Categories
Profit Models Upstartist MBA Value Creation

The Art of Profitability

To succeed in business, you have to be a student of profitability.  Where does your profit come from?  How do companies profit from the services and products you use everyday?

Below are 22 different models of profitability presented in examples you can relate to your own business (these are taken from the Art of Profitability, and represent the most common profit models – surely there are more!).  There may be some profit-sources you never considered before.  Some questions to think about as you go through the different profit models:

  • Which of these profit models are at work in your business?
  • How does profit happen in your competitors’ businesses?
  • How well do your employees understand our profit models? Is the organization aligned to help capitalize on them?
  • Are there new profit models that you could apply to improve profitability and lower risk?
  • Which of your current initiatives could improve your profitability and should be accelerated? Which may actually impair it, and should be discontinued?
  • Which specific actions can your organization take in the next ninety days to improve our profit position?

I have attempted to illustrate each profit model through definition, conditions and examples.

Profit Model Definition Conditions Examples
Customer Solution Profit Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time.Study customers, create a custom solution set with multiple services. Develop relationships. Caters to customers that require relationship building Once Factset identified a company as a potential customer, they’d send a team of 2-3 people to work there for a few months, learning everything they could about the customer, how their systems worked (& didn’t work), what they really cared about. Based on this genuine knowledge, they’d develop customized products and services tailored to the specific characteristics and economics of the account. Once they landed the account, they spent a ton of time integrating their product into the customer’s systems. During this process, revenues were tiny and costs were huge. But after 3-4 months, they were woven into the daily flow of customer’s operations. Software debugged and working fine. Now one person could maintain account, part-time. More people in company use it. Costs fall, revenues grow.
Pyramid Profit Company caters to different levels of price sensitivity. Offer a range of services from low price / high volume to higher price / lower volume.The base of the pyramid consists of low-priced high-volume products, while the apex is made up of high-priced low-volume products.

The bulk of profitability is concentrated at the top of the product pyramid, but the base plays a strategic role — often through a “firewall” brand — in protecting the profitability at the top.

Has to be a hierarchy of customers with different expectations and different attitudes towards price.Top of pyramid is the most profitable so make sure you have enough customers at the top. Mattel and Barbie: Barbies were priced $20-$30. But imitators can come in below you, so you build a firewall, a $10 Barbie. Barely profitable but prevents other companies from establishing a connection with your customers. And even girls who start with the $10 Barbie move on to buy accessories. Then made a $100-$200 Barbie for nostalgic collectors.Nokia PhonesSkypePhone Plans
Multi-Component Profit Same product, several businesses.Multiple products and/or sales channels, and only some of these represent the bulk of profitability. The customer behaves very differently on different purchase occasions;  he or she has different degrees of price sensitivity.To maximize sales in the high-profitability components, it’s necessary to have full presence in the less-profitable components as well.Caters to customers that consolidate on fewer suppliers. Coke has different prices per ounce depending on whether you buy it in a grocery store, from a vending machine or in a restaurant.HotelsRetail Clothing Stores
Switchboard Profit Multiple sellers communicating with multiple buyers via a power broker associated with the service provider. The more buyers and sellers that join the switchboard, the larger the margin commanded by the service provider. Can’t do it with a small percentage of supply: once you have 15-20% of market, an upward spiral kicks in. Perceived probabilities go way up, and all deals start flowing your direction. Profitability per unit of effort also goes up.Need connections with major suppliers, or significant market share of suppliers. Michael Ovits (TV and movie producer)Ovitz put entire movie needs together: representing writers, actors, director, and represented them as a package to studios for greater profits and profitability per unit of effort.Ebay
Time Profit Takes advantage of innovation, newness, uniqueness, to gain time limited competitive advantage. Requires strong early sales effort to maximize high margin revenue.Profit margins quickly erode as competition catches-up.When a product is new, it earns premium profits. Then, when a competitor copies the innovation, price competition drives profits to zero.

Companies relying on this model make continuous innovation the modus operandi.

“When you see #2 in the rear-view mirror, step on the gas”.

Need to have major product launches, or ways to “squeeze out the juice before everyone else learns the secret.” Intel CPU’sElectronics
Blockbuster Profit Identify and support blockbuster opportunities or “home runs” and manage the research and development process to maximize chances of success. Usually for products / industries with high research and development costs, highly influenceable demand, or where there still are many discoveries to be made.Usually need an intensive marketing campaign. Movie StudiosBook PublishersDrug Makers
Profit-Multiplier Profit Take a skill, asset or intellectual property and make money from it 5 or 6 times. Take any asset, iterate it, reuse it, give it a different form.Results in better profit from lower development cost, as you don’t have to reinvent the wheel every time you use it. Branding helps here: leverage brand to multiply the value of one service by selling loosely related services under the same branding.Different from the Multi-Component Profit because it’s not the same product: it’s different products from the same original asset. Selling Information Online (blog, whitepaper, ebook, video course, etc)Disney(Lion King movie, broadway play, lunchbox, game, stuffed animals, etc)
Entrepreneurial Profit Totally aligns an organization behind rational, common sense, profit-seeking activity, rather than all the extraneous nonsense that only large organizations can afford or tolerate. A mindset that says, “We can’t afford to operate any other way.”  Total focus on customer responsiveness, energy and efficiency. Relies on speed, focus, innovation, rapid learning and cost-control.  Essentially a Lean Startup. IMVU
Specialist Profit Specialists usually can achieve a) lower cost through better knowledge b) better price through reputation or unique design of offering c) shorter selling cycles d)more rapid & market penetration because of existing connections.  This results in higher margins than generalists. Budget Airlines

Tennis Shop

Orthodontists

Installed Base Profit Initial product sales or profits are slim and profit is realized on follow-up products and services.This model is about transferring power from the customer (initial purchase with more price sensitivity) to the producer (subsequent purchases with less price sensitivity). If seller makes initial purchase price too high the customer will switch brands.Seller must keep user engaged and its follow-up products easy to buy.

Take some aspect of your business where customers are returning naturally and stimulate it more – market aggressively.

Gilette (Razors and Blades)Nintendo Game Consoles

Laser Printers

 

De Facto Standard Profit The more players who buy and enter the system, the more valuable the network.Being the standard leads to less surprise and allows you to plan more (Surprises cost money by causing you to react, respond, scramble).Your customers do your marketing for you. Microsoft Office

ETS (who run SAT tests)

CFA Exams

Brand Profit The company expends significant marketing investment in order to build awareness which is reinforced by customer experience. You know brand profitability is working when a consumer says, “I only drink Coke” even-though blind tests show consumers are often unable to distinguish the difference between Coke and its competitors. Need time and resources (persistent spending) to build cumulativebrand awareness and loyalty.Need to go after the share determining segment (SDS) – “the SDS is the most important segment in the market. That’s the one where high share today translates into high share of the whole market tomorrow.” NikeCoke

Cigarettes

Specialty Product Profit Similar to brand profit but companies use above standard materials and design to generate higher margins until competitors start to imitate.”Find the richest fields: the place where customer need, technical feasibility, and lack of competition intersect.” Need to continually develop new niche products with higher margins.Difference from Blockbuster Profit is that this is niche: specialty foods, specialty papers, etc. Finding a legitimate need or variation and addressing it. Ben & Jerry’sPrada

Tumi

Local Leadership Profit Many businesses and their company economies are totally local. Risk occurs when these companies fail to recognize they are a local business model.Strive for local leadership, this could mean x locations per city / county.…

in doing so take advantage of lower purchasing costs, lower recruiting and advertising costs, shops as billboards, foot traffic and higher awareness and potentially slightly higher pricing.“Saturate the circle” or “fill the column.”

Requires financing and operational expertise to multiply quickly StarbucksWalmart

McDonalds

Transaction Scale Profit Turn small business away to focus on the big accounts; bias yourself to big business Big transactions are a function of your relationships, and it takes years to build relationships Real estate agent who only sells houses worth over 1 million dollarsAd agencies

Investment Banks

Value Chain Position Profit Some places are much more critical than others. The high ground. The river ford. The mountain pass. The bridge. The isthmus. The channel – think of Gibraltar, Suez, the Bosphorus.What’s true in geography is true in business. There are places in the value chain that are ten times more valuable than others in terms of profit, power, and control. These special places are the control points of the business landscape and could arise from scarcity, bottlenecks, connection with customers, relative value added, etc. The location of value chain position profit is different for each industry and can change rapidly.Be aware of existing control points, radical shifts in control points, and new control points that could arise. Justin BieberLebron James

Apple OS & Itunes

Google

 

Cycle Profit Industries characterized by distinct and powerful cycle. The company can not control the cycle, but it works to maximize its position within the cycles grip. As capacity tightens the companies lead price increases, as capacity loosens, its lag price declines.When others lose money, you break even. When others break even, you make money. Hard to predict cycles.The key to profiting from cyclical industries is arbitrage –  to “lead” or be ahead of the up cycles and to “lag” or be behind the down cycles.   This can be done through buying low / selling high, reducing costs, or increasing / lowering prices depending on where you are in the cycle. ShippingTravel Industry (adjust rates seasonally)
After Sale Profit Price sensitivity is highest when ticket price is high, variability is high, and there are lots of options (i.e. houses, cars, TVs).  Customers spend a lot of energy finding the best deal.Price sensitivity is lowest when ticket price is low, variability is low, and there are few options (i.e. coffee, service contracts, insurance, accessories). Requires a mini-market has been created or brought into being by the initial sale; usually mini-market items are lower priced and frequency of purchase is greater.Difference from Installed Base Profit is that other companies are profiting from after sale products Insurance companiesIphone / Ipad accessories
New Product Profit The Profit Parabola |_/\_ “The total profit earned by all players in a market goes up, peaks, and comes back down to zero.”Manage the parabola strategically by overinvesting on the left-hand side of the parabola, and underinvesting on the right-hand side.On the left-hand side, above all else, fight for mindshare. Be seen as the category leader in the mind of the customer. Merchandise your product mercilessly. Be everywhere. Build plants and do subcontracting deals as fast as you can.Before hitting the peak of the parabola, invest less money to manage the business to maximize cash flow (right-hand side).

“Get off the last wave first, catch the next wave first.”

The objective is to reverse the investment ratio about a year before hitting the peak; therefore, you need a good grasp of when the product will peak.  Could conclude this from growth rates, customer excitement / boredom, etc.Which stage are you in?  The gold rush, peak, or no profit zone? CarsWalkman
Relative Market Share Profit Companies with high market share tend to be more profitable due to a) scale economies in manufacturing b) greater purchasing clout c) lower per-unit manufacturing costs d) lower per-unit costs for overhead and R&D e) attracting the best talent – everyone likes to work for a leader f) more resources, cash or otherwise g) more ability to control / plan the market. General ElectricSamsung

 

Experience Curve Profit Experience in serving the market and strong financial management drives down the transactional cost. Danger with this profit model is that you can miss the forest for the trees; innovations that make you irrelevant, or the invention of a new model that delivers the same thing at a 20-30% lower cost.
Low Cost Business Design Profit The company thrives on reducing the cost per unit through cumulative experience. The low-cost business design doesn’t need huge market share to be hugely profitable. It is hugely profitable as long as it continues to be dramatically lower-cost.  Dollar stores

To succeed in business, you have to be a student of profitability.  Where does your profit come from? Are there new profit models that you could apply to improve profitability and lower risk?


Reading List

Adrian Slywotzky, The Art of Profitability

Web

Derek Sivers, Presentation on the Art of Profitability

Categories
Marketing The Lean Startup Upstartist MBA Value Creation

The Lean Startup

The Lean Startup Summary

  • The Lean Startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. The Lean Startup takes lean manufacturing concepts and applies them to the process of innovation in uncertain environments.
  • The big idea is to figure out the right thing to build – that customers will pay for – as quickly as possible i.e. “validated learning”
  • Startup productivity is not about how much stuff you are building (or dollars, awards, press, vanity metrics) but how much validated learning you are getting.
  • You must have a hypothesis in order to have validated learning.  Startups need to have a value hypothesis (how does the product or service deliver value?) and a growth hypothesis (how are customers discovered?).
  • The goal is to minimize time through the Ideas BUILD – MEASURE – LEARN feedback loop, which is another way of describing the scientific method.  To do so, you first need to ask what you want to learn (what is your growth or value hypothesis)?  From that… How will you measure your learning outcome (metrics)?  From that… What do you need to build (minimum viable product) to measure it?

  • Minimum Viable Product – building something to test your growth or value hypothesis with minimum effort and the least development time.  The idea is to remove any feature, process, or effort that does not contribute to validated learning.
  • 5 Why’s – when encountering any problem, get to the root cause by asking why 5 times, and then spend proportionally more time on the root cause.
  • A pivot is a special kind of change designed to test a new fundamental (and strategic) hypothesis about the product, business model, and engine of growth. Pivot types include Zoom-in, Zoom-out, Customer Segment, Customer Need, Platform, Business Architecture, Value Capture, Engine of Growth, Channel, and Technology.  You want to pivot before you scale.
  • Eric Ries, author of The Lean Startup, summarizes lean startup principles on his book page.
  • Reduce uncertainty by satisfying the following stages:
  1. Discovery – find problem / solution fit
  2. Validation – find product / market fit through a minimum viable product
  3. Efficiency – found product /market fit,  fine tune and optimize user experience
  4. Scale – focus on customer acquisition

Entrepreneur and lean startup proponent Ash Maurya describes the stages of successful start-ups similarly in his book Running Lean.

  1. Problem / Solution Fit: do I have a problem worth solving?
  2. Product / Market Fit: have I built something people want?
  3. Scale: how do I accelerate growth?

Maurya emphasizes focusing on learning and pivots before Product / Market Fit, focus on growth and optimization after Product / Market Fit.

Reading List

Eric Ries, The Lean Startup
Ash Maurya, Running Lean

Web

Professor Chuck Eesley, Stanford University, Technology Entrepreneurship
Max Marmer and Bjoern Lasse Herrmann, Startup Genome
Eric Ries, Startup Lessons Learned

Categories
Business Ideas Business Models Marketing Upstartist MBA Value Creation

Evaluating Your Business Ideas

How can we think deeper and more broadly about our business ideas?  How can we evaluate each idea’s market potential?

Below are 8 frameworks to evaluate, structure and refine your business ideas.

The Business Model Canvas

“No business plan survives first contact with a customer”

– Steve Blank, Serial Entrepreneur, Author & Lecturer at Stanford University

Based on the work of 470+ strategy practitioners from 45 countries (and described in great detail in Business Model Generation), the business model canvas allows you fit your business model on one page.  The categories you must think through are your business’ Value Proposition, Customer Relationships, Key Activities, Key Resources, Key Partners, Channels, Customer Segments, Revenue Streams, and Cost Structure.  There are 30 free business canvas tools and templates on the book’s site.

Here’s a video that describes the elements of the business model canvas:

A derivation of the business model generation canvas is the lean canvas by Ash Maurya.  It uses the same one-page format, but with different categories: Value Proposition, Problem, Solution, Key Metrics, Unfair Advantage, Channels, Customer Segments, Revenue and Cost Structure.  You can easily create your own lean canvas at:

http://www.leancanvas.com

The beauty of these 1-page canvases is they allow you to quickly describe your business model in an easily shareable format.  Gone are the days where you need to spend a month preparing a detailed 20 page business plan!  The vast majority of startups will look nothing like what was described in the original business plan; the premise behind these tools is to quickly make your best plan, get feedback from others, and then start validating your model as soon as possible.

Customer Value

In Innovation: The 5 Disciplines for Creating What Customers Want, Curtis Carlson and William Wilmot argue that business innovation must be centered around creating customer value. Their value proposition template is “NABC:”

  • What is the important customer and market NEED? Does your product or service make a demonstrable difference to your customers?
  • What is the unique APPROACH for addressing this need?
  • What are the specific BENEFITS per costs that result from this approach?
  • How are these benefits per costs superior to the COMPETITION and the alternatives?

This template keeps you focused on your customers and competition.  Can you offer your customers something materially more valuable than the alternatives and in a sustainable way?

10 Ways to Evaluate a Market

Here’s a handy back-of-the-envelope method you can use to identify the attractiveness of any potential market. Rate each of the 10 factors below on a scale of 0-10, where 0 is extremely unattractive and 10 is extremely attractive.

  1. Urgency – how badly do people want or need this right now?
  2. Market Size – how many people are actively purchasing things like this?
  3. Pricing Potential – what is the highest price a typical purchaser would be willing to spend for a solution?
  4. Cost of Customer Acquisition – how easy is it to acquire a new customer? On average, how much will it cost to generate a sale, in both money and effort?
  5. Cost of Value Delivery – how much would it cost to create and deliver the value offered, both in money and effort?
  6. Uniqueness of Offer – how unique is your offer versus competing offerings in the market, and how easy is it for potential competitors to copy you?
  7. Speed to Market – how quickly can you create something to sell?
  8. Up-Front Investment – how much will you have to invest before you’re ready to sell?
  9. Upsell Potential – are there related secondary offers that you could also present to purchasing customers?
  10. Evergreen Potential – once the initial offer has been created, how much additional work will you have to put into it in order to continue selling?

Add your scores.  Anything below 50 is probably not worth investing your energy and resources.  Any idea that scores 70 or higher signifies a strong opportunity.

Core Human Drives

Does your business satisfy a core human need?  Many times our purchases are motivated less by the product than by what the product gives us: money, status, power, love, knowledge, protection, and pleasure.  Buying a BMW is about much more than getting from point A to B.

According to Paul Lawrence and Nitin Nohria, the authors of Driven: How Human Nature Shapes Our Choices, all human beings have 4 core human drives that profoundly influence our actions:

  • The Drive to Acquire – the desire to obtain physical objects as well as immaterial qualities like status, power and influence.  Companies that promise to make us wealthy, famous, influential or powerful connect to this drive. (i.e. retailers, investment companies)
  • The Drive to Bond – the desire to feel valued and loved by forming relationships with others. Companies that promise to make us attractive, well-liked, or highly regarded connect to his drive. (i.e. restaurants, conferences, dating services)
  • The Drive to Learn – the desire to satisfy our curiosity. Companies that promise to make us more knowledgeable or competent connect to his drive. (i.e. graduate programs, publishers, training workshops)
  • The Drive to Defend – the desire to protect ourselves, our love ones and our property. Companies that promise to keep us safe, eliminate a problem or prevent bad things from happening connect to this drive. (i.e. insurance products, legal services, alarm systems)

Josh Kaufman, author of the Personal MBA has added a fifth:

  • The Drive to Feel – the desire for intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Companies that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive. (i.e. sporting events, concerts, travel companies)

The more core human drives you connect with, the more attractive your offer will be to your potential market.  Consumers are not rational.  Why do some guys spend thousands of dollars on alcohol at clubs but only 20 dollars/month on a gym membership?  Because “going out” satisfies a much more elemental need than “working out.”

12 Economic Forms of Value

Did you know there are only 12 ways businesses make money?

  1. Product – create a single tangible item, then sell and deliver it for more than what it cost to make.
  2. Service – provide help or assistance, then charge a fee for benefits rendered.
  3. Shared Resource – create a durable asset that can be used by many people, then charge for access.
  4. Subscription – offer a benefit on an ongoing basis, and charge a recurring fee.
  5. Resale – acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price.
  6. Lease – acquire an asset, then allow another person to use it for a predefined amount of time in exchange for a fee.
  7. Agency – market and sell an asset or service you don’t own on a behalf of a third party, then collect a percentage of the transaction price as a fee.
  8. Audience Aggregation – get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience.
  9. Loan – lend a certain amount of money, then collect payments over a predefined period of time equal to the original loan plus a predefined interest rate.
  10. Option – offer the ability to take a predefined action for a fixed period of time in exchange for a fee.
  11. Insurance – take on the risk of some specific bad thing happening to the policy holder in exchange for a predefined series of payments, then pay out claims only when the bad thing happens.
  12. Capital – purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend

Use this list to get to the heart of your business model.  For example, my bachelor cooking school business would provide value as a product, subscription and/or audience aggregator.

Total Available Market

Consultants, financiers, and business development professionals do this all the time: size the market.  What is your total available market?  What we’re looking for here is 1) the number of available customers and 2) the potential value of each customer, which requires top-down and bottom-up thinking.

Unfortunately, we can’t employ pricey consultants to do this for us or purchase thousand dollar industry reports as bootstrapping entrepreneurs.

To determine the number of available customers, start with studying your competitors online.  Do they publish their financials or number of customers anywhere?  You can also look at how many people are searching for your product or service using Google’s Keyword Tool.  You can use Facebook Ads to see how many people fit your target audience (i.e. Chihuahua owners).  Or you can find a site with a large number of potential customers – such as Amazon, LinkedIn and Craigslist – and piggyback off their customer base.

To determine the potential value of each customer, you’ll want to calculate each customer’s lifetime value. You can talk to potential customers to get an idea of how much money they spend on their dog or tennis equipment, but usually you’ll just have to make your best assumptions and guesses. This is why it’s often best to scratch your own itch or to scratch your group’s itch – you can infer much about your customer’s buying habits through your own behavior.

I highly encourage you to read Noah Kagan’s post How to Create a Million Dollar Business This Weekend to see how he calculated his Total Available Market.

Blue Ocean Diagnostics

In the global bestseller Blue Ocean Strategy, the authors provide a number of handy tools and diagnostics to identify blue oceans: uncontested market spaces through new value propositions.  Personally, I have used the Blue Ocean Strategy Canvas and 4 Actions Framework many times over the years for different consulting projects.

Blue Ocean Strategy Canvas charts out the factors of competition on x axis, quality of offering on the y axis.  Which 3-4 factors present the best opportunities for new value propositions?

4 Actions Framework asks which factors of competition should your offering eliminate, reduce, create and raise?

Your GFP Quotient (Gut-Fit-Passion)

Which of your ideas sounds the most exciting?  Which business could you imagine working on (and staying on top of the industry) for 5, 10, 20 years?  Which business can you provide both a unique product and high value to customers? Which business fits your desired outcomes and lifestyle? Which one has a purpose that’s enduring and important to you?

This goes back to understanding your strengths and interests.

There’s a lot of headaches, sweat and tears ahead.  And success will require persistence and tenaciousness. What – aside from the money – would make it all worth it?

 

Reading List:

Josh Kaufman, The Personal MBA
Alexander Osterwalder, Business Model Generation
Ash Maurya, Running Lean
Curtis Carlson and William Wilmot, Innovation: The 5 Disciplines for Creating What Customers Want
Paul Lawrence and Nitin Nohria, Driven: How Human Nature Shapes Our Choices
W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy

Web

Noah Kagan, How to Create a Million Dollar Business This Weekend (article)

Categories
Business Ideas Marketing Upstartist MBA Value Creation

7 Ways to Generate Your Next Big Business Idea

How do you get your best business ideas?

My observation is that most entrepreneurs fall into 2 camps: those that solve their own problems (i.e. “scratch your own itch”) or those who seek exploitable or underserved markets (i.e. “markets matter most”). Personally, I gravitate towards the former: I find it easiest to brainstorm and work on solutions to my own problems.  But I think it’s important to try a variety of approaches to find your next big idea.  In fact, I make a point to follow “markets matter most” entrepreneurs to challenge my thinking patterns.

The 7 techniques below should help you get ideas flowing no matter what your disposition.

1. Scratch Your Own Itch

“The easiest, most straightforward way to create a great product or service is to make something you want to use. That lets you design what you know – and you’ll figure out immediately whether or not what you’re making is any good.”

– Jason Fried, Rework

Find something that is missing in your life and supply that need.

There are many examples of people who scratched their own itch and in the process, exposed a market of people who needed exactly what they needed.  The company 37 Signals wanted to track their interaction with partners and customers and created Highrise, a contact management software that is now used by thousands of companies. Track coach Bill Bowerman decided that his team needed lighter running shoes. His experiments with pouring rubber into the family waffle iron resulted in Nike’s waffle sole.

What problems do you find intolerable?

What products or services do you use and frequently complain about?

What do you need but don’t have? What is your dream solution?

 2. Scratch Your Group’s Itch

Related to scratching your own itch is scratching the itches of your social, industry and professional groups. The idea here is that you are more intimate with the problems and needs of your tribe than those outside the circle.

Look creatively at your resume, work experience, habits, and hobbies and compile a list of all the groups, past and present, that you can associate yourself with.

Which social, industry, and professional groups do you belong to, have you belonged to, or do you understand?  What groups of people purchase the same products you own and services you use?

What products or services do these groups use and frequently complain about?

What do these groups need but don’t have? What is their dream solution?

3. Follow the “Iron Law of the Market”

“Market matters most; neither a stellar team nor fantastic product will redeem a bad market. Markets that don’t exist don’t care how smart you are.”

– Marc Andreessen, Co-founder of Netscape

Follow the “Iron Law of the Market:” even the most ingenious idea will fail if no one wants it.

Your guiding question for this technique is “what are people willing to spend money on?”  Instead of elusively searching for the perfect idea, see what people are buying or searching for now.  Then build a better or complementary solution.

I highly recommend you read Noah Kagan’s post on How to Create a Million-Dollar Business this Weekend to employ a “markets matter most” mentality to find your profitable idea and find $1,000,000 worth of customers.

Some suggestions to find a product and/or market with guaranteed customers:

Review Top Sellers on Amazon (or your niche/favorite e-commerce site)

Check completed listings on Ebay (or your niche/favorite e-commerce site)

Browse the Q&A on LinkedIn, Reddit or Quora (or your niche/favorite forum site)

Look for frequent requests on Craigslist Gigs (or your niche/favorite job site)               

Find number of potential customers through Facebook Ads (for example, you could see how many Ivy League graduates live in Vietnam, or how many Lakers fans there are worldwide. that’s why Facebook tries to get you fill out your profile in detail!)

 4. Copy, Transform and Combine

There’s the myth that creativity is the product of geniuses. In actuality, as Trey Kirby shows in his thought-provoking web series Everything is a Remix, creativity happens by applying ordinary tools of thought to existing materials.  Those tools are copying, transforming, and combining, of which combining is the most powerful.  Some of the most heralded inventions of mankind – the printing press, the Ford Model T, the internet – happened when ideas were connected.

Everything is Remixed – Part 3 (Part 1, Part 2, Part 4)

Clayton Christensen, author of the Innovator’s Dilemma and one of the world’s foremost authorities on innovation, calls associating the “backbone of the innovator’s DNA.”  And Twyla Tharp, widely acknowledged as one of America’s greatest choreographers, has taught that you don’t have a really good idea until you combine two little ideas. Comedy writers also use association techniques to generate punchlines and even premises for movies i.e. “what would happen if you had a detective… for pets?”  ACE VENTURA.

Implicit in the power of combination is that the more diverse our experiences and knowledge, the more connections our brains can make. It’s the reason why businessmen, scholars and musicians alike explore unfamiliar industries, fields, and genres for inspiration, and why we often get our best ideas when traveling.

What ideas could you copy, transform or combine for your market? 

What metaphor could you use to express your business idea?

5. Phrase Ideas as Questions

To paraphrase Peter Drucker, the important and difficult job is never to find the right answers, but to find the right questions.

To generate more ideas practice asking “Why?” “Why not?” and “What if?”  Instead of thinking in statements, think in questions. Phrasing your idea as a question generates many more possibilities.

Paul Graham describes this beautifully in his essay Ideas for Startups:

“The fact is, most startups end up nothing like the initial idea. It would be closer to the truth to say the main value of your initial idea is that, in the process of discovering it’s broken, you’ll come up with your real idea.

The initial idea is just a starting point– not a blueprint, but a question. It might help if they were expressed that way. Instead of saying that your idea is to make a collaborative, web-based spreadsheet, say: could one make a collaborative, web-based spreadsheet? A few grammatical tweaks, and a woefully incomplete idea becomes a promising question to explore.

There’s a real difference, because an assertion provokes objections in a way a question doesn’t. If you say: I’m going to build a web-based spreadsheet, then critics– the most dangerous of which are in your own head– will immediately reply that you’d be competing with Microsoft, that you couldn’t give people the kind of UI they expect, that users wouldn’t want to have their data on your servers, and so on.

A question doesn’t seem so challenging. It becomes: let’s try making a web-based spreadsheet and see how far we get. And everyone knows that if you tried this you’d be able to make something useful. Maybe what you’d end up with wouldn’t even be a spreadsheet. Maybe it would be some kind of new spreasheet-like collaboration tool that doesn’t even have a name yet. You wouldn’t have thought of something like that except by implementing your way toward it.

Treating a startup idea as a question changes what you’re looking for. If an idea is a blueprint, it has to be right. But if it’s a question, it can be wrong, so long as it’s wrong in a way that leads to more ideas.”

6. Pick a fight

Creativity is an act of defiance.  You’re challenging the status quo and questioning universally accepted truths.  You’re asking 3 questions that mock conventional wisdom: 1) why do I have to obey the rules? 2) why can’t I be different? 3) why can’t I do it my way?

– Twyla Tharp, The Creative Habit

Pick a fight with the routines and rituals of the world. If you think a competitor sucks or the current way of doing something sucks, say so.  Having an enemy gives you a great story to tell and forces people to take notice and take sides.

Refuse to accept things as they are.

What pisses you off more than anything?

Who would you like to start a fight with?  

How can you embrace, change and make your mark on life?

7. Understand the Sources of Innovation

Peter Drucker, in his classic book Innovation and Entrepreneurship (written in 1985!), lays out 7 sources of innovation. I highly encourage you to read the book to find more examples of each source.

  1. The unexpected success, failure, or outside event i.e. accidentally discovering penicillin
  2. The incongruity between reality as is and reality as it is assumed to be or ought to be i.e. why buy DVDs for $20 when there are so many free or cheap alternatives?
  3. Innovation based on need i.e. there’s got to be a better way to search the web
  4. Changes in industry structure or market structure i.e. more people buying books on Amazon online than at Borders bookstore
  5. Demographics (population changes) i.e. baby boomers retiring, China’s growing middle class
  6. Changes in perception, mood and meaning i.e. “asia is the place to do business,” “Apple products are the best for creatives”
  7. New Knowledge, Both Scientific and Non-Scientific i.e. nuclear energy

We can use these 7 sources as signals for the opportunity to innovate. As you can tell, the key is awareness of accidents, incongruities, changes and trends.  We should embrace chaos because it is chaos that brings the greatest opportunities for creativity and innovation.

Reading List

Peter Drucker, Innovation & Entrepreneurship
Twyla Tharp, The Creative Habit
Timothy Ferriss, The 4 Hour Workweek

Web

Noah Kagan, How to Create a Million Dollar Business This Weekend (article)
Paul Graham, Ideas for Startups (article)
Trey Kirby, Everything is a Remix (video series)
37 Signals, Getting Real – What’s Your Problem? (chapter)