable: average U.S. household income during the years of the study was $71,500. Once you have enough money to cover the necessities and a few luxuries, you reach a point of Diminishing Returns: every additional dollar you earn doesn’t provide the same amount of utility.
Knowing your monetary point of Diminishing Returns is useful: by consciously limiting your consumption beyond a certain point and establishing long-term savings, you can reap the benefits of financial security and Resilience without spending every waking moment working to pay for pleasures you’ll adapt to in less than a month.
According to George Vaillant, the project’s director, the results of the Harvard Study of Adult Development (the longest-running longitudinal study of mental health) boil down to this: “the only thing that really matters in life are your relationships with other people.”
“We act as though comfort and luxury were the chief requirements of life, when all we need to make us happy is something to be enthusiastic about.”
Never compare your inside with someone else’s outside. —HUGH MACLEOD, AUTHOR OF IGNORE EVERYBODY
The only metric of success that matters is this: are you spending your time doing work you like, with people you enjoy, in a way that keeps you financially Sufficient? If so, don’t worry about what other people are doing.
Grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.
One of the best things I’ve ever done was choose to stop paying Attention to the news—99.9 percent of the information you’ll find in a newspaper or television newscast is completely outside of your Locus of Control. Instead of fruitlessly worrying about “what the world is coming to,” ignoring the news helps me spend more of my time doing what I can to actually make things better.
The more Attached you are to a particular idea or plan, the more you limit your flexibility and reduce your chances of finding a better solution. It’s good to be dedicated to the pursuit of your goals, but only to a point. If you become too Attached to the visions you have in your head, you’ll have a hard time adjusting to the inevitable twists and turns of life.
R&D exists because it works—companies that make Research and Development a priority often discover new products to offer their customers or process improvements that meaningfully contribute to the bottom line. If it works for them, it can work for you. What would it look like if you set aside a few hundred dollars a month as a Personal R&D budget? Using the techniques discussed in I Will Teach You to Be Rich by Ramit Sethi, it’s remarkably easy to automatically divert a certain amount of your monthly income into an account earmarked for Personal R&D. That money can then be used—guilt free—for purchasing books, taking courses, acquiring equipment, or attending conferences: anything that will improve your skills and capabilities.
I recommend reading Your Money or Your Life by Vicki Robin and Joe Dominguez, as well as following Get Rich Slowly (getrichslowly.org) and The Simple Dollar (thesimpledollar.com) online. All it takes is a little creativity and budgeting, and you’ll be well on your way to funding your own self-directed Research and Development laboratory.
Everyone has Limiting Beliefs in certain areas. Anytime you use the words “I can’t,” “I have to,” or “I’m not good at,” you’ve discovered a potential Limiting Belief. Most of the time, taking a moment to consciously question the belief is all you need to do to break it. “Is that really true?” and “How do I know that’s true?” are very powerful and versatile Self-Elicitation questions.
The way you choose to respond to challenges determines how successful you ultimately will become.
Viewing your mind as a muscle is the best way to help it grow.
On the whole, influence is much more effective than compulsion. The vast majority of people naturally resist being forced to do something against their will or better judgment, so constantly relying on compulsion to get things done is a poor strategy.
Comparative Advantage means it’s better to capitalize on your strengths than to shore up your weaknesses.
Comparative Advantage applies as much to individuals as it does to countries: businesses work better if the individuals who operate them focus on what they’re best at, working with other specialists to accomplish everything else they need. “Strengths-Based Management” is simply another term for Comparative Advantage.
Having a wide variety of team members with different skills and backgrounds is a major asset: it increases the probability that one of your teammates will know what to do in any given circumstance.
“No man is an island.” Focus on what you can do well, and work with others to accomplish the rest.
Communication Overhead is the proportion of time you spend communicating with members of your team instead of getting productive work done.
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.
Studies of effective teamwork usually recommend working in groups of three to eight people.
Once group size expands above eight, each additional team member requires more investment in communication than they add in productive capacity. If you want your team to perform at its best, make your teams as small and autonomous as possible.
The deepest principle in human nature is the craving to be appreciated.
Everyone has a fundamental need to feel Important. It doesn’t matter if you’re dealing with a customer, an employee, an acquaintance, or a friend. The more Important you make them feel, the more they’ll value their relationship with you.
Fortunately, making others feel Important is not particularly difficult if you make an effort to be present and curious. It mostly has to do with undivided focus: paying attention, listening intently, expressing interest, and asking questions.
In What Got You Here Won’t Get You There, veteran executive coach Marshall Goldsmith explains that high-level executives often subtly (and sometimes blatantly) put down their peers and subordinates to make themselves feel smarter or more Important. What putting others down actually accomplishes is shutting down effective communication. Effective communication can only occur when both parties feel safe. As soon as people start to feel unimportant or threatened in a conversation, they start “stonewalling,” shutting down communication. The threatened party may continue to interact, but mentally and emotionally, they’ve withdrawn from the conversation.
The STATE model to communicate without provoking anger or defensiveness: 1. Share your facts—Facts are less controversial, more persuasive, and less insulting than conclusions, so lead with them first. 2. Tell your story—Explain the situation from your point of view, taking care to avoid insulting or judging, which makes the other person feel less safe. 3. Ask for others’ paths—Ask for the other person’s side of the situation, what they intended, and what they want. 4. Talk tentatively—Avoid conclusions, judgments, and ultimatums. 5. Encourage testing—Make suggestions, ask for input, and discuss until you reach a productive and mutually satisfactory course of action.
The Golden Trifecta is my personal three-word summary of How to Win Friends and Influence People. If you want to make others feel Important and safe around you, always remember to treat people with appreciation, courtesy, and respect.
Appreciation means expressing your gratitude for what others are doing for you, even if it’s not quite perfect.
Courtesy is politeness, pure and simple. I once heard Courtesy defined as “accepting small inconveniences on behalf of another person,” and I think that’s a very useful definition.
Respect is a matter of honoring the other person’s status. No matter how you relate to the person you’re communicating with, Respecting them as an individual is critical if you want to make them feel Important or safe, no matter how high or low their social status.
People will be more receptive to any request if you give them a reason why. Any reason will do.
If a general tells a field commander precisely how to capture a hill and the situation changes, the field commander is forced to return to the general for new orders, which is slow and inefficient. If the general explains the strategy to the field commander and explains why that particular hill is important and how it will support the overall strategy, the field commander is free to use his knowledge of the Goal and fresh intelligence to act in a new way that supports the original intent.
By communicating the intent behind a certain plan, a leader can make constant communication less critical for the success of the entire team. If everyone understands the purpose of the plan, everyone can act in ways that support the intent without requiring constant attention.
Accountability is about one person taking responsibility. If two people are accountable for the same decision, no one is really accountable. —GLYN HOLTON, INVESTMENT RISK MANAGEMENT CONSULTANT
(1) always personally step up and take responsibility, unless relieved by a more experienced professional, and (2) always direct commands or requests very clearly to one specific individual at a time. If someone appears to be experiencing a heart attack in a crowded store and you yell, “Someone call 911,” it’s likely that no one will actually call—the more people around, the more likely everyone will assume that someone else is taking action. It’s far more effective to single someone out, make eye contact, point, and say very clearly, “YOU—CALL 911.” They will.
If you’ve ever worked with a group of people who have no Power over one another, you know what I’m talking about. Unless someone steps up and takes individual responsibility for actually making things happen and holding individuals accountable for progress, a committee can deliberate for years without getting anything done.
“No battle was ever won according to plan, but no battle was ever won without one… Plans are useless, but planning is indispensable.” The value of planning is in Mental Simulation: the thought process required to create the plan itself. Use plans, but don’t depend on them—as long as you keep working as quickly and effectively as possible, the project will be done as soon as it’s feasible.
When your car breaks down, whom would you rather take it to—a mechanic who’s a friend of a friend, or a random operation you found in the phone directory? Given the choice, people always prefer to interact with people they know and like. Referrals make it far easier for people to Decide to work with someone they don’t know. Referrals are effective because they transfer the qualities of being known and liked. The reason you’re more likely to go to a mechanic your friend recommends is that you know and like your friend, and your friend knows and likes that mechanic. Even if the competing mechanic in the phone book is highly qualified, that doesn’t matter as much as being known and liked.
The psychologists introduced challenges and goals that required both groups to work together: solving a water shortage, deciding on a movie to watch, and pushing a broken-down truck back to camp. When the campers started feeling like part of a larger group, the conflicts subsided.
Over time, you become more and more like those whom you spend time with, and less like people in other groups. Convergence is the tendency of group members to become more alike over time. In business, this is sometimes called a company “culture,” in the sense that people who work there tend to have similar characteristics, behaviors, and philosophies. Convergence also means that groups have a tendency to police themselves.
The groups you spend time with automatically and profoundly influence your behavior. According to the late Jim Rohn, author of The Art of Exceptional Living, “You are the average of the five people you spend the most time with.” The values and behaviors of the people you interact with on a daily basis exert constant pressures on you to adopt the same values and behaviors. Convergence can be useful if you consciously choose to spend time with people you’d like to become more like over time.
If your social circle isn’t supporting your goals, change your social circle.
In The Millionaire Next Door, Thomas Stanley and William Danko describe the lives and habits of people who have a net worth of over $1 million. More often than not, they live in modest houses, drive used cars, and buy inexpensive clothing. If you think about it, that makes sense—the best way to build wealth is to earn a lot of money without spending it. People who want to signal they’re well off, on the other hand, tend to spend their money on items that communicate wealth and status—large houses, luxury cars, designer clothing, expensive vacations. These purchases are often financed with debt—if you look at the bank statements of the seemingly well-to-do, you’ll often find they’re in a precarious financial position.
The most effective testimonials tend to follow this format: “I was interested in this offer, but skeptical. I decided to purchase anyway, and I’m very pleased with the end result.” The reason this format is more effective than a litany of people gushing about your offer is that it more closely matches how your prospects are feeling: interested but uncertain. By signaling that the decision was a good one, testimonials tell your prospects that it’s safe to buy. Add a bit of Social Proof to your offers, and your sales will soar.
If you’re in a position of Authority, your Authority will change the way others interact with you. Simply because you express an opinion, your subordinates will be far more likely to Interpret your position as a truth or as a command. As a result, people will begin to filter the information they give you based on what they think you want to hear—which may not be what you need to hear. This filtering behavior is how Authority figures often end up “living in a bubble”—the combination of Authority and Confirmation Bias shelters them from information that contradicts their opinions. As a result, it’s difficult for Authority figures to compensate for the Excessive Self-Regard Tendency.
Work to establish yourself as an Authority on what you’re offering, and people will be more likely to accept your offer.
Obtaining small Commitments makes it more likely people will choose to act Consistently with them later.
Incentives are tricky because they inevitably interact with our Perceptual Control systems. For example, giving an employee a bonus or raise for doing something good can create a curious result—they stop doing what got them the reward. That makes no sense until you realize there was always a reward—they did what they did because they wanted to, so the reward was internal. Paying them makes the action part of their job, which reduces their inner drive to complete it for its own sake. In the case of Conflict, Perceptual Controls win over incentives every time. Incentives can be useful if used appropriately, but tread cautiously. If the incentives of the people you work with aren’t aligned with your interests, you’re bound to have problems.
The best way to avoid Modal Bias is to use Inhibition to temporarily suspend judgment. Part of the value of understanding cognitive biases is the knowledge that you’re not immune to them, and simply knowing they exist doesn’t make them any less influential. Modal Bias is automatic—we have to use Willpower to overcome it. If you’re a leader or manager, it pays to consciously suspend your judgment long enough to thoroughly consider the perspectives and suggestions of the people you work with. Otherwise, you’re very likely to miss important information. Remind yourself to keep an open mind, and you’ll enhance your ability to make wise decisions.
High achievement always takes place in the framework of high expectation.
Individuals tend to rise to the level of other people’s expectations of them. In general, people tend to perform up to the level that others expect them to perform. If you don’t expect much from the people you work with, it’s likely you won’t inspire them to perform to the limits of their capabilities. Let them know you expect great things from them, and more often than not, you’ll find that they perform well.
The Pygmalion Effect also features a paradox: having high expectations of people will produce better results, but it also increases the probability that you’ll be disappointed. The Expectation Effect means that our perception of the quality of someone’s work is a function of our original expectations. The higher our expectations are to begin with, the higher their performance will generally be, but the risk that our expectations will be violated is also much higher.
The Attribution Error means that when others screw up, we blame their character; when we screw up, we attribute the situation to circumstances.
When something isn’t going as expected, try to find out as much as you can about the circumstances surrounding the behavior you’re noticing. More often than not, you’ll find that it’s a matter of circumstance, not a fundamental character flaw.
Fixating on the issue is the least productive thing you can do when something goes wrong. By the time you’re aware of an issue, preventing it is beyond your Locus of Control. The issue has already occurred—the only question is how you plan to respond to it.
By focusing your energy on evaluating potential responses, you’re far more likely to find a way to make things better.
Focusing on the potential Options is far more constructive—you’re presenting several courses of action and the costs and benefits associated with each, then recommending a solution based on the available information.
Do this often and well, and you’ll develop a Reputation for clearheadedness in the midst of crisis. Focus on Options, not issues, and you’ll be able to handle any situation life throws at you.
Based on what we’ve learned thus far, here are six simple principles of effective real-world Management: 1. Recruit the smallest group of people who can accomplish what must be done quickly and with high quality. Comparative Advantage means that some people will be better than others at accomplishing certain tasks, so it pays to invest time and resources in recruiting the best team for the job. 2. Clearly communicate the desired End Result, who is responsible for what, and the current status. 3. Treat people with respect. Consistently using the Golden Trifecta—appreciation, courtesy, and respect—is the best way to make the individuals on your team feel Important. 4. Create an Environment where everyone can be as productive as possible, then let people do their work. 5. Refrain from having unrealistic expectations regarding certainty and prediction. 6. Measure to see if what you’re doing is working—if not, try another approach.
In a recent essay, software entrepreneur Joel Spolsky explains why managers should stop calling the shots and start letting people do their jobs: Stop thinking of the management team at the top of the organization. Start thinking of the software developers, the designers, the product managers, and the front line sales people as the top of the organization. The “management team” isn’t the “decision making” team. It’s a support function. You may want to call them administration instead of management, which will keep them from getting too big for their britches. Administrators aren’t supposed to make the hard decisions. They don’t know enough.
Good employees and contractors are not necessarily the people who have the fanciest résumé or perform the best in a phone screen or interview: the best hires are people who get things done and work well with other members of your team. Ideally, you’re looking for an individual who will contribute valuable work, who’s excited about the opportunity, and who you’ll enjoy working with every day. Here’s the golden rule of hiring: the best predictor of future behavior is past performance. If you want to hire people who will perform well for you in the months and years to come, you need to look for people who have performed well in the past.
Either way, don’t write the job description like an advertisement: you want to describe what the applicant will actually do on a day-to-day basis if they work for you, with as much unembellished detail as you can share. You’re looking for people who are attracted to the work, and it’s difficult for applicants to determine whether or not they’ll be a good fit unless you describe exactly what the job involves.
In the application, ask a few basic questions that require a certain amount of specialized knowledge in the field to answer. The most promising candidates will be easy to identify. Once you’ve identified a few promising candidates, ask each one to show you examples of two or three of their best projects to date. These projects don’t have to be directly related to the job in question, but they should be work that the applicant is proud of and that they believe highlights their skills. The idea is to see examples of what the candidate has accomplished to date, which makes it easier to gauge their relative level of experience and work ethic.
When you contact a candidate’s references, your questions should be simple: e.g., Would they work with the candidate again? If they hesitate or talk around the question, it’s a no. If you can’t reach a reference when you call, leave a message and ask them to contact you if the candidate is extraordinary. If they are, you’ll receive a return call. If they aren’t, you won’t. Finally, give promising candidates a short-turnaround project or scenario to see how they think, work, and communicate firsthand. Small projects tend to work best for skilled technical employees, while scenarios work best for candidates who will be responsible for product creation, marketing, sales, business development, finance, and management roles. The outcome of the assignment should be a deliverable of some kind: a report, a pitch, an asset, or a process.
The purpose of the project or scenario is to evaluate the candidate’s actual work in a realistic environment. What does the candidate focus on first? What do they notice, and what do they miss? How do they explain their choices and recommendations? How do they respond when you ask questions or disagree with a conclusion?
Instead of building a complex system from scratch, building a Prototype is much easier—it’s the simplest possible creation that will help you verify that your system meets critical Selection Tests. Expanding that Prototype into a Minimum Viable Offer allows you to validate your Critically Important Assumptions, resulting in the simplest possible system that can succeed with actual purchasers.
In The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt explains what he calls the “Theory of Constraints”: any manageable system is always limited in achieving more of its Goal by at least one Constraint. If you can identify and alleviate the Constraint, you’ll increase the Throughput of the system.
Every time someone sees a funny video on YouTube, they’ll pass it along to several friends. That’s Autocatalysis. If your business includes some Autocatalyzing element, it’ll grow more quickly than you expect.
When the Environment changes, the system must change with it to continue operating.
A Selection Test is an Environmental constraint that determines which Systems continue to self-perpetuate and which ones “die.”
Businesses also have Selection Tests: enough value provided to customers, enough revenue to cover expenses, enough Profit to stay financially Sufficient.
In The Black Swan, Nassim Nicholas Taleb, a former hedge fund manager, describes the perils of Uncertainty. No matter how stable or predictable things seem, unpredictable “black swan events” can change everything in an instant. The term “black swan” was a common expression in sixteenth-century London for something that was impossible or didn’t exist—everyone knew that all swans were white. The problem with the term is what eighteenth-century philosopher David Hume called the “problem of induction”: until you see every swan that exists, you can never assume the statement “all swans are white” is true. All it takes is one black swan to completely invalidate the hypothesis, which happened when black swans were documented in Australia in 1697 by Dutch sea captain Willem de Vlamingh. The moment before they happen, the probability of “black swan” events occurring is essentially zero.
You can’t know in advance if (or which) black swan events will occur: all you can do is be flexible, prepared, and Resilient enough to react appropriately if and when they do.
Don’t rely on making accurate predictions—things can change at any time. Planning for flexibility in response to Uncertainty via Scenario Planning is far more useful than pretending to be a seer.
It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. —CHARLES DARWIN
Psychologically, it’s very difficult to internalize that some things are random: there’s no rhyme or reason to many of the things that happen in the world. Because of our natural Pattern Matching abilities, we tend to see patterns where none exist and tend to attribute random Changes to skill if the Changes are good or misfortune if they’re bad. As a result, we’re Fooled by Randomness.
In The 4-Hour Workweek, Timothy Ferriss shares a method that made his business work far more efficiently. Initially, when a customer service representative had a problem with a customer, they were required to obtain approval from Tim before resolving it. By instituting a policy that allowed representatives to do anything necessary to solve the problems that cost less than $400 without approval, Tim made his business system less dependent upon him for operation.
While we are free to choose our actions, we are not free to choose the consequences of our actions. —STEPHEN COVEY, AUTHOR OF THE SEVEN HABITS OF HIGHLY EFFECTIVE PEOPLE
Approach making changes to a complex system with extreme caution: what you get may be the opposite of what you expect.
If you can’t understand it, you can’t change it. —ERIC EVANS, TECHNOLOGIST
Instead of trying to understand the system all at once, you break up the system into parts, then work on understanding the subsystems and how they interact with one another.
“What gets measured gets managed.”
Measure too much, and you’ll inevitably suffer from the Cognitive Scope Limitation, drowning in a sea of meaningless data. Some Measurements are more important than others: Key Performance Indicators (KPIs) are Measurements of the critical parts of a System.
Value Creation: How quickly is the system creating value? What is the current level of Inflows? Marketing: How many people are paying Attention to your offer? How many prospects are giving you Permission to provide more information? Sales: How many prospects are becoming paying customers? What is the average customer’s Lifetime Value? Value Delivery: How quickly can you serve each customer? What is your current returns or complaints rate? Finance: What is your Profit Margin? How much Purchasing Power do you have? Are you financially Sufficient?
Find your system’s KPIs, and you’ll be able to manage your system without drowning in data.
The best way to maintain Analytical Honesty is to have your measurements evaluated by someone who isn’t personally invested in your system. Incentive-Caused Bias and Confirmation Bias are all too easy to succumb to if your social status is on the line.
As a general rule: examine no measures in isolation—always look at them in Context with other Measurements.
Sampling can help you identify systemic errors quickly without testing all of the output of the system, which can be time-consuming and expensive. If you’re manufacturing mobile phones, you don’t have to test every single phone that comes off the line. If you test one in twenty phones, you can still identify errors quickly enough to fix the system if something goes wrong. Depending on how quickly and accurately you need to spot errors, you can increase or decrease the Sampling rate.
—Return on Promotion: For every $1 you spend in advertising, how much revenue do you collect? —Profit per Employee: For every person you employ, how much profit does your business generate? —Closing Ratio: For every prospect you serve, how many purchase? —Returns/Complaints Ratio: For every sale you make, how many choose to return or complain?
A Median is calculated by sorting the values in order of high to low, then finding the quantity of the data point in the middle of the range.
A Mode is the value that occurs most frequently in a set of data.
A Midrange is the value halfway between the highest and lowest data points in a set of values. To calculate the Midrange, add the highest and lowest values, then divide by two. Midranges are best used for quick estimates—they’re fast, and you only need to know two data points,
Here’s another thought experiment, using hypothetical data: people who suffer heart attacks eat, on average, 57 bacon double cheeseburgers every year. Does eating bacon double cheeseburgers cause heart attacks? Not necessarily. People who suffer heart attacks typically take 365 showers a year and blink their eyes 5.6 million times a year. Do taking showers and blinking your eyes cause heart attacks as well? Correlation is not Causation. Even if you notice that one measurement is highly associated with another, that does not prove that one thing caused the other.
How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg. —ABRAHAM LINCOLN
Segmentation is a technique that involves splitting a data set into well-defined subgroups to add additional Context. Splitting the data into predefined groups can uncover previously unknown relationships. For example, knowing that orders increased by 87 percent this month is good, but knowing that 90 percent of those new orders came from women in Seattle is even better.
Humanization is the process of using data to tell a story (Narrative) about a real person’s experience or behavior. Quantifiable measures are helpful in the aggregate, but it’s often necessary to reframe the measure into actual behavior to really understand what’s actually happening.
When I developed home cleaning products for P&G, market research data told us that two broad Segments existed: people who valued regular deep cleaning (“Unless I’m on my hands and knees cleaning with bleach and elbow grease, I’m not satisfied”) and people who wanted cleaning to be quick and convenient (“I’m too busy to clean—as long as it looks good enough, I’m happy”). Using this information, we combined these characteristics with other data like household income, family statistics, and hobbies to create a profile of a fictional person. Once the profile was developed, it became easier to use the data we had to make decisions—instead of relying on statistics to evaluate an idea, we could rely on our intuition by asking ourselves if “Wendy” would like it.
Intervention Bias makes us likely to introduce changes that aren’t necessary in order to feel in control of a situation. Many corporate policies have their roots in Intervention Bias. When something bad happens, it’s tempting to “fix” the situation by installing additional layers of limitations, reporting, and auditing. The result isn’t an improvement in Throughput or efficiency: it’s an increase in Communication Overhead, waste, and unproductive bureaucracy.
Imagine a company that allows its employees to purchase any book they want or need, no questions asked. Books are inexpensive sources of high-quality information, so making it easy for employees to obtain them makes sense. All is well until one employee abuses the privilege and orders hundreds of novels for personal enjoyment. What should be done? Many companies would respond by eliminating the policy and requiring a manager’s approval for all book purchases. But this change wouldn’t fix the situation, because it isn’t a widespread issue. Instead, it would annoy or anger employees who use the privilege responsibly, waste time for everyone by increasing paperwork and bureaucracy, and reduce employee productivity by increasing the amount of time it takes to find information they can use to improve the business. The correct response in this case is to do nothing. One employee has abused the privilege, so the situation can be handled with a single discussion, without a major change in policy. The damage is limited, and there’s no sense in penalizing everyone for a single person’s poor judgment. It is a Normal Accident, so overreaction is counterproductive.
Optimization is the process of maximizing the output of a System or minimizing a specific input the system requires to operate.
In practical terms, trying to Optimize for many variables at once doesn’t work—you need to be able to concentrate on a single variable for a while, so you can understand how the Changes you make affect the system as a whole. You’re trying to find Causation (not Correlation) in your Changes, and hidden Interdependencies can make it difficult to understand which Changes produced which results.
Refactoring is the process of changing a system to improve efficiency without changing the output of the system. The term comes from computer programming—programmers will spend hours rewriting a program that, if all goes well, does exactly the same thing when they’re finished. What’s the point? The primary benefit of Refactoring isn’t improving the output—it’s making the system itself faster or more efficient. By rearranging the processes the system uses to produce the result, it’s possible to make the program run faster or require fewer resources while operating.
In any complex System, a minority of the inputs produce the majority of the output. This Pattern of persistent nonlinearity is now called the Pareto principle, or the 80-20 rule. Personally, I prefer to refer to it as the Critical Few. Once you understand this common Pattern, you’ll find it in many areas of life: In many businesses, less than 20 percent of the customers account for more than 80 percent of annual revenue. Less than 20 percent of a business’s employees typically do 80 percent or more of the highly valuable work. You wear less than 20 percent of the clothing in your closet over 80 percent of the time. You spend over 80 percent of your time communicating with less than 20 percent of your personal contacts.
In The 4-Hour Workweek, Timothy Ferriss used the Critical Few to identify his best performing customers. Out of the 120 customers Ferriss was serving, 5 accounted for 95 percent of the revenue. By focusing on those top-performing wholesalers and putting the rest on “autopilot,” Ferriss doubled his monthly revenue and cut his work time from eighty hours to fifteen hours a week. The same approach is often useful to weed out results you don’t want. While conducting his business analysis, Ferriss realized that two particular customers accounted for most of his frustration and fire fighting. “Firing” these energy-sucking customers, even though they represented significant sources of volume, liberated his time and energy.
Find the inputs that produce the outputs you want, then make them the focus of most of your time and energy. Ruthlessly weed out the rest.
In a similar vein, eating one cookie is great. Eating two cookies is even better. Eating a hundred is actually worse. More is not always better. (The same relationship applies to drinking beer and taking vitamins.) All good things are subject to Diminishing Returns—after a certain point, having more of something can actually be detrimental.
No matter how much people liked the commercial, at a certain point it would “wear out,” and the company would no longer produce $1 of revenue for every dollar the company spent showing that ad. That was the “Point of Diminishing Returns”—if we spent more dollars showing the same commercial, the company would start losing money. Far better to spend those funds promoting the product in a different way.
After you’ve picked the “low-hanging fruit,” further Optimization can cost more in effort than you’ll reap in returns. That’s a good point to stop. Perfectionism is a trap for the unwary. Optimize and Refactor up to the point you start experiencing Diminishing Returns, then focus on doing something else.
Removing small amounts of Friction consistently over time Accumulates large improvements in both quality and efficiency.
The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. —BILL GATES
Ironically, reliable systems tend to dull the operator’s senses, making it very difficult for them to notice when things go wrong—the moment when their attention is most sorely needed. As a result, the more reliable the system, the lower the likelihood that human operators will notice when something goes wrong—particularly if the error is small.
The measure of success is not whether you have a tough problem to deal with, but whether it’s the same problem you had last year.
Standard Operating Procedures are also effective ways to bring new employees or partners up to speed quickly. Having a central source of SOPs can help new employees or partners learn how you work far more effectively than informal training. Storing your SOPs in some sort of central electronic database is best—it ensures that everyone can instantly reference the most up-to-date procedures available.
No matter how expert you may be, well-designed checklists can improve outcomes. —STEVEN LEVITT
First, Checklisting will help you define a System for a process that hasn’t yet been formalized—once the Checklist has been created, it’s easier to see how to improve or Automate the system. Second, using Checklists as a normal part of working can help ensure that you don’t forget to handle important steps that are easily overlooked when things get busy. Pilots have extremely detailed Checklists for takeoff and landing for a reason: skipping a step is easy, but can have major consequences for everyone on board. Even pilots with decades of flying experience always use Checklists to make sure everything is done right and in the proper sequence.
By taking the time to explicitly describe and track your progress, you reduce the likelihood of major errors and oversights, as well as prevent Willpower Depletion associated with figuring out how to complete the same task over and over again.
While most farms were introducing chemicals and machinery into agriculture, Fukuoka was consciously doing nothing—and reaping the rewards of high yields and ever-increasing soil richness.
Instead of trying to do too much, Fukuoka only did what was absolutely necessary. As a result, his fields were consistently among the most productive in the area. Cessation takes guts. It’s often unpopular or unpalatable to do nothing, even if doing nothing is actually the right solution. As an example, “pricing bubbles” are often caused by government intervention in certain markets, which has the Second-Order Effect of artificially decreasing the costs of certain actions, leading to rampant speculation.
Doing something is not always the best course of action. Consider doing nothing instead.
HERE’S WHAT MAKES A BUSINESS RESILIENT: —Low (preferably zero) outstanding debt —Low overhead, fixed costs, and operating expenses —Substantial cash reserves for unexpected contingencies —Multiple independent products/industries/lines of business —Flexible workers/employees who can handle many responsibilities well —No single points of failure —Fail-safes/backup systems for all core processes
A Fail-safe is a backup System designed to prevent or allow recovery from a primary system failure. If the primary system fails in some way, well-designed Fail-safes can keep the system from collapsing unexpectedly. You can find backup systems anywhere consistent performance is critical.
Airplanes have systems that sense a failure in cabin pressure, automatically deploying face masks attached to an oxygen tank. If the airplane’s pressurized cabin fails for some reason, the passengers won’t lose consciousness—a very good thing indeed. Fail-safes are not efficient in the sense that you’re investing time and resources in a system you hope you’ll never use. Backup systems and Insurance, from one perspective, can be seen as a waste of money—why spend valuable resources on something you hope you’ll never need? Here’s why: by the time you need a Fail-safe, it’s too late to develop one. In order to be effective, Fail-safes must be developed before you need them.
Stress Testing is the process of identifying the boundaries of a system by simulating specific Environmental conditions. Instead of staying in systems engineer mode, Stress Testing inverts your mind-set into “demon mode.” What would it take to break what you’ve built?
Using an Automated tool, I simulated a huge number of visitors hitting my Web site at the same time. The tool continuously increased the number of visitors requesting my Web site, then tracked how long my Web site took to respond.
Stress Tests can help you learn more about how your system works. If you’re in the manufacturing business, you could simulate a sudden order of thousands of units—can you keep up? If you’re doing customer support, you could simulate a massive influx of questions or complaints—could you handle it?
A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences. —PROVERBS 27:12
Scenario Planning is the process of systematically constructing a series of hypothetical situations, then Mentally Simulating what you would do if they occured. You may not be a seer, but Counterfactual Simulation gives you a powerful capability: imagining things that might occur, then figuring out what you’d do if they did. Scenario Planning is essentially detailed, thorough, and systematic Counterfactual Simulation applied to major decisions.
Scenario Planning can help you prepare for many different possible futures. Instead of rigidly focusing on only one option, your business will become more flexible and Resilient, improving your ability to Change and adapt to a changing world.
The Sustainable Growth Cycle is a pattern I’ve noticed in businesses that are able to grow year after year without major difficulties. This cycle has three distinct phases: expansion, maintenance, and consolidation. In an Expansion phase, the company is focused on growing. New offers are created and tested. New markets are explored. New business units are built and staffed, and future plans are created. Early data about what works is collected for later use. In a Maintenance phase, the company is focused on executing the current plan. The Marketing, Sales, and Value-Delivery parts of the business are in full swing, and emphasis is placed on fully exploring the potential of the current business structure. Systems are put in place to ensure the execution. In a Consolidation phase, the company is focused on analysis. Information about the performance of the business is examined in detail in an attempt to figure out what’s working and what’s not. Things that aren’t working are cut back or eliminated, and things that are working are given more resources.
Business is never easy—it’s an art as much as a science. The Middle Path is the ever-changing balance point between too little and too much—just enough. No one can tell you what the Middle Path is—you have to be walking the path to know, and it changes constantly. Getting the balance right in the midst of Uncertainty is the difference between a competent business professional and a great one.
Constant Experimentation is the only way you can identify what will actually produce the result you desire. Often, the best (or only) way to learn things is to jump in and try.
Once you’re committed to exploring something, you’ll learn far more quickly than if you’d cowered on the sidelines.
A truly good book teaches me better than to read it. I must soon lay it down, and commence living on its hint. What I began by reading, I must finish by acting. —HENRY DAVID THOREAU
When asked in an interview with students from the University of Nebraska–Lincoln about what superpowers he’d like to have, Buffett answered: “I’d like to be able to read faster.” Most of what Buffett does on a daily basis is read financial reports and learn new concepts, looking for new ways to increase the value of his company. Even the wealthiest person on earth has things to improve and more to explore. That ongoing curiosity is what made them successful in the first place.