What’s the Business Hierarchy of Needs? How does it work?
The Business Hierarchy of Needs is a system for prioritizing tasks in business introduced by business author Mike Michalowicz in Fix This Next. Understanding this system is an advantage for any business owner.
Learn how the Business Hierarchy of Needs works and how to use it.
What Is the Business Hierarchy of Needs?
In Fix This Next, Mike Michalowicz introduces the Business Hierarchy of Needs, a system for determining which of your company’s problems you should fix next.
Michalowicz says most entrepreneurs have the skill to fulfill their companies’ requirements—to maintain the essential functions that keep them in business—but struggle to do so because they don’t know how to prioritize. They’re overwhelmed by problems, so they focus on fixing the most immediate one instead of identifying the most impactful approach that’ll fix the problem’s root cause. For example, they may focus on mollifying an upset customer instead of changing the manufacturing process to avoid the problem that the customer complained about. Since the root cause isn’t resolved, problems continue to appear.
How Michalowicz’s System Works
Michalowicz’s system helps you prioritize solutions for your company’s problems by identifying its most crucial requirement—or vital need, as he calls it. This is whichever essential function will cause the most damage to your company if it isn’t fulfilled. Framed positively, fulfilling this requirement will bring the most benefit to your company—it’s the most impactful approach. For example, if your business is failing because you’re not making enough sales, your crucial requirement may be attracting and converting customers.
The Structure of Michalowicz’s Prioritization System
Michalowicz’s prioritization system groups a company’s requirements into five tiers: sales, profit, structure, influence, and self-perpetuation, with sales being the lowest tier and self-perpetuation being the highest. These tiers are arranged in order of importance, with the requirements that are most essential to your company’s survival on the lowest tier. Thus, you must fulfill the more essential, lower-tier requirements before moving to higher tiers. This structure is based on Maslow’s Hierarchy of Needs, a psychological theory that states people can’t effectively fulfill some higher-tier requirements (like forming strong relationships) before they’ve fulfilled other, more essential lower-tier requirements (like food).
Here, we outline these tiers and highlight several of the requirements in each tier. We’ll explore these tiers and requirements in more depth later in this guide.
Tier #1: Sales. Help your company survive by earning revenue through sales.
- Requirement #1: Set a sales goal that supports your personal financial comfort.
- Requirement #2: Attract and convert enough customers.
- Requirement #3: Fulfill your responsibility to the customer.
Tier #2: Profit. Help your company endure and prosper by earning enough revenue that you can safely withdraw profit.
- Requirement #1: Separate profit from revenue.
- Requirement #2: Increase sales margins and frequency.
- Requirement #3: Eliminate debt.
Tier #3: Structure. Increase your company’s stability by delineating and improving its processes.
- Requirement #1: Increase process efficiency.
- Requirement #2: Capitalize on employee experiences.
Tier #4: Influence. Encourage customer and employee loyalty by creating positive change.
- Requirement #1: Identify a mission that you’re passionate about.
- Requirement #2: Improve people’s lives.
Tier #5: Self-perpetuation. Help your company self-perpetuate by continuing to create positive change after you leave.
- Requirement #1: Plan for leadership changes.
- Requirement #2: Create a supportive community.
- Requirement #3: Improve adaptability.
How to Use the Business Hierarchy of Needs
To identify your company’s crucial requirement using Michalowicz’s system, use the outline above to follow these steps:
- Cross off any requirements you’ve already fulfilled. For example, if you attract and convert enough customers to meet your sales goal, you’d cross off Requirement #2 on Tier #1.
- Identify the lowest tier of the hierarchy with unfulfilled requirements. For example, if you have unfulfilled requirements on Tiers #1 and #2, focus first on Tier #1, as those requirements are more essential.
- Identify which unfulfilled requirement will most improve the company by being fulfilled—this is your crucial requirement. If you have to attract customers and improve how you fill orders, for example, prioritize the latter: If you can’t fill your current customers’ orders well, attracting more won’t help you.
(Shortform note: Once you’ve crossed off already-fulfilled requirements and identified the lowest tier with unfulfilled ones, how do you determine which requirement on that tier is your crucial requirement? Consider using the “5 Whys” analysis technique to reverse-engineer your company’s biggest problem. This technique reveals an issue’s root cause by forcing you to look beyond the surface cause. First, identify a problem in your company and ask “Why did X happen?” Then, when you answer that question (“Y caused X”), ask “why did Y happen?” Keep asking until you identify the root cause—a process that often takes five repetitions, hence the technique’s name. Finally, determine if fulfilling one of your lowest unfilled requirements will solve that root cause.)
