This article is an excerpt from the Shortform book guide to "The Personal MBA" by Josh Kaufman. Shortform has the world's best summaries and analyses of books you should be reading.
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What is Josh Kaufman’s The Personal MBA about? What is the key message to take away from the book?
In The Personal MBA, bestselling author and entrepreneur Josh Kaufman offers a comprehensive overview of how businesses work. He argues that there are five key processes underpinning every business and suggests ways to optimize them for successful results. You’ll come away knowing how to identify profitable opportunities and make informed decisions to ensure business success.
Here’s a brief overview of the key themes.
The Personal MBA
In The Personal MBA, Josh Kaufman offers a comprehensive overview of how businesses work. He argues that there are five key processes underpinning every business—creating value, marketing, selling, delivering value, and managing finances—and suggests ways to optimize them for successful results.
(Shortform note: The number of key processes underpinning every business is debatable. While management experts agree that Kaufman’s five processes are common to all businesses, they argue that different types of businesses rely on additional key processes depending on what they offer and their industry. For example, risk and compliance processes are essential for a business operating in a highly regulated industry, such as finance, but aren’t as necessary for businesses operating in less regulated industries, such as fashion. Understanding specific industry requirements will give you a clear idea of what additional key processes you need to manage to make your business a success.)
This guide discusses Kaufman’s advice for managing these five processes in four parts—we’ll explore his thoughts on managing the fifth process, finance, throughout the guide:
- Part #1: Create value that satisfies needs
- Part #2: Entice attention
- Part #3: Encourage transactions
- Part #4: Fulfill expectations
Part #1: Create Value That Satisfies Needs
According to Kaufman, the first process a successful business must focus on is providing something valuable to trade. In this first part of the guide, we’ll explain the five basic needs underlying all of the different things that people want. We’ll also clarify how people determine the value of products and services and the different ways businesses can provide services that seem valuable. Finally, we’ll discuss why it’s necessary to research the profitability of potential products and services before developing them.
People Want to Fulfill Their Basic Needs
While people appear to want many different things, Kaufman argues that they all make purchases in an attempt to fulfill five basic needs:
- To feel good about themselves: This includes enhancing their well-being, appearance, and status and satisfying sensory desires.
- To connect with others: This includes engaging in romantic, platonic, and professional interactions, both online and offline.
- To grow and learn: This includes increasing academic or professional knowledge and pursuing interests and hobbies.
- To feel safe: This includes protecting themselves, their loved ones, and their possessions from potential threats.
- To avoid effort: This includes eliminating tasks that take up too much time and energy or those that require specialized knowledge or resources.
How People Judge the Value of Products and Services
Kaufman argues that people’s needs shift according to their circumstances—they’re receptive to different offers at different times depending on how relevant these offers are to their situation. For example, someone who’s happily married is less likely to see the value in services that facilitate romantic connections and won’t be as receptive to these services as someone who’s just been through a divorce.
Further, Kaufman argues that even if people would like to improve or change their circumstances, they’ll only be receptive to offers that claim to help them if they’re uncomfortable with their current situation. This is because people are more motivated to move away from discomfort than they are to move toward comfort. So, if they’re comfortable with their situation, they won’t feel compelled to introduce changes into their lives. However, if they’re uncomfortable, they’ll be motivated to seek solutions to find some relief.
For example, if the recent divorcee would like to date but is currently comfortable being single, she won’t be motivated to seek out a partner. As a result, she’ll be less receptive to dating services than someone who hates being single.
Even when people are receptive to your offer, they won’t consider purchasing it until they’ve assessed how valuable it is to them. According to Kaufman, people judge the value of products and services in two ways:
- Objectively: Does it meet all requirements? Is it reliable? Is it cost-effective?
- Subjectively: How does it make me feel? How does it impact how others feel about me?
Businesses Align Offers With What People Want
Now that you know the basic needs that motivate people to make purchasing decisions, let’s look at the many different ways businesses can provide services to meet these requirements. Kaufman suggests eight ways for businesses to fulfill one or more of these five basic needs.
- Create or buy products to sell: This involves creating or buying something tangible and keeping enough inventory to fulfill customer demand. For example, design and manufacture toys or purchase premade toys in bulk to distribute and sell.
- Offer services for a one-time fee: This involves providing specialized skills and abilities and often requires additional employees to fulfill customer demand. For example, charge a fee to edit a manuscript or repair an engine.
- Create an asset and charge for access: This involves creating a single shared resource that multiple people can benefit from at the same time. For example, build a cinema and charge multiple people to view one screen.
- Supply products and services for subscription fees: This involves building a customer base and providing ongoing benefits for a recurring fee. For example, offer regular pool maintenance for a pre-arranged monthly payment.
- Rent out physical property: This involves acquiring and maintaining an asset and charging people to use it for a set period of time. For example, lease your garage as storage space and charge for the length of the tenancy.
- Provide a brokerage service for commission: This involves acting as an intermediary between sellers and buyers and negotiating fees based on the value of the sale. For example, match employers with job seekers and charge a percentage-based fee of the hiring salary.
- Create and monetize attention: This involves creating value to attract the attention of an audience and then selling access to that audience to a third party. For example, attract attention to your blog by offering valuable information and then sell ad space for additional revenue.
- Lend money or offer insurance: This involves capitalizing on financial assets by offering funds or risk-protection in exchange for a fee. For example, offer financial loans and charge interest or offer credit or warranty options for your products and services.
Evaluate Potential Products and Services Before Investing in Them
According to Kaufman, successful businesses engage in research and rigorously test the viability of potential products and services before they commit to developing them. This process helps them test their assumptions about how profitable the venture will be and prevents them from investing time and resources in projects that won’t pay off.
Kaufman suggests asking yourself five questions before developing potential products and services:
Question #1: How Much Will It Take to Get It Out There?
Consider how much time and money you’ll need to invest to create, market, and distribute your product or service. What resources will you need? How much research and development will it take to get it right? Estimate both your fixed costs, such as rent and salaries, and your variable costs, such as supplies and usage-based utilities.
Question #2: How Will You Finance It?
Consider if you’ll need to borrow money and what risks this will involve. If you intend to seek out investors, how much control will you lose and how will this affect your business decisions?
Question #3: How Much Demand Is There?
Consider how many people would want your offer and how much they’d be willing to pay for it. Calculate how many sales it will take to recoup your investment and make a profit.
Question #4: How Much Competition Is There?
Consider how your product compares to what competitors are offering. The more competitors there are, the more you’ll need to differentiate your offer and battle for customer loyalty.
Question #5: How Much Potential Is There to Expand Your Offer?
Consider if there are ways to build on your offer to generate future sales and profit from your investment. Can you adapt your offer or provide complementary products to fulfill additional needs?
(Shortform note: Business experts offer additional insights into why you should start planning ways to expand your offer. Your current business idea is likely to appeal to one type of consumer with specific needs. If you offer variations or complementary products and services, you’ll inevitably attract a wider range of consumers. This will increase your overall sales, provide financial stability, and allow you to compete more strongly in your industry.)
Overestimate the Risks of Proceeding With Your Idea
According to Kaufman, when you’ve come up with a product or service that you’re excited about, it’s often difficult to think about it objectively. This is because your eagerness for it to work prompts you to gloss over the five questions and unintentionally ignore any information that doesn’t support its success. As a result, you underestimate the risks involved and find yourself unprepared to turn your idea into a profitable venture.
However, Kaufman notes, if you intentionally look for reasons why your idea won’t work—by overestimating the requirements and risks of proceeding with it—you’ll be able to make more accurate plans that help you to succeed.
(Shortform note: Disaster avoidance experts suggest a practical way to withhold your excitement, objectively assess all relevant information, and identify potential risks: Imagine that your business idea has already failed and that you’re thinking about it retrospectively. Write out all of the plausible reasons for this failure. For example, the product was defective or the marketing department failed to attract attention. Then, brainstorm ways to solve these potential problems and integrate your solutions into your current business strategy.)
Part #2: Entice Attention
Once a business has something to offer, the second process it needs to focus on is attracting attention and appealing to potential customers. In this section of the guide, we’ll touch on why it’s important to tailor your marketing approach to people who’ve already expressed an interest in your offer. Then, we’ll discuss how to make your offer as appealing as possible.
Identify People Who Might Be Interested in Your Offer
Kaufman argues that people are busy and their minds are always preoccupied with something. With so many demands competing for their attention, they tend to make quick decisions about what’s relevant to them and worth their time. This means that they automatically ignore unsolicited advertisements related to products and services they have no interest in purchasing.
(Shortform note: Charles Duhigg (The Power of Habit) sheds light on why people make quick decisions about what advertisements are relevant to them. Your brain seeks out ways to avoid information overload so that it can function efficiently. It achieves this by creating automatic routines and decisions based on what you do or pay attention to most often. These stored patterns allow you to get through your day without having to pause and consciously think about everything you do—they account for more than 40 percent of your daily decisions and behaviors, including what advertisements you pay attention to.)
So how can businesses get people to notice what they’re offering? According to Kaufman, successful businesses don’t waste time or resources trying to get attention from people who have no interest in what they have to offer. Instead, they target people who’ve already expressed an interest in similar offers and focus their marketing efforts on converting these people into paying customers.
- For example, there’s no point in promoting a vegan recipe book to someone who’s recently purchased a book about offal. But it is worth promoting it to someone who bought a raw food recipe book since it complements their interests.
(Shortform note: Osterwalder and Pigneur (Business Model Generation) suggest an alternative approach to targeting potential customers: Define the customers you intend to target before you work on developing your offer. This way, instead of developing an offer and hoping you’ll find interested customers, you can design your offer around customers with specific needs and simultaneously develop your marketing and sales strategies to effectively target them.)
Persuade Them to Want What You’re Offering
After identifying people who might be interested in the product or service, successful businesses focus on making their offer as attractive as possible to these potential customers. Kaufman suggests four ways to achieve this.
Keep your message short and direct: Just because people are interested in your offer doesn’t mean they have unlimited attention to devote to your content. If your marketing message doesn’t get to the point, people will lose interest.
(Shortform note: Research backs up the necessity of getting to the point in your marketing: The average attention span is just 8.25 seconds—if you don’t engage people’s attention within this time, they’ll automatically switch their attention to something else and you’ll lose your chance of appealing to them.)
Pay attention to when potential customers are susceptible to your offer: Even if people are interested in what you have to offer, they’ll only pay attention to your content when it suits them. For example, they may willingly engage in your content when they’re shopping online but might block your content if you spam their browser with advertisements while they’re working.
(Shortform note: How can you find out when your customers want to hear from you? Management experts suggest that you can achieve this by tracking, collecting, and integrating data—such as demographic, psychographic, or clickstream—about potential customers and the circumstances in which they make purchases of similar products and services. This will help you to tailor your offer to suit the preferences of individual customers.)
Provoke a positive emotional response by clarifying the benefits: Clearly demonstrating the benefits of your offer encourages people to imagine how good their lives will be after accepting the offer. It also makes them feel like they’re missing out as long as they don’t have it. One way to do this is to offer free samples or trial periods so that potential customers can directly experience the benefits of your offer.
(Shortform note: While it’s true that free samples and trial periods offer a way to experience the benefits of your offer, people are unlikely to feel emotionally engaged or sign up for these free trials unless they feel like they need those benefits. To provoke this feeling of need, the authors of Positioning suggest over-simplifying the value you intend to offer so that your customers can immediately understand the benefits they’ll receive. For example, if you offer a professional cleaning service, focus on a simple benefit your customers get from using your service—they get to come home and relax knowing that all of the chores have been taken care of.)
Make use of endorsements to establish trust: When people see someone they like or respect advocating your offer, they automatically take notice. Additionally, they subconsciously transfer their positive feelings about this person to your offer: “If so and so’s representing this, it must be good.”
(Shortform note: Because they help to establish customer trust, endorsements also increase a company’s sales by an average of 4 percent. Marketing experts suggest that effective endorsements hinge on two factors: First, how well you know your potential customers’ interests—this guides your decisions about what type of endorser to look for. For example, if you know that your customers care about the environment, you’ll look for someone who has already expressed an interest in similar issues. Second, how authentic the endorsement seems—the easier it is for people to believe that the endorser actually uses your product or service, the more authentic and appealing it will be.)
Part #3: Encourage Transactions
After appealing to potential customers, the third process businesses must focus on is securing sales so that they can recoup their investment and make a profit. In this third part of the guide, we’ll first explore tactics businesses use to encourage sales. Then, we’ll discuss different strategies for determining your prices.
Customers Feel No Sense of Urgency to Hand Over Their Money
Once a business has caught the attention of potential customers, it’s in their interest to complete transactions as quickly as possible. Otherwise, short attention spans coupled with the desire to keep options open influence these people to drift away. However, while businesses want to make sales as quickly as possible, Kaufman argues that customers don’t feel this same sense of urgency. They often have a range of alternatives to explore and want to take time to ensure they’re getting the best value for their money.
(Shortform note: Research clarifies why people prefer to keep their options open instead of completing transactions. Browsing for products online or window shopping involves anticipating what it would be like to have all of these different things in your life. This process releases dopamine (the hormone that makes you feel good) into your bloodstream and increases your desire to seek out even more things that make you feel good. However, this dopamine hit stops the moment you stop imagining multiple possibilities and commit to one possibility. In other words, it feels more pleasurable to think about buying things than to actually buy them.)
So how do businesses encourage people to hand over their money before they lose interest? According to Kaufman, they achieve this in two ways.
- First, they incorporate limitations into their offer—either by limiting the availability of the product or service or setting an expiration date on a discounted price. These tactics make offers appear more valuable by suggesting that potential customers will “lose out” if they don’t immediately hand over their money.
- Second, businesses offer money-back guarantees to establish trust and alleviate remaining concerns about whether or not the offer is worth paying for.
(Shortform note: As an online shopper, you’ve probably noticed and fallen prey to three additional tactics employed by businesses seeking immediate transactions: using words that imply urgency, such as “subject to stock,” simplifying the purchasing process to make it as easy as possible—for example, Amazon’s “buy with 1-click” button, and suggesting that you can pay in installments—which makes their offer appear more affordable.)
How to Price Your Offer
When pricing offers, businesses need to strike a balance between providing a fair price to customers and making a profit. Kaufman suggests four different ways to achieve this balance and determine the price of your offer:
Manufacturing cost + profit: Work out how much your offer costs to produce and add on how much profit you want to make per sale. For example, your product costs $20 to create and you want to make a 10 percent profit for every sale so you set the price as $22 ($20 + 10%).
Comparative pricing: Work out the average price that offers similar to yours are selling for and set your price accordingly. Setting a lower than average price attracts more customers but it may also signal that your product or service doesn’t offer as many benefits as what’s currently on the market. Alternatively, setting a higher than average price signals that you’re offering something superior to what’s currently on the market. This approach attracts fewer customers but results in more profit per sale.
Price based on long-term value: If you’re selling an asset that will produce ongoing income for your purchaser, set the price according to how much you expect this asset to earn over a set period of time. For example, you’re selling a franchise and expect it to earn $3,000 a month over a period of 10 years. You set your asking price for $360,000 ($3,000 x 12 months x 10 years).
Price based on subjective value: People value products and services in different ways depending on their specific requirements and how beneficial the offer appears to be—the more an offer appears to meet their specific needs, the more people are willing to pay. Determining how much your offer is worth to the people who value it the most will allow you to set higher prices. For example, a seasoned marathon runner will value high-grade running shoes more than someone who only goes for occasional runs.
How to Increase Profits Without Raising Your Prices
Since businesses rely on profits from their sales to continue running, they often raise prices in an attempt to quickly generate more revenue. However, this isn’t the only way to increase your profits. According to Kaufman, there are three other ways to increase your sales revenue:
1) Complete single transactions with more customers: This involves attracting and converting more potential customers into paying customers for a single product or service.
(Shortform note: The most effective way to complete more single transactions is to expand your marketing, sales, and distribution network. This increases your online presence and allows you to cover more geographical locations—thus attracting a wider range of customers. Since many businesses don’t have the resources to expand their network, they often partner with external marketing agencies, vendors, and distributors to manage customer relationships on their behalf.)
2) Increase the size of each transaction: This involves convincing customers to pay more by purchasing additional products and services. For example, customers buy a mobile phone (the main product) and accessories, such as headphones and a case (the additional products).
(Shortform note: Sales experts suggest that you can increase transaction amounts by bundling products and services and marketing them as a set. For example, presenting the phone, the accessories, and the line rental subscription as a package deal. Alternatively, you could present your products and services separately and offer a discount to customers who choose to make multiple purchases at one time.)
3) Sell more often to existing customers: This involves encouraging customers to increase the frequency of their transactions. For example, customers who buy printer ink once a month generate more long-term profit than those who buy the same product once every six weeks.
(Shortform note: Customer retention experts suggest an effective way to encourage more frequent transactions: Send reminders based on past purchases. This involves tracking your customers’ previous purchases and sending reminders to restock. For example, the printer ink business reminds customers to purchase ink four weeks after their last order.)
Part #4: Fulfill Expectations
After making a sale, the fourth process businesses must focus on is ensuring that customers are satisfied with their purchases. In this section of the guide, we’ll first clarify why prioritizing customer satisfaction is essential to business success. Then we’ll explain how optimizing your resources and procedures ensures customer satisfaction and allows your business to thrive.
Satisfied Customers Are the Key to Long-Term Success
Kaufman argues that successful businesses pay as much attention to meeting or surpassing customer expectations after a sale as they do on attracting new customers. This is because satisfied customers often become repeat customers and offer a reliable source of long-term revenue. They also give positive reviews that bolster your reputation—thus attracting even more customers free of charge.
(Shortform note: In addition to offering a reliable source of revenue and bolstering your reputation, satisfied customers provide two benefits: First, they’re more likely to offer feedback and a deeper understanding of their motivations, which will help you to create better products and services. Second, they’re more likely to test or become early adopters of your newest products and services.)
On the other hand, businesses that fail to meet customer expectations create disappointed customers. According to Kaufman, disappointed customers abandon you for your competitors and leave bad reviews that undermine your reputation. This damages your business in multiple ways: It repels possible customers and forces you to allocate resources to repair your reputation and acquire new customers. These extra expenses eat into any profits you do manage to make and get in the way of your success.
Optimize Systems and Procedures to Ensure Satisfaction
Kaufman argues that the best way to ensure customer satisfaction is to make sure that your business operations are as efficient and reliable as possible. The more efficient your operations, the more time and money you save running your business. This leaves you in a better position to provide a high-quality service that outdoes your competitors—resulting in more sales, increased profits, and long-term success.
(Shortform note: Management experts Ken Blanchard and Sheldon Bowles (Raving Fans) clarify why efficient operations are the key to customer satisfaction. Customers form expectations based on their past transactions with a business—and they expect future transactions to be just as good, if not better. This means that businesses must set processes in place that allow them to provide a consistent and reliable service—otherwise, they risk disappointing and losing their customers.)
To optimize your operations, you first need to understand all of the tasks that your business relies on. Consider your product or service and write down all of the steps it takes to:
- Create it: This includes designing, manufacturing, and ensuring quality control.
- Market it: This includes your branding and media campaigns.
- Process orders: This varies depending on whether you deal directly with your customers or use intermediaries to handle your orders.
- Deliver it: This depends on the nature of your product or service and whether you’re reliant on distribution channels to fulfill your orders.
- Follow up on it: This includes providing customer support and troubleshooting problems.
(Shortform note: Business strategy experts suggest creating a more thorough outline in order to fully understand your operations. In addition to all of the steps each task involves, note down the people responsible for carrying out each step, what triggers them to take action, and what they specifically do. Interviewing the people involved in each task will help you to gather all of the necessary information.)
Once you’ve outlined all of the tasks involved in running your business, consider how you can make incremental improvements to save time, effort, and money. Kaufman suggests considering ways to:
- Streamline them: This might include automating some of the tasks or eliminating unnecessary tasks.
- Cut costs while maintaining quality: This might include cutting intermediaries out or changing suppliers.
- Improve them: This might include investing in resources such as equipment or more employees.
(Shortform note: Osterwalder and Pigneur (Business Model Generation) offer practical advice to help you streamline your processes, cut costs, and optimize your operations: Use the Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis to evaluate the effectiveness of each of your processes, as well as your overall business strategy. The SWOT analysis examines both internal and external factors—things you can control and things you can’t, provides a clear indication of your strengths and weaknesses, and reveals opportunities to improve your current operations.)
Prioritize Improvements That Will Make the Most Impact
As you work through this optimization process, you’ll come up with a long list of both minor and major improvements that you can make. Kaufman suggests prioritizing those improvements that will make the biggest difference to your efficiency and profits. Consider impact and possible consequences to determine how much difference an improvement will make.
Impact: Each improvement, even the simplest ones, will require additional resources to implement, but some will have a much larger impact than others. For example, negotiating rates for ad-hoc office supplies will probably take the same amount of time and effort as negotiating rates for your manufacturing facilities. Both tasks require your resources but only one of them is going to make a significant impact on your bottom line.
Possible consequences: By their nature, business operations are interdependent. Changes introduced to improve one operation often create consequences for multiple operations. For example, redesigning your packaging materials impacts your marketing department—because they have to spend extra resources updating their content to reflect the new design.
Kaufman suggests separating your list of improvements into two groups: Those that will massively improve your efficiency or profits (your priority list) and those that won’t. Before proceeding with an improvement on your priority list, consider all of the possible consequences it will have on the rest of your operations. Paying attention to these two factors will help you plan ahead and allocate the necessary resources to successfully implement the change.
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Here's what you'll find in our full The Personal MBA summary :
- A comprehensive overview of how businesses work
- The five key processes that underpin every business
- How to identify profitable opportunities to ensure business success