Alright, so you want to be an entrepreneur and start a business. Before you even start searching for the next great idea, you gotta understand what makes up a business. Just like how all matter in the universe is made up of atoms, the transaction is what makes up a business. The asset (i.e. your product or service) you produce must be something that matches what your customers want. This is called asset specificity. In other words, the more specific your asset is - or the closer your product is to what people want - the higher the chance a transaction will happen.
Mitchell’s monograph pairs the transaction with three kinds of thinking, which he calls planning, promise and competition cognitions. In plain words: can you actually pull it off (planning), will the customer believe you’ll deliver (promise), and why you instead of anyone else (competition)? When transactions aren’t happening, one of those three is usually the broken part.
The other thing to watch is friction: anything that makes the transaction harder than it needs to be. Its opposite is glide. A classmate’s example was grocery shopping. At the big chain the lineups crawl and nobody seems to care, while at Kim’s Market the produce is cheap and the line moves fast. Same groceries, very different transaction.
Next, you must know the difference between a business and a project. If you’re starting a company, are you putting together a team of people who are interested in your project, or in your vision? Say your company’s vision is “to provide people with instant sexual gratification in their lives”. If you approach a person you want to recruit about joining your company, and the first thing they ask is “what kind of sex toy are you making?” then you know they’re only interested in your project. These kinds of people are most likely the ones who will not stay with you in the long-run. Regardless of whether that’s actually important to you right now, at least be aware of it. Know that especially as a new startup, you might want to prioritize looking for people who resonate with your vision rather than your project. A project has a beginning and end. A business does not (and should not). You should be looking at the long-term plan of your business and how it will evolve. If you’re producing and selling products, then you should be looking at improving the product or making new products. If you’re providing a service, you should be looking at how the service can provide more value or what market segment you haven’t targeted yet. The moment any of that stops, then your business will most likely fail.
So where do ideas actually come from? Most of the time you’re not inventing anything. You’re looking for a new combination: two things that already exist, put together, or something that exists over there but not over here. Bubble tea hot pot is the easy example. Someone in Taiwan combined bubble tea with the hot pot experience. That’s one new combination. Bringing it to Canada, where nobody has seen it, is a second one. You find these by travelling, by paying attention to what annoys you, and by noticing when something feels broken or missing.
Steve’s own script doesn’t start with ideas. It starts with his motivators: the desire to put his education to use, ambition, and the rest of the list of things that push him to go looking for new ventures. Write yours down before you start hunting. When an idea looks shiny, check it against why you’re doing this in the first place.
Look at the companies that last, and none of them are one-trick ponies. They keep a portfolio of options going, so they can grow into something bigger. McDonald’s started as a burger place, but ask them today and they’re really a real estate company: they own some of the best corners in every downtown. Amazon started as an online store, and what it really does better than anyone is get stuff to people.
If someone walks up to you and their hair is on fire, could you sell them a cup of water? Probably. That’s the easiest sale you’ll ever make, because the need is obvious and urgent. So the job is to find out what sets your customer’s hair on fire. Everyone has a few of these problems at any moment: some personal, some financial, some about work or school. The closer your product comes to putting one of those fires out, the less selling you have to do.
When looking at various ideas, you will want to consider whether it is going to be targeted broadly to all types of customers or it will be a niche. Either way, they’re simply a strategy to meet specificity. Another strategy is to find a blue ocean - create a market that didn’t exist before. Just beware that it’s much more difficult and far riskier than simply competing in a red ocean. Nintendo is a prime example of that going from the Wii to the Wii U.
Saying “go find a blue ocean” is easy. The Four Actions Framework is how you do it. Look at everything your industry competes on and ask four things: what can you eliminate, what can you reduce, what can you raise, and what can you create? Yellow Tail did this with wine. They threw out all the snobby wine terminology that everyone assumed mattered, and made something easy to drink and easy to pick off a shelf. The people who bought it weren’t wine people at all. That’s the point: you’re going after the non-customers.
To see where you stand, plot your products on a Pioneer-Migrator-Settler map. Pioneers are the products nobody else has, which is where the blue ocean is. Settlers are the me-too products fighting it out in the red ocean. Migrators sit in between. If everything you make is a settler, you know what your problem is.
When researching for data to support your idea or to identify opportunities, know that there is data lag. In other words, the data you’re getting is most likely outdated because there’s a process (which takes time) to acquiring and analyzing it, so you must factor that into any of your forecasts.
Steve has a story that shows what data lag means in practice. A game studio asked what it should make next, so he pulled the sales numbers by genre. Character-based action games were booming and survival horror had crashed. His advice: everyone can see the boom, so by the time you launch you’ll be stuck in a red ocean. Make the survival horror game, because people will want it again. They ignored him, made the action game, and it failed. Around the same time, Resident Evil 4 came out and single-handedly revived survival horror. If you can see a trend in the data, so can everyone else. Look at what used to be popular and is down right now, and time your launch for when it comes back.
The coronavirus made the same point that week. A case reported today was infected a week or more ago: about six days for symptoms to show up, then a few more to see a doctor and get test results back. Every number you look at is already old.
When the economy tanks, people still want to treat themselves. They just stop doing it with cruises and new cars, and switch to affordable luxuries: small things that don’t cost much but still feel like a treat, like a chocolate bar, ice cream or a video game. If you’re searching during a recession, that’s a segment that holds up.
Steve’s whole approach comes from a little survey he ran on successful people. He asked two questions: what’s the smartest thing you’ve ever done, and what’s the stupidest? They struggled with the first one, and the answers were vague (“I married a great wife”). But they could fill an afternoon with very specific stupid things they’d done.
Business school works the same way. Every team presents its solution to a case, and the professor isn’t hunting for the genius answer. They’re looking for the things in each plan that are going to cause failure. Strip those out and you’re most of the way there. Hence the line Steve wanted to put on T-shirts: be at least average, but don’t be stupid. He even orders this way in restaurants: ask what people keep ordering and pick one of those. It’s never the worst thing on the menu, and it’s usually great.
Let’s say you have a bunch of ideas and opportunities that might be worth pursuing. How would you determine which ones you should actually go for? You only have so much resources at your disposal, and you definitely don’t want to put all your eggs into one basket, nor do you want to FOMO. Doing your research is usually the first thing to do. The more information you get, the better, right? Unfortunately, the human mind can only process so much information before it gets confused. Aside from the fact that there’s no such thing as “perfect information”, receiving more information means more time to process and make sense of it. This is what we call Bounded Rationality. As humans, we need to understand our limits and draw a line on when to make a judgement.
Old-school economics assumed we’re all economically rational: we look at every option and pick whatever maximizes our utility. Offered a gift card or a $100 bill, we’d take the cash every time. Herbert Simon won a Nobel Prize for pointing out that people don’t actually behave that way. We decide with asymmetric information (the other side often knows more than we do), and with real limits on our time and brainpower.
He also took apart the idea of “perfect information”: the belief that if we knew everything, we’d make purely rational decisions. Past a point, more information doesn’t help. It just confuses you, which is why you need to know when to stop researching.
The Long Tail sounded authoritative, and plenty of people built strategies on it. Anderson wrote it from observation: he saw some things and believed them to be true. Elberse did it the academic way. She started with a hypothesis and tested it against real rental data, and found the tail got longer but the hits got even bigger. Steve’s example: “the sun always rises” feels true because you’ve seen it every day, but seeing something every day isn’t proof. Before you bet on an idea, ask whether anyone actually tested it, or whether it just sounds right.
One way to deal with this is the concept of satisficing. The idea is that you’re balancing between being happy with the result (satisfy) and being “okay” with the result (suffice). If the amount of information you’ve gotten appears to be just sufficient, then that’s when you can stop researching and move on to the next step.
An implementation of satisficing is using the strategy of Real Options. When you “option” something, it’s basically like a (non-refundable) deposit. Assembling a portfolio of real options will allow you to expand your horizons and not be all-in on one thing (“sink the boat”) or missing out on actual opportunities because you were too worried about the commitment/cost/consequences (“miss the boat”).
You really love Taco Bell but there are none near you. You noticed there’s a parcel of land nearby for sale, and you get the idea to open a Taco Bell there. However, you have not done adequate research on the actual costs (including time & effort) to do so. You don’t want to dive head first into this venture, but you also want to keep your options open. Instead of buying the land outright (which costs a sizeable amount of money), you can place a deposit on it, effectively preventing anyone else from buying the land for a few months. It will allow you to do some more planning before you make a commitment to go forward or to abandon the idea.
Be aware that Real Options is not an exact science - it’s based off of your own experience and common sense to make these decisions, and your evaluations can be pretty subjective. This is simply a tool to help you be as flexible as possible and make decisions quickly.
You can also consider using Stage Gate as a second layer to make decisions. Meaning on top of your real options thinking, you set certain requirements (“gates”) for the idea to progress into the next stage. This should help minimize investment costs and give a more concrete directive into developing the idea.
When you’re building a team of people, the idea is that you want those people to come from different backgrounds, skills, and experiences. In other words, you want a heterogeneous team that will increase the chances for your idea to become a breakthrough.
Ideally, the people you want to hire should be an expert at their field. But what is an expert? Martin Broadwell, a management trainer, introduced the model of the four stages of competence. An expert is considered as the “unconscious competent”, meaning that the person can execute their skill without giving it much thought, almost like being a natural at it. That’s not to say the person simply has talent, but rather they spent an incredible amount of time and effort to perfect their craft.
One problem of finding experts is that there are plenty of people who consider themselves to be experts. They overestimate their abilities. We call this the Dunning-Kruger effect. Whenever someone calls themselves an expert, be wary. There are other telltale signs such as them not being aware of their own lack of knowledge or skill and not recognizing other people’s actual skill.
Steve’s favourite picture of unconscious competence is Joannie Rochette at the Olympics. Her mother died two days before her short program, and she skated an amazing routine. Her mind was so full of grief that her training simply took over. A few days later, once she could think again, she did worse.
Dunning-Kruger cuts both ways. The bottom quartile overestimates itself, but the top quartile underestimates itself. Experts fixate on the few things they still can’t do, and they spend their time around other experts, which makes them feel average. So the real expert is often the one who won’t call themselves one.
For the other side of the 10,000-hours idea, a classmate recommended David Epstein’s Range, which argues that people with a wide spread of skills are often the real experts.
The three important attributes of hiring a person should be in this order: Integrity, Passion, and Experience. Hire slow and fire fast. Sounds brutal, but it’s what keeps your business running.
One major challenge when you want your idea to become an actual business is determining whether it can be one, and a sustainable one at that. Between the personal skills and knowledge you possess and all the research you have done, it’s very difficult to boil it down to a “YES DO IT” or a “NO DON’T”. Ron Mitchell developed a tool called the New Venture Template that will help determine this through a series of questions, and it will spit out a set of results and recommendations for you. The two main things it will answer for you are: “Is it a business?” and “Can you keep it?” While it’s on a scale for both factors, the template should assist in determining whether your idea is a fad (it’s a business, but it’s unsustainable), a hobby (good idea, but won’t make money), or something in between.
New Venture Template: score your idea on the New Venture Template
The questions boil down to six things. For “Is it a business?”: is it innovative (a real new combination), is it valuable (people will pay more than it costs you), and is it persistent (they’ll keep needing it over time)? For “Can you keep it?”: is it scarce (hard to copy), is it non-appropriable (nobody can grab the profits out from under you; the template’s “holdup” question asks whether a supplier could hold you hostage, like a chair maker who depends on wood from one forest in Siberia), and is it flexible (you can adapt when the market changes)? Miss on the first three and you have a hobby. Miss on the last three and you have a fad.
Score high on both and you have what the template calls a model venture, which is basically the perfect company. Good on the business side but only so-so on keeping it is a lifestyle business, like a corner store or a franchise. It gives you a job, but plenty of other people can do the same thing just as easily, so it never turns into an Apple.
One other factor to think about is if your idea has the potential to have disruptive innovation. It can be something that starts off small and creates a new market which eventually disrupts an existing market and displaces the existing market leaders. This would happen because the leaders have a tendency to oversample their existing (usually small/limited) core customer segment, asking them about what they want. Meanwhile, the new entrant would continue to improve their product until it becomes relevant in the market and enters the “sellable zone”. The market leader ends up going out of the zone as they continue to only listen to their core consumers or fans.
Cable TV networks kept offering more and more channels but with more and more advertising and higher rates. When online streaming sites such as YouTube and Netflix came along, they started off being a non-threat to the networks, as they catered to an extremely small market at the time. As the years went by, these sites vastly improved in capabilities and user experience, and became the dominant way of media consumption, disrupting the market and resulting in cable TV subscriptions plummeting and becoming obsolete.
So think about where your idea might be positioned in the market, and where it could be in the future (or where you want it to be).
The week the coronavirus hit, the class debated the shutdown. The first effect was obvious: the virus is most dangerous to seniors, so shut things down to protect them. Steve put the uncomfortable next question to the class: a shutdown pushes poorer and younger people further down, and that has health costs of its own, like rising infant mortality. Whatever you think the answer is, the habit is worth keeping. Trace the second-order effects before you decide, because the obvious move has consequences too.
Now that you have narrowed down your idea, it’s time to think about the nitty-gritty. To start, how involved are you going to be in this, personally? Chances are, you are very passionate about your idea, and you want to devote 100% of your time on it. And that is fine at the beginning. But then you have to consider - especially as an entrepreneur - how long do you actually want to stick around.
The general idea is that you want to build something that can eventually sustain itself without your involvement. When the clarity of proposition increases over time, your personal involvement should decrease.
You want to be able to grow your business to the point where you have a large team of people that can run the business for you, and you will have to let it go to pursue other things. A services-based business (such as photography and hairdressing) will be particularly difficult to go through this process, as you are usually part of what customers are paying for. There are solutions to this, though, such as training other people to take over or starting a franchise.
Next, you should identify the current and potential stakeholders for your business. With the Stakeholder Theory, you will be able to determine what type of approach to use for your business. Is your plan to make money for yourself and your shareholders, or will your employees also benefit along with the community? Ideally you would want most, if not all, stakeholders involved to have a some amount of power, legitimacy and urgency to bring them in closer to being a definitive stakeholder. That will result in harmony in your business. If any one dimension is lacking, then it’s just a recipe for disaster.
If you’re starting a business with partners, you would want to incorporate a company, sign a founders agreement, and create shares. Bring people on and entice them with a slice of the company.
Incorporating sounds complicated. It isn’t. You go to a lawyer, they file the forms, and for somewhere between $500 and $1,000 you can be the CEO of a company by this afternoon (even faster if you take a numbered company and skip the name search). You start with one share. At that point the company is worth about what you paid for the paperwork.
As the only shareholder you’re also the entire board, so you can create as many shares as you want. Say you issue a million. Here’s the part people forget: creating shares doesn’t change the value of the company, it only changes the value of each share. A $500 company with a million shares is still a $500 company. This is dilution. The only way the company becomes worth more is if the people you hand shares to bring value with them.
So be picky. Your first instinct will be to bring in someone to help you do the work. That’s the last person you want as a partner, because work can be hired and replaced. Give shares to the people who raise the value of the whole thing: the strategy, the experience, the person investors want to see at the table. Workers get a paycheque. Executives get shares.
So you’ve found a partner who actually brings something to the table. Don’t just hand over a slice of the company on day one. Put their shares on a vesting schedule: they earn them bit by bit (say, a fifth each year over five years), so if they bail after six months, they don’t walk away with a chunk of your business. This goes into the founders agreement, which will run you another $3,000 to $4,000 in legal fees. Worth it. Three people with different skills, one vision, and all locked in for five years is worth a lot more than $500, at least on paper.
One more thing about who’s in charge. Shareholders vote for the board of directors, and the more shares you have, the more of the board you get to pick. The board’s one real job is to hire and fire the CEO. So when you give away shares, you’re also giving away votes on who runs the company. With 51% you pick the board yourself.
The Spotify case had a lesson buried in it for anyone doing a revenue-share deal. Your game sells millions of units, or your song gets played on millions of radios, and you still get nothing, because the deal was split net of costs and the costs ate it all. So if you ever do a revenue split, do it on gross revenue. Take a smaller percentage if you have to, but don’t let them cut anything off the top except maybe manufacturing. You want a number an accountant can look at and understand: gross sales, here’s your percentage, end of story.
The other way to line everyone up is ownership. Steve pointed out a detail the case barely mentions: Taylor Swift owns part of her label, Big Machine. So she gets her cut plus a share of the company’s success, and more control over her career than most artists.
If your business involves creating and selling digital products or a product that is digitally distributed, then you should look at where you are going to be when looking at the Long Tail. Depending on your budget, chances are you will want to develop multiple small products located at the end of the tail and use Real Options to work their way up the tail.
The way you price a digital product or service has vastly changed in recent years thanks to digital distribution, and also has inadvertently changed how the Supply & Demand model works. In a traditional supply & demand model, the supply and demand curves essentially dictates what price point you should set your product to get the most demand and units sold. Usually there aren’t a lot of flexibility to achieve such an equilibrium. With products like video games, it’s possible to offer “deluxe” or premium editions that charge more, and you get an area between the price points that becomes your consumer surplus. But with free-to-play and microtransactions, the consumer can now choose their own price and pay what they want. They can find their own place on the demand curve.
Free-to-play works because a small group of players spends far more than everyone else. The industry calls them whales. Games like Candy Crush and Clash of Clans let the whales pay a lot while everyone else plays for free or pays a little, so every customer finds their own spot on the demand curve. Usually 90% or more of players pay nothing, so about 10% of the community carries the whole business.
Subscriptions (or SaaS) may seem more like a traditional model with set price points, but it is more advantageous as you are getting a consistent revenue stream from the monthly or yearly payments.
Identifying the costs of your business is also important. Knowing your fixed and variable costs will help you determine how to price your product/service, factoring in the price sensitivity of your target market.
You will also need to plan how that will tie in to your brand. Pricing can be part of giving a perceived value to the customer, regardless of the cost of the actual product/service. For instance, brands that are premiumoriented like Apple and Dyson price their products higher than anyone else, because they want to be seen as a brand of quality and integrity. The target segment for them are people who care more about the attributes of the product rather than the price. Looking at brand maps (think back to Multidimensional Scaling in MarkStrat) will give you a better sense on where to position your product.
You will need to find a source of capital to fund your business. Even if you’re rich and have lots of personal assets, you wouldn’t want to rely on those to prop up your business. An entrepreneur would find investors and venture capitalists to provide the funding you need and minimize your risk. Other than creating a business plan showing how you can break-even or make a profit in a certain period of time, you will also need to be able to sell the idea - in person - to potential investors and convince them that you and your business idea are extremely valuable and they would be missing out if they decline.
Remember the Bank of Steve in MarkStrat? A real bank works the same way. You don’t ask “can we have $12 million.” You come with a proposal: how much, at what interest rate, repaid over how many years, and what you’re spending it on. Then expect pushback, because banks hate risk. The rate and the terms are all negotiable, so leave yourself time for the back and forth. And only borrow if you have a strategy that turns that money into more money, because the repayment comes right off the top.
Two more things about borrowing. Ask for more than you think you need: if the plan says eight million, ask for nine or nine and a half, because things will come up that you didn’t plan for. And know where the rate comes from. The Bank of Canada lends to the banks at the prime rate, and the banks put a markup on it before lending it to you. Inflation sets the floor: if your money can’t earn more than inflation, it’s shrinking just sitting there.
On Dragons’ Den it looks like the whole deal is “15% of my company for $40,000.” In real life the price and the percentage are a small part of a much bigger deal. An offer comes as a term sheet, and the rest of that document is where the hidden time bombs are. That was the WebTracker case: two offers that you can’t compare on the headline number alone. If you don’t understand a term, look it up or pay a lawyer to explain it before you sign anything.
And when someone does show interest, don’t get flattered and drop everything for them. That’s them using Real Options on you: you do all the work of opening your books, while they’re looking at a dozen other companies and not telling you. The moment someone wants to invest in you or buy you, stop and go find everyone else who might want to as well. This is called running a process. You want them all at the table at the same time, bidding against each other. It’s the dating problem again, except in business nobody thinks you’re a jerk for seeing all seven at once.
Not all money is equal, either. Smart money comes with something attached: connections, help raising the next round, access to customers or strategic partners. Dumb money is just cash. Friends and family might give you $100,000 or $200,000, but that’s usually all they can bring to the table.
Two more traps from WebTracker. Watch for unallocated shares in an offer: the bigger deal can leave the founders owning a smaller slice once those extra shares are counted. And if you came up with the idea while you still worked somewhere else, read the indemnity clause. If your old employer comes after you, the investor’s agreement makes it your problem, not theirs. So the investor’s lawyers being comfortable with it doesn’t mean much. Get your own lawyer to confirm you’re clean.
Pitching as a nobody is an extreme uphill battle. You want to be able to control the room, but that is usually reserved for people for have money, power, and/or fame. However, there is a way around that, and that’s through the method of establishing yourself as a local celebrity. Before that, though, we’re going to make the assumption that the pitch meeting was scheduled prior with an agenda of some sort. The following is a general set of steps you can follow:
Once you have established this, the result should be that the people in the room will be completely focused and engaged on you. That’s when you can continue your pitch and present a compelling narrative. By using phrases like “It used to be that X, but today it’s Y” and implementing the Hollywood 3-Act Structure (Setup, Confrontation, Resolution), you’re elevating your status in the room, because you’re creating the engagement where people want to hear the end to your story. (Note: Refer to Oren Klaff’s Pitch Anything)
At the end of the pitch, if the investor or VC is expressing interest, you need to immediately pull back and redirect the spotlight on them, asking them about their background in the context of what you do, then say we can decide if we are a good fit. Chances are, it may throw them off and you have effectively turned the tables where you are the person who is considering them instead of the other way around. You will have controlled the room and turn yourself into a local celebrity.
Why do those steps work? Because the first part of the brain to react to anything new is the oldest part, the croc brain. In a business meeting its questions boil down to one: do I want this, or is it a threat that’s going to drain my resources? You have to get past that before anyone starts actually thinking about your idea.
So don’t open with your products or your résumé. Open with the big problem facing everyone around the table, then say: here are the three or four trends we’re following that have come together to open a window of opportunity right now. A list makes people pay attention, because now they want to hear the whole thing.
Go in as the star of the show, not as someone begging. In a job interview or a pitch, you’re the scarce one. There are plenty of people with money and plenty of companies with jobs, but there’s only one of you.
If the boss doesn’t show up and sends someone junior instead, give it a few minutes and then reschedule. It’s hard to walk out after waiting three weeks for the meeting, but it’s worse to pitch the underling and have them pass it on badly. People tend to respect you more for walking. One classmate had to make a similar call with a top client of their sign company who wouldn’t pay: they told him service would stop until he did.
Last, don’t lead with a demo. If you gave demos to everyone who asked, that’s all you’d ever do, and there are bigger things to figure out first: do we like each other, what are we going to build, and how will we judge it? And when someone asks a technical question mid-pitch, shut it down. It’s the buzzkill in the room.
If you’re trying to sell a service instead of a product, you might find it to be significantly more difficult, as a service is intangible and requires much more explanation without physical proof. A product can be tested right away. A service must be paid for first before verifying. To make things easier, use the Services Blueprint as the template and focus on the “magic” behind your service and talk about the promise.
The blueprint is a one-pager you walk a potential customer through: this is how we deliver the service, this is what you’re buying, this is where the value comes in, this is where you and I interact, and this is your part in it. A hotel is the classic example. Lay it out in rows: what the customer does, what happens in front of them (on stage), and what happens out of sight. The out-of-sight part is the point. The moment a customer can see the work as hours, they start doing the math on your hourly rate (“why am I paying $500 for two or three hours?”). Keep the magic invisible and they’re buying a product, not your time.
As you’re developing your idea and turning it into an actual business, You will undoubtedly continue to invest more and more over time, whether it’s money or time. One thing to be aware of is if you ever find yourself at a crossroads and need to decide whether you should sink an additional amount of investment into it, is the concept of Escalation of Commitment. You must remember that when you’re calculating the possible return on this, it should be based on the investment you will be putting in and not factor in the investment you had put in already. The investment you had already put in is considered as sunk costs. It cannot be recovered.
Every big company has an internal rate of return: the return it expects whenever it spends money. Steve’s example: “when we spend a dollar, we expect to get $5 back, so show me how spending $50 million turns into $250 million.” Whatever has already been spent doesn’t count (that’s the sunk cost). The only question is whether the money still to come will clear the hurdle. And don’t get attached. As the stock market saying goes, don’t let your dogs become your pets: sell the underperformer, take the loss, and put the money somewhere it can work.
Remember the hotel owner from Steve’s first day of MBA school? Rooms are $100 a night. When a room is occupied it costs $5 in power and heat, $8 in laundry and $10 in housekeeping. That’s $23 of variable cost. The mortgage and the staff work out to another $40 a room, and that gets paid whether anyone sleeps there or not. It’s late, he has empty rooms, and a guy walks in with $50. Should he take it?
Yes. This is the Hotel Room Dilemma. The $50 covers the $23 it costs to have him stay and puts $27 towards the fixed costs, which is $27 more than an empty room pays. Just don’t make a habit of it. It only works for spare capacity, and if word gets out that your rooms go for $50, that’s your brand now.
The same numbers give you your break-even. At full price, every room-night leaves $37 after all the fixed and variable costs. If you sank $200,000 into the place, you need $200,000 ÷ $37 = 5,405 room-nights to get your money back. Rent 1,000 a year and that’s about five and a half years. Now compare that to how long the thing you bought will last. If the equipment needs replacing before you’ve broken even on it, don’t buy it.
In order to effectively sell to a customer, you need to know your product market match and what features and attributes should be in your main selling message. If you don’t match your message to what customers care about, then you’ll have a lot of trouble getting the sale. You can plot these onto the Relevance VS Distinctiveness chart:
Table stakes are features that most (if not all) of your competitors also provide, but customers find those important and valuable (e.g. SEO). Uphill battle are features you may find to be unique or distinctive, but the customer may not care about, or weren’t properly communicated on how it actually affects the quality of the product (e.g. owner had a near-death experience). Core choice drivers are the features you want to be the main message to push your product.
“What’s your budget?” “What are your salary expectations?” These are tactics. They want you to give up a key piece of information that you can never take back. Whoever names a price first is at a disadvantage, almost without fail, because everything after that gets measured against it. Price should be the last thing you talk about. When you get pushed, deflect: “I do have expectations, but I’d prefer to discuss that when there’s a formal offer.” If they push harder, tell them it’s not only going to come down to price for you.
Class two got its name from this one. There are two ways to fire someone. With cause means they did something wrong, illegal or immoral. You don’t pay severance, but you have to document it and be able to prove it. Without cause means you don’t give a reason and you pay them out. Say you’re really firing a guy because you can’t stand looking at his shirt one more day. Don’t dress that up as cause. He’ll go to a lawyer, it becomes a wrongful dismissal case, and now you have to prove your reasons. Just pay the severance (after five years, that’s probably about two months, whatever the contract says). If his lawyer squeezes out another month, pay that too. It’s cheaper than court.
There are three buyer types that exist within each of the quadrants of the Relevance vs Distinctiveness chart: The Economic Buyer, User Buyer, and Technical Buyer. In simple selling, these three are usually inhabits a single person, hence it’s relatively easy to sell to. In complex selling, particularly when you’re selling a service, this becomes more complicated as there might be multiple people in any given buyer type. You have to meticulously craft your message to cater to each of these buyer types and ensure they’re all convinced that what your offering is the solution for them.
If your product or service is targeted at other businesses (B2B), then the complexity grows even more. Think back to your previous job at Servall. Just trying to sell a single ID scanner to a nightclub was an incredibly long and arduous process, with long response times from the client and having to deal with politics and legislation (California, in particular). The company used Solutions Selling as the approach, with the idea of security and nightlife safety as the Core Choice Drivers. They had to deal with the decision maker, who represents the Economic Buyer; the manager/head bouncer, who represents the User Buyer; and the head of IT, who represents the Technical Buyer. All of those people had to agree that Servall’s solution was the way to go in order for the deal to happen.
There are really only three things you can compete on: speed, cost and quality. Think of it as a triangle. Can you be the best at all three? Don’t even try. No successful company does. You’re lucky to be the best at one, and you have a very slim chance at two. As a new business you’re probably not going to be the cheapest, so figure out which of the other two is yours. When we went through this in class with my own work, the answer was that I shouldn’t compete on speed or price at all. It’s a particular kind of quality that not everyone appreciates, which is what makes it a niche.
Why not be the cheapest? Because there’s only ever one cost leader in an industry. In retail it’s Walmart, and everything about that business is built around cutting costs. You won’t out-Walmart Walmart. At the other end, notice which brands almost never discount: Apple, Arc’teryx, Canada Goose, Dyson, Ferrari. They’re aimed at people who care about the product, not the price.
The strongest brands own one word in the customer’s head. Apple is design. Volvo is safety. Chanel is status. Singapore Airlines and Emirates are hospitality. What’s yours?
When transactions aren’t happening, one thing to check is your promise. Either the customer doesn’t understand why they should buy, or they don’t believe you’ll deliver. There’s a ladder for backing a promise up. Advertising is the cheapest and easiest way to promise something, which is exactly why people meet it with suspicion. A warranty is stronger (notice how every car commercial ends with one). A contract is as far as you can go: you’ll be happy or you get your money back. The less people trust you, the further up the ladder you need to go.
Sounds like interest. Think about what it costs them to ask, though: zero. Meanwhile you’re spending days writing it instead of doing paid work. They’ve kept the whole upside of maybe working with you and given you nothing back. It’s a free Real Option on you. Formal RFPs are even worse. They’re set up as a feature checklist to find who’ll do it the cheapest, which is a game you’re set up to lose. So change the rules and make them make an investment too: “Yes, I can give you a proposal, but before I do, I need this from you.” The easiest ask is time. Offer a proper next meeting to understand what they need, with the actual decision maker in the room, instead of going away to polish a proposal for five hours. If they won’t give you that, they were never a customer, and you’ve saved yourself the days.
Any new product you release will find itself going through a process where it will be purchased and used by different groups of people as time goes by. Particularly for tech-based products, the theory of the Diffusion of Innovations is very applicable. The challenge is to make sure that your product will be adopted by the masses, which categorized as the Early Majority, Late Majority, and Laggards.
Geoffrey Moore describes a chasm existing between the Early Adopters and Early Majority. The reason for this is that both Innovators and Early Adopters have a completely different mindset than the rest, where they are known to be more adventurous and risk-taking. These people are generally easier to sell to, especially if your product has a notable innovation. The Early Majority onwards, however, are far more conservative, so marketing a new product to them will be significantly more challenging. Moore’s suggested solution to “crossing the chasm” is by target a small, but focused segment within the Early Majority that has the most pain. This segment cares more about the potential of solving their problem than checking other people’s reviews. If your product can successfully solve their biggest pain point within a reasonable price - and there are enough of those people - then you have found a “beachhead”.
The next step is to dominate this beachhead by offering the “Whole Product”, meaning not only do you need to sell the product, but also sell the entire experience surrounding the product. Apple is a prime example of effectively selling the Whole Product. Lastly, by comparing your product with competitors, you can tune your messaging so that the segment can understand your product easier and consider you as the “safe” or most rational option.
Picture your customers stacked in four tiers: Platinum, Gold, Iron and Lead. The old way of sorting them was just by how much they spend. The more useful line is the one under Gold. Above it, you’re their first choice. They come to you before anyone else, which gives you the chance to keep them happy. Below it, they wander back and forth between your pyramid and everyone else’s. So the job is to make the top two tiers as fat as possible by giving each customer the next logical step up. You end up with customers who are more profitable and who don’t defect.
Don’t only look at spend when you sort them. Who responds to your messages, who follows you, who tells their friends about you? Those people are worth more than their receipts say.
Careful with the words: in Moore’s model, early adopters are the second group to buy. The first are the innovators, and they get their information straight from the industry. A classmate who pre-orders his gear is the classic case: he pays full price before it even ships, his demands are high, and he’ll put up with bugs to get it first. Each group after that is more price-sensitive, wants more features, and expects the bugs to be gone.
Steve learned this one the hard way. His studio was three months from launching a social game where people built and traded collections of virtual goods. Then Pinterest came out, and he realized they had overshot the market: people were happier pinning pictures of cats than playing a sophisticated collecting game. If they had launched, they would have failed. Instead he kept the technology and looked for a better use for it.
If the MarkStrat experience is of any indication, maintaining your products with your team is full of challenges and conflicts. Everyone has a different opinion about how things should be handled, and there’s always bound to be someone who wants to go in a different direction. However, you should consider this to be a good thing, as conflict is an indicator of progress. As a CEO, your role is to identify and manage conflict within the business. If you and your executive team come together and quickly agree on something without much discussion, then you should be wary. Chances are, there is compromise going on that you may not know of. It may seem counterintuitive, but conflict encourages strategy, and strategy creates value. You would rather have a bunch of people come out slightly unhappy, but find a middle ground that everyone can truly agree on.
The DRW Technologies case is a lesson in how not to arrive at a company. DRW was decentralized on purpose: the CEO set up systems and let go of control, and each of the 21 plants ran itself. A new executive, Claiborne, was hired from outside to cut costs, and within days he sent an email to every plant announcing a new purchasing policy. Most of the plant managers quietly ignored it, and it went downhill from there. Debbie had already told him what to do first: go and visit the plants. He would have learned why they were missing targets, why there was a backlog, and how the place actually worked. The lessons: make sure a new hire fits how your company runs, and don’t try to change people’s jobs with an email from someone they’ve never met.
Sandy, Steve’s colleague from Microsoft, came in to talk about how Microsoft turned itself around under Satya Nadella. The quickest way to change a culture is to change the incentives, because people do what they’re rewarded for. The bigger shift was mindset: from a know-it-all culture (“everyone relies on us, we have this operating system”) to a learn-it-all one, a growth mindset, where even a good way of doing things might not be the best way. That tone had to come from the top, so Nadella brought in leaders who already thought that way. He tells the story in his book Hit Refresh.
It also raised a question every company with several product lines faces: when do you get out of one? The class debated Microsoft’s phones. Shutting the line down risked the awareness and loyalty attached to the name, its brand equity. A company like Stanley Black & Decker faces the same call across tools, barbecues and everything else it makes. Before you shut something down, ask what the name is worth.
Steve’s take on leading a team: you can build a mountain, stand at the top and tell everyone on it what to do. But then the mountain can never get bigger than you. As a game producer, he saw his best role as finding the things the team might be doing wrong, not running every decision. Get talented people, help each of them stand on top of their own mountain, and the whole thing can grow taller than you ever could alone. It’s the same goal as clarity of proposition: build something that doesn’t need you at the top.
A few things from running a pretend company that apply to a real one. You don’t get rewarded for a pile of cash sitting in the bank, so spend your budget, but spend it efficiently. Don’t overproduce, because inventory you can’t sell costs you money just sitting there. Your ambitions will almost always be bigger than your budget, so you have to choose. And the scoreboard was the share price index, not who sold the most units.
Two more from the debrief. Marketing isn’t advertising. In a big company, the marketing department is a profit centre, responsible for sales and costs, which is exactly what MarkStrat simulates. Advertising is just one piece of it. And MarkStrat had a known end date, which changed how everyone played. Public companies live like that permanently: they have to report every quarter, so the pressure always pulls toward the next three months instead of the long game.
Steve brought up a study on the science of happiness that split people into five groups by income, from the ultra poor to the ultra rich. The ultra poor are not happy at all, which makes sense when every struggle is about survival. The ultra rich are pretty happy, because they’ve already won the game. The surprise is who’s miserable in between: the rich. Feeling discontent comes from wanting to be somewhere else, believing you could get there, and not getting there. If you know it’s impossible, you can make peace with it, which is why the poor turn out happier than you’d think. The number that came out of the analysis as the happiest income was about $80,000 a year.
Why is this in a business script? Because entrepreneurs are chasers by nature. Business is the most fun and most competitive game there is, and a bit of frustration is part of any good game. Just decide what “winning” means for you before you start, or you’ll hit every target and still feel behind.
Steve told it as a parable, too. A businessman on holiday watches a fisherman struggle out to sea with his son every day, and explains how bigger nets, a boat and eventually a whole fleet would make him rich enough to do whatever he wants. And what would he want to do? Spend his days fishing with his son. Steve’s own version: he had his pilot’s licence at 17 and was training to fly for a living, until he realized he loved flying too much to turn it into a job. And the flip side: the doorman at the Royal York Hotel in Toronto makes over $100,000 a year, because he loves opening doors and does it better than anyone. Do what you love well, and the money tends to follow.
This is the template Steve walked through in Class 11: the same 15 questions, the same nine-point scale, and the same simple averages his spreadsheet used. For what the questions are really getting at, see the New Venture Template in Screening. Pick a score for each question. Higher is always better, even where the question is worded backwards (“Is there no holdup?”). If you get stuck, load the class example and see how Steve scored a classmate’s app.
Steve’s warning: the template is only as good as the person using it. The numbers come from asking hard questions and being honest about the answers, so it works best with someone pushing back on you. Saving it as a text file and handing it to Claude, or to a mentor, is a good way to get that pushback.