PDF Summary:Fix This Next, by Mike Michalowicz

In Fix This Next, entrepreneur and business author Mike Michalowicz introduces the Business Hierarchy of Needs, a system for determining which of your company’s problems you should fix next. Michalowicz created this system because many entrepreneurs struggle with prioritization. They’re often overwhelmed by problems, so they focus on fixing the most immediate problem instead of identifying the most impactful approach that’ll fix the problem’s root cause. Since the root cause isn’t resolved, problems continue to appear.

In this guide, we’ll discuss how Michalowicz’s prioritization system works and how you can use it to make your business more successful. In our commentary, we’ll compare his advice to that of other business experts like Simon Sinek and Seth Godin, as well as explore concrete tips for implementing Michalowicz’s ideas.

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Michalowicz says you can spend profit on almost anything—in contrast with your comfortable salary, which provides enough money to maintain your current lifestyle but excludes luxury expenses. The only exception is that you can’t spend profit on your company. If you reinvest the money, it’s an expense, not profit, because you’re using that money to help your company survive or grow.

(Shortform note: American tax laws echo Michalowicz’s idea, classifying reinvested profit as a business expense. While Michalowicz uses this classification to discourage reinvestment, some business owners see it as a reason to reinvest: Business expenses are generally not taxed, while profit is. So, some business owners reinvest to avoid higher income taxes. The money they save on income taxes could arguably be considered a reward for running their business (as they can use more of their salary for personal or even luxury expenses).)

Here, we'll highlight three requirements that make up this tier:

Requirement #1: Separate Profit From Revenue

Separate profit from revenue before paying the company’s expenses, Michalowicz says. You can do so by allotting a percentage of your revenue to profit and putting it into a separate bank account. This ensures you’re rewarded for running the company, as that money is saved for your personal use regardless of the company’s expenses. This reward then encourages you to keep working hard and helping your business succeed. (This is also the key tenet of another of Michalowicz’s systems for business success: Profit First.)

(Shortform note: How does rewarding yourself for running your company encourage you to keep working hard? Psychologists say that receiving a reward releases dopamine, a neurotransmitter that improves happiness and encourages you to earn more rewards. In this case, it would encourage you to work hard so you can keep earning profit. Putting this money into a separate bank account (as Michalowicz suggests) could arguably increase this encouragement: Some banking experts say that using several bank accounts can make it more obvious when money enters or leaves a particular one. Having an account dedicated to profit makes it easy to see when you earn that money, emphasizing the reward instead of burying it under other transactions.)

Requirement #2: Increase Sales

Increase sales margins (the amount of money you earn per sale) and frequency (the number of products you sell). Earning more money per product and selling more products increases revenue, making your company more profitable, sustainable, and prosperous.

To increase margins, Michalowicz says, charge four times the material and production cost of your products. These higher prices imply better-quality products, attracting customers. To increase sales frequency, embrace a specific area of your industry and expand your offerings within that niche. Specialization encourages customers to buy more products because they trust you to meet their needs within that niche.

For example, say you sell graduation caps and gowns. When you increase your prices, you attract more customers who want high-quality products. You also start selling graduation cards and diploma frames, becoming popular as a one-stop shop for graduates and their families.

Other Methods to Increase Sales Margins and Frequency

In The Personal MBA, Josh Kaufman offers an alternative formula for price-setting: price = material and production costs + desired profit percentage. For example, if the cost was $10 and you wanted to make 40% profit, you’d set the price to $14 (as opposed to $40, using Michalowicz’s formula).

Why would you use a formula that produces lower prices and therefore smaller margin increases? The answer arguably lies in the variable profit margins in different industries. For example, restaurants often have a 3%-5% profit margin. Raising prices too far beyond your industry’s average could drive customers away, instead of attracting them by implying high quality—so, Kaufman’s formula may work better than Michalowicz’s in this case.

When it comes to increasing the number of products you sell, other experts recommend marketing additional products based on customers’ past purchases. For example, say you run a pet store and a customer bought a dog bed from you. You may then market dog toys and leashes to that customer, as their previous purchase shows they’ll likely be interested. This is similar to Michalowicz’s specialization suggestion—you encourage the customer to trust you to once again meet their needs within a specific niche (in this case, dog supplies) since you did so before.

Requirement #3: Eliminate Debt

Eliminate your business debt. Michalowicz says being in debt prevents you from achieving financial freedom and increases anxiety, as you’re constantly aware that you owe other people money. (Shortform note: Eliminating debt isn’t just important for business owners seeking financial freedom and relief from anxiety—it’s important for anyone seeking to become rich. In The Automatic Millionaire, David Bach discusses clearing debt as one of the essential elements of becoming rich. Bach explains that interest accrues rapidly on debts. If you don’t pay them off quickly, you can end up paying far more than the initial amount—making it much harder to become rich.)

To avoid the problems that come with having debt, use your profit to eliminate your business debt: After separating your profit from revenue as discussed above, use 95% of that profit to pay off your debt and keep 5% as your personal reward. (Shortform note: This method may work for business debt, but how can you pay off personal debt? Some financial experts suggest using the 50/30/20 method: Devote 50% of your salary to paying for needs like rent, devote 30% to wants like streaming subscriptions, and use 20% to pay off your debts. Alternatively, you could use this 20% to both pay off debt and build savings.)

Tier #3: Increase Stability Through Structure

The third tier of Michalowicz’s system is increasing your company’s stability through structure. Michalowicz defines structure (or order, as he calls it) as delineating and improving your company’s processes so anyone can use them to keep the company running smoothly. By completing this tier, you ensure your company doesn’t rely on any one person for survival. This means your employees can take sick days or vacations without issue, and you can work less.

Should Employees Want To Be Indispensable?

While ensuring companies don’t rely on any one individual may be good for business owners, what if you’re an employee? Many people want to be indispensable at work because it provides job security, some business experts say: If the company can’t function without you, you’re safe from layoffs or firing. However, this goal can be harmful. When you try to be indispensable, you’re more likely to experience high stress or burnout because you can’t easily take sick days or vacations. In addition, if no one else can fill your role, you can’t advance to new positions, becoming trapped in one role.

Instead, these experts suggest increasing your value as an employee by teaching your skills to your coworkers and helping make the company’s employees more capable overall. This is arguably part of delineating and improving the company’s processes—you’re sharing your skills and knowledge on how best to complete processes so other people can do so, too.

We’ve grouped Michalowicz’s advice on completing this tier into two requirements:

Requirement #1: Increase Efficiency

Make your processes more efficient. Michalowicz says many companies use inefficient processes simply because they’re familiar, which wastes money and effort. To avoid this pitfall, look for areas in your company where time is wasted or tasks pile up. Then, change those processes to be more efficient, regardless of how familiar or traditional they are.

(Shortform note: Besides changing outdated processes, you may also have to change your outdated managerial mindsets, as Marshall Goldsmith explains in What Got You Here Won’t Get You There. If you’ve been in business for several decades, you may make assumptions about your subordinates’ desires and behaviors based on your experiences (what you’re familiar with). For instance, you may assume you don’t need to consider employee happiness because you pay them to work, not enjoy themselves. However, the working world has changed significantly in the past few decades, and many of these assumptions can reduce employee retention and company success.)

Often, time is wasted or tasks pile up when only one employee can complete a task. To eliminate these bottlenecks, schedule four-week vacations for your employees, Michalowicz says. Knowing they’ll be leaving forces employees to document their processes clearly and accessibly—that way, their coworkers can assume those responsibilities and continue normal operations in their absence. You can then adjust these processes for the long term, sharing essential employees’ tasks among several people, so the company no longer relies on them solely.

Encouraging Clear Process Documentation

Even if you can’t send your employees on lengthy vacations, providing guidelines on documentation could help employees clearly share their processes. In Traction, Gino Wickman suggests documenting the 20% of a process that produces 80% of its results. This mirrors the well-known Pareto Principle: the idea that, in many cases, 80% of a result stems from only 20% of your activities. Identifying that impactful 20% shows you where you should devote your time and energy to be most effective and productive.

When documenting a process, only including essential steps eliminates extraneous tasks, improving efficiency and clarity. While Michalowicz suggests using this documentation to redistribute tasks and eliminate bottlenecks, Wickman focuses on using it to problem-solve. Problems often arise when a process isn’t completed properly. By reviewing a process’s documentation, you can identify which step wasn’t completed properly and fix that problem.

Requirement #2: Capitalize On Employee Experience

Use your employees’ experience to improve your processes, Michalowicz says. Your employees have unique skill sets and backgrounds that help them complete tasks and solve problems. They can use this experience to improve the company’s processes, making it more stable and successful. (Shortform note: Some business experts add that you can create a workforce with a wider variety of unique skills and experiences by increasing diversity. In turn, this wider variety helps your employees make better decisions overall, which improves stability, increases revenue, and makes the company more successful.)

To capitalize on employee experience, put them in the right roles. Identify an issue in your company and then evaluate your employees to find one that’s best suited to fix it. Usually, this is an employee who regularly deals with the issue, as they’re more likely to know why it happens and come up with effective solutions. Finally, put that employee in a role where they can fix the issue and adjust the company’s processes to avoid recurrences.

(Shortform note: Some business experts say you can capitalize on employee experience to identify issues, as well as resolve them. This is especially true for frontline managers and workers—employees who are directly involved in the production and delivery of your company’s goods and services. Just as employees who regularly deal with an issue can better resolve it, frontline employees can recognize issues with these core operations that higher management would miss. Once your frontline employees have alerted you to a problem, these experts say you should communicate closely with them and then modify your company-wide policies to reflect their insight.)

Tier #4: Inspire Loyalty Through Influence

The fourth tier of Michalowicz’s system is inspiring loyalty through influence. Michalowicz defines influence (or impact, as he calls it) as creating positive change for your community. To complete this tier, you must connect your company to a larger mission, which then encourages loyalty in your customers and employees—they see the good you’re doing with your mission and are inspired to support it. Loyal customers are more likely to buy your products and recommend them to others, while loyal employees are more likely to work hard to help your company succeed.

Here, we'll highlight two requirements in this tier:

Requirement #1: Identify Your Mission

Decide what kind of positive change you’re going to create for your community. This change doesn't have to be dramatic, Michalowicz says; it’s more important that you and your employees are passionate about the way you’re helping people because that passion lets you persevere through difficult situations. One way to identify your mission is to look at how your company or industry harms your community and work to resolve it. For example, if you run a logging company, your mission might be to provide high-quality products (lumber) while minimizing your harmful effects on the environment.

(Shortform note: As an employee, how can you be passionate about your work if your company doesn’t have a clear mission? Some business experts suggest talking to your coworkers about how your work improves the world, even in small ways. Realizing the positive influence you already have can help you feel passionate about your work and persevere in creating positive change.)

Mission vs. Purpose

Michalowicz’s definition of “mission” may be more commonly called “purpose” in the business world. A company’s purpose is often defined as the overarching reason it has certain goals or takes certain actions, and it often describes the way the company hopes to improve the world. In contrast, a company’s mission is often defined as the specific goals and actions that its purpose inspired—the concrete steps the company takes to create positive change.

Going back to our logging example, these experts would likely define “providing high-quality products while minimizing your harmful effects on the environment” as your purpose. Your mission may be planting a sapling for every tree you cut down or rejecting clearcutting.

If you connect your company to its current goals or actions (mission) instead of the purpose behind them, you may struggle to inspire loyalty among customers as well as employees. In Start With Why, Simon Sinek says that customers who believe in your company’s purpose are more likely to be loyal than those who simply like your company’s current goals or actions. These individuals are passionate about why you do things and will likely continue buying your products and working hard as long as you uphold that “why.” In contrast, people who focus on your company’s current goals or actions will likely stop supporting you if those things change.

Requirement #2: Improve People’s Lives

Use your company to improve people’s lives—to give them a transformational experience, as Michalowicz puts it. When you improve employees’ and customers’ lives, they become more loyal because, as discussed above, they’re inspired to help you continue your mission.

To help your employees, first, ask them about their passions and goals. Then, adjust their tasks and schedule to give them the time or money to pursue these passions and goals. As well as being inspired by your mission, your employees will be more likely to work hard and help the company succeed because they’re grateful: They know you made an extra effort to help them, so they’ll be more likely to do the same in return.

(Shortform note: Gratitude may improve work ethic through the reciprocity reflex. In The Happiness Hypothesis, Jonathan Haidt says humans have an evolutionary instinct to repay favors. Thus, if someone’s helped you in the past, you’re more likely to help them in return. This reflex evolved because it improved early humanity’s chances of survival, creating a network of obligation that encouraged everyone to care for each other.)

To help customers, provide goods or services that feel like they’re changing customers’ lives—the more significant the change, the better. For example, say you run a company that creates puzzle books. You might make your product feel life-changing by including facts and statistics in every chapter that show how completing puzzles improves brain function.

Maximizing Happiness to Improve People’s Lives

In Delivering Happiness, Tony Hsieh offers another method of improving employees’ and customers’ lives, using a three-level theory of happiness:

• Fulfill expectations: You reach the lowest level of happiness by fulfilling the basic service standards needed to retain customers and employees. For example, customers expect to receive their purchases on time. If you regularly ship orders late, they’ll stop buying from you. This logic also applies to employees and their paychecks.

• Fulfill desires: You reach the middle level of happiness by going beyond your community’s expectations and considering their desires. They may not expect to receive these benefits, but they want them and are happier with them. For instance, you may give free shipping to customers and full-coverage insurance to employees.

• Fulfill unrecognized needs: You reach the highest level of happiness by improving customer and employee experiences in ways they haven’t thought of. They may not consciously want these benefits, but they’ll be happier with them. For example, you may give customers faster shipping and employees extra paid time off.

As you reach these levels, your relationship with your employees and customers improves, encouraging loyalty. To maximize this improvement, Hsieh says to reach all three levels.

Michalowicz’s advice for improving employees’ lives arguably corresponds to level two of this scale, as asking employees about their passions and goals is a way to identify and meet their desires. Thus, once you provide time and money for your employees to pursue their passions, Hsieh would likely suggest that you find ways to fulfill their unrecognized needs.

Further, Michalowicz’s advice for improving customers’ lives can arguably encompass level three of Hsieh’s scale. You can do so by highlighting a life-changing benefit of your product or service that your customers might not have expected—one that surprises or delights them.

Tier #5: Continue The Mission Through Self-Perpetuation

The fifth and final tier of Michalowicz’s system is helping your company continue its mission through self-perpetuation. Michalowicz defines self-perpetuation (or legacy, as he calls it) as your company continuing to have a positive effect on the community after you stop actively participating in it. By completing this tier, you connect the company more firmly to its mission and then disconnect yourself—you make the company an independent entity guided by its mission rather than your personal direction. This lets the company continue improving people’s lives and being successful in the long term, even after you’re no longer involved in its operations.

How to Disconnect From Your Company Effectively

Some business experts agree you must disconnect from your company. However, you must prepare for this transition adequately. Low success rates after a founder leaves often occur if the company’s brand is too strongly tied to this single individual. When the founder leaves, the company struggles to handle the confusion of losing its leader and doesn’t believe that its brand (and, arguably, mission) can continue without them.

Besides Michalowicz’s advice (which we cover below), you can improve your company’s odds of survival by encouraging trust and team spirit in the company rather than the founder, both among employees and customers. This redirects people’s confidence from you as founder to the entire company: Everyone believes in the company’s brand and ability to survive, so they continue working hard to maintain its success (or, in the case of customers, buying its products).

We’ve consolidated Michalowicz’s suggestions on completing this tier into three requirements:

Requirement #1: Plan For Leadership Changes

Plan how your company will continue its mission after you’re gone. This includes identifying your successors and deciding how the company’s leadership will be structured. It’s important to do this in advance, as unexpected circumstances could force you to leave the company earlier than intended, and your employees will struggle to adapt without a plan in place.

To make this plan, Michalowicz recommends identifying the people who best support your company’s mission and preparing them for a leadership role. Encouraging flexibility is also helpful, so if one employee is promoted to lead the company, the others can take over her responsibilities and keep the company running normally throughout the transition.

Further Tips on Succession Planning

Jim Collins and Jerry Porras emphasize the importance of succession planning in Built to Last. In addition to being prepared for leadership, they say new leaders must be committed to continuing the succession plan. As soon as a new leader takes over, they should start evaluating candidates to eventually take over from them.

This continuous succession planning creates a “leadership continuity loop,” ensuring that power can smoothly transition from one person to another whenever necessary. In addition, continuous planning would arguably increase flexibility (as Michalowicz suggests) since your employees are already thinking about the future and how they can prepare for it.

After identifying people who best support the company’s mission, how do you prepare them for a leadership role? Business experts suggest implementing the following strategies:

• Define potential career paths. When employees know their career options, they’ll be more excited and work harder. Make sure they understand the requirements for each level of promotion and that they have the chance to become a leader.

• Offer continuous training. Many companies stop training employees after onboarding, but this means employees aren’t learning important leadership skills. They particularly recommend instituting an open-door policy so employees can approach you with questions about leading.

Requirement #2: Create a Community

Create a community that appreciates your company’s mission and encourages your company to uphold it when you’re not there to do so. In Tier Four, we discussed how connecting your company to a mission inspires loyalty. In Tier Five, your goal is to encourage that loyalty until your customers will promote your product and protest if your company deviates from its mission. This creates a virtuous cycle: Your community encourages the company to uphold its mission, the company continues to create positive change, and your community remains loyal to the company. In contrast, a less-loyal community will simply stop supporting the company if it doesn’t uphold its mission.

To create a community, develop imagery, narratives, and spaces that are unique to your company and customers, Michalowicz says. These elements separate your company from your competitors, encouraging your customer base to be loyal to you. These elements also provide a connection with your customers, encouraging them to participate in the community.

Returning to our logging company example, your mission is to provide high-quality products while minimizing harm to the environment. You make your logo a tree stump with a sapling growing out of it, unique imagery that shows your commitment to both providing your product and fostering new growth. Your unique narrative is that a company that inevitably harms the environment can also protect it if you put in the effort. You foster unique forums online, giving people a place to discuss their experiences of, advice on, and ideas regarding buying wood-based products sustainably and mitigating the harm caused by logging.

How to Build a Community

Community building experts explain that there are three stages of building a successful community: Members are attracted to the community’s sense of identity, they participate in the community, and they’re rewarded for that participation. That reward further encourages their sense of identity, creating a virtuous cycle.

Michalowicz’s advice to develop unique imagery, narratives, and spaces aligns with the first stage of this cycle. These elements show off the community’s identity, letting people easily understand and relate to it and thus encouraging them to join. Community-building experts offer a couple of tips for defining your communal identity (and thus your imagery, narratives, and spaces):

• Be specific. No community can serve everyone, and the more specific your group identity is, the more attracted people who relate to that identity are likely to be.

• Reach out to isolated groups. When people feel isolated, they crave community. If you reach out to them, they’ll be more likely to enthusiastically join the community.

Encouraging participation is important because the more people engage with the community, the more they’ll relate to the group identity. This is likely why customers would be willing to promote your product and uphold the company’s mission: They identify so strongly with the community that supporting the company’s identity is an extension of supporting their own.

When rewarding people for their participation in the community, use intrinsic rewards (like a sense of status) as well as extrinsic rewards (like gifts). Customers who gain intrinsic rewards are more engaged and will probably remain in the community even if the extrinsic rewards stop. For example, if you grant the title “Superstar” to people who attend 10 community events, those people will have a sense of higher status, encouraging them to keep participating.

Requirement #3: Be Adaptable

The company needs to be adaptable to remain successful and continue its mission after you leave. This includes company leadership being willing to change the work processes its employees use or even the company’s business model and industry. Michalowicz says being willing to change lets the company continuously develop better ways to improve people’s lives. In contrast, failing to adapt can put your company out of business.

(Shortform note: Michalowicz describes continuing your mission as the primary goal, even if you must change business models or industries to do so. But how can a company survive such massive change? In Built to Last, Jim Collins and Jerry Porras say that you must identify a few important, unchanging values that will guide your company’s decisions and help you continue your mission. The stability of these values helps your company remain cohesive and successful despite major changes. For example, our logging company may value quality and sustainability. Even if the company’s specific products or working methods change, it’ll keep making quality products in sustainable ways, thus upholding its mission.)

To be adaptable, hold quarterly meetings with your department heads. Michalowicz suggests two key topics for these meetings: First, evaluate whether each department’s processes are helping your company succeed and complete its mission. This lets you fine-tune your processes and quickly resolve problems. Second, brainstorm ideas for other, yet-to-exist companies that could put you out of business. This gives you a big-picture view of your business model and competitors, which lets you fill any gaps in your company’s offerings and adapt to major changes in your industry.

(Shortform note: Michalowicz’s advice is directed toward helping a company uphold its mission, but it could also apply to helping an individual uphold a personal mission. In Built Through Courage, Dave Hollis says that everyone has a purpose (or mission). Much like Michalowicz, he emphasizes the importance of honestly evaluating your daily behaviors and environment (your processes, if you will) to make sure they’re supporting your purpose. If you don’t, you risk being held back by bad habits or wasted time. He also recommends imagining different paths you could take in life (such as a career change) because it helps you recognize that you have options and you can make big changes to improve your life.)