Create Value: Standard Forms of Value Continued

 

The Personal MBA: The Foundation of Effective Business

 

Lesson Info

Create Value: Standard Forms of Value Continued

Thought I'd just check in before we continue any questions over the material that we've discussed so far everything clear in our work book in the status seeking I don't know if the people on the internet have this but there's a quote it says it's a long coat I'm not totally sure how it of plus the status seeking its on the society which scorns excellence in plumbing as a humble activity and tolerates shoddiness and philosophy because it is an exulted activity will have neither good plumbing nor good philosophy neither its pipes north's theories will hold water so I think john w gardner is excellent quote how does it relate to status? He thinks it seems with the moral of that is that you shouldn't need to seek status as much and just sort of do what you want how does that yeah, plus I chose that quote because it's a really good example of an activity that a lot of people uh look at is very low status and an activity that people really look at it as his high status, and I think it's it's...

really important for us as business people that a lot of the things that we're going to do on a daily basis, they're actually kind of low status activities, right? You know, it's there's a lot of a lot of plumbing there's a lot of things that and that need to go into the operation of a business and so for us, it's important to understand that status considerations are really big on the part of the purchaser but for us as business people it's important to dig in and either serve markets that maybe a little bit lower status than then we would personally prefer or take on activities that are a little bit lower status than we might. I personally prefer just kind of a good reminder that, uh, some things are really, really important, like plumbing, even if they're not the sexiest things that way do on a daily basis when you're talking about evaluating the market that you talk about urgency having having pu inside your house and not in the toilet, that is off the charts urgency that's a really? Yeah, yes. Does that make sense? Yeah. So now any other questions? Yeah, I went over here. I don't know. I'm gonna follow pu inside your house. Uh that's a yeah, let's go here. Uh, no getting back wants to know if people our status seeking something you broke down and death just a moment ago. If people are status seeking and I provide a service which for them is photography, should I start out with a high price and convince people that I'm worth that or if I start out cheaper can I move up later, it is much more difficult to move out, move up later than it is to just set your price, and you know that there's the psychology of pricing is just fascinating, and one of the social signals that are pricing sends it, particularly if your service provider is if you are expensive, it's highly likely that you are worth that expense, so people are often more likely to purchase from high priced service providers because that price sends a signal that there's quality here than they are to trust an important service to somebody who charges, much less so. Lots of amazing psychology if if you're interested in this there's that there's a wonderful book by robert shell genie called influence that talks about the social social psychology of lots of common life situations, including pricing, and I think this if I'm remembering right there's one example in that book where he talks about was a product based business that sold jewelry. There was one particular necklace that didn't wasn't selling really well, and so the owner of the business told, told their assistant, mark, this price in half, we just need to get rid of it. So somehow wires got crossed and they actually doubled the price instead of cutting it in half, and they sold out all of their stock. Because people perceived the higher price for this truly jewelry as a higher quality piece of jewelry, and so more people bought it. So pricing does weird things that's where psychology and as a service provider it's in your best interest to charge a high price to signal that you're worth it and then do everything in your power to overdeliver upon the promises that you're making to charge that price. Then it is too to start signaling low value and try to work your way up can add on a charge that the so photography and along with the question that was online, especially the wedding photography is it seems to be very unique in the fact that we have very uneducated clientele. Most people have never, you know, unlike something like toilet paper, which everyone understands everyone needs when you have a client coming tio, they don't necessarily understand the value that you are creating, and so it can be scary. Tio ask for a higher price because then you have to literally justify it. People just won't be like, oh, that's, obviously, because what? Uncle bob can do it for five hundred dollars? Why can't you do it for that, so do you still suggest higher pricing? If you second educating clients well what I would say is and we're going to talk about this in great detail when we get to the sale section because there's an idea called education based selling the best thing that you can do is a service provider set a high price but spend a lot of time educating your customers or your client about exactly what you're doing and why the asking price is a very small fraction of the value that you are ultimately going to deliver to them and if you can get that balance right you're paying this thing which feels really high but you're getting this enormous amount of benefits that you can get nowhere else that works really really well so yeah the trick is to set your price is high and then make sure you're spending enough time making sure people know why they're paying that why it's worth it before we continue to do one more question on ok ok this is a question from curious about identifying a market he says what if I find a market that that does not exist today because people did not think of that need yet think ipod I'm thinking nothing but the ipod apple was tapping into something that was pre existing already existed yet so so the story about the ipod is mp three players had had been around for what for five years before the ipod came out and the trick was that mp three players were sold on these very geeky criteria, right? One hundred twenty four megabytes of space, which nobody knows what that is right or the the average person that they were trying to sell this to like that means nothing so apple's biggest innovation with the ipod I was going to an existing market that had sales so people were buying mp three players over tape cassettes or or cd players and then changing two things the first thing they changed was the design of the product, so it know it looked like a high design really the status signaling element of this is a really cool I think they did that really well. The other thing that they did was reframe from very geeky technical criteria um their tag line at launch was a thousand songs in your pocket and that was a really that's we'll talk about this in marketing called it's called a hook it's a way of very succinctly describing the the key benefit of what you're offering in a way that your primary customer cares about. And so what I like to carry a thousand songs in my pocket? Yes, I would this thing is a really cool status a signal oh it also happens to be twice as expensive as the's geekier mp three players but I don't care because I'm getting more benefit than I'm paying in the higher price right? So that's that's that's how that works the best advice that I can give you and we'll go into this a little bit in terms of evaluating ideas if you were doing something absolutely new to the world um here's your criteria get ten people to preorder this thing that you bought at the price that you would like to charge or if it's recurring occurring at least three paying clients confirmed that you they're going to start paying you as soon as you start offering service if you can't reach that very minimum threshold shouldn't thank you very long to hit it if what you have is really promising if you can't get there it may not be as promising an idea as you think it is go all right let's finish the's the's forms value so we're on form of value number five resale and resale is essentially purchasing an asset from another business to sell it later at a higher price so a grocery store is a resale business the carry lots of stock they buy it from wholesale producers like farms. In the case of food from manufacturers they take all of that stock into inventory at a low price they put it on a shelf and they mark it up sometimes two or three times what they paid for it right and the business makes their money in the difference between what they purchased a product for and what they sell the product for now, why do resale businesses exists? Because it's so that seems really efficient, right? You're inefficient convenience? Why can you give an example of that? Um, why? Why don't the originators sell the product themselves? Well, it's a lot easier to go to your local grocery store to pick up your broccoli and your zucchini and you're toilet paper and your shampoo than it is to go to all the different particular spots the actual vendors and you probably spend more time and money in gas to get tell the different places than you will in paying the slightly higher price by buying groceries exactly so that's why re so uh businesses benefit the shopper or or benefit the person who's purchasing the product? How does it benefit the suppliers so let's imagine we have a farmer who's who's making apples right? They could either sell those apples for a dollar a pound to a grocery store or they could sell it for three or four dollars a pound to and in consumer. Why don't they take the higher the higher price? Because there's more people at the grocery store teo funnel where everyone will go to exactly so selling to lots of individual purchasers is actually really difficult and so it's in the farmers benefit to sell all of their apples for one dollars to a grocery chain then it is to try to hang out there shingle and sell individual apples to thousands upon thousands of people. And so the farmer gets to spend more time forming apple. They get a guaranteed price for at a large supplier that makes the whole thing worth it. And then the grocery chains make money by marking up those apples and selling doing the work of selling it to individual purchasers. Okay, that's, why resell works? It works for the suppliers. It works for the customers, and it works for the resellers who are connecting the stock with the individual buyers that make sense. Now the keys to doing this effectively, this is a hard business. It really is. Um, the keys to operating a resale business are purchasing products as inexpensively as possible, which usually means in bulk, right? So most resellers don't buy products individually from wholesalers. They buy a whole bunch of them at the same time, and those air usually ships to a warehouse or a distribution center or someplace where they sit in the retailer's inventory until their ships to a store, it actually be on a shelf, right? So you have to be able to do that. A big risk for resale business is the product gets damaged in this process, right? The shipment from the hole from the wholesaler to the distribution center distribution center to store store to putting on the shelf you would be amazed, you know, walk into your local wal mart target tesco grocery store you would be amazed how much of the stock that sits on the shelf if there's more in the back room that got damaged on the way there and that loss is very, very real. So as a recently that's that's a really big risk um once it hits the shelves, you need to find purchasers of the product as quickly as possible to lower your inventory costs. So just like product based businesses can have a lot of money tied up in their stock, their inventory that they have on hand to sell to their resellers the resellers are sitting on their own stock and the longer it takes to sell the products that they buy, the less money they ultimately make because inventory expensive. Okay, so so managing stock is a big, big part of running a resale business like lies if you run out of stock, don't have anything to sell to your customers it's like the worst possible scenario there's a person in your store looking at a shelf and there is there's something that they want to buy and they can't find it right managing stock levels is really important now you also want to be able to sell the product for as high a markup as possible but you're doing that in the face of lots of competition right? Because your suppliers are probably not supplying just one business they're probably supplying several so you need to be able to sell it a high enough price that it it makes it worth it for you to run this business but not so high that your shoppers go and shop someplace else right now the value in this business is connecting wholesale suppliers with retail buyers and pocketing the difference if you can do that, you can do enormously well so even on very, very very thin margins. So so the absolute markup ah that a retailer like wal mart target costco, tesco any of the big retailers take actually really small really small you'd be surprised uh but they're serving so many customers with so many different types of products that they make a lot of money because every transaction it in general is is profitable that make sense basics of how a retail business works there's a a local retailer that has just the most incredible model to me it's so they are they're a reseller for amazon returns how does that work? So apparently they buy in bulk shipments of return products to amazon okay? And then the way that they resell them is that they date every packages it comes in and it's and there is clearly marked in terms of what it is and as the inventory ages the percentage discount increases all interesting and so people have an incentive to take the old stock first exactly. And so they turned through merchandise incredibly quickly it's for the most part as is but you can return the product within a week or two if if it turns out that it's broken but for the most part it's it's people returning things because they decided they wanted something different and so amazon gets the credit of the shipping back to them whatever whatever we pay for that and then and then they apparently sell it for for a pretty substantial discount and we'll refer that model to work very close interesting. Now one one thing that a lot of resale business is uh do it. Some point is they experiment with products of their own right? So the store label brand stuff that's how this works because if they control the product that's coming in they can control that supply chain. They also control the pricing and they make a higher profit on it right? So you can start to see retailers experimenting with with several of these models the amazon is a reseller that's that's experimenting with subscriptions for example you like these I I subscribe there's there's a particular type of gluten free protein bar that I really like every month I get three boxes of them ships to my house house and charged to my credit card from amazon who receives a markup on the resale so there's all sorts of different ways that you can do it but the whole the stock traders maxim of buy low sell high that's the essence of a resale business now former value number six was called police and elise is a form of value where you acquire an asset and then allow another person to use it for a specific period of time in exchange for feet so rental cars are really great example right? You go on rent a car you don't own the car you just pay some money so you can have the keys to the car and the right to drive it around for a certain period of time and the rental car company makes money because as long as you return that car in good condition uh they can rent out that car to lots and lots of people over over the products. Useful life right now that if you return the product in good working condition is a big right and that is that's actually the primary risk of a leasing or or rental type business right it's involving durable assets that can be damaged or can be lost or can be be destroyed right? So you need to be you in order to run this type of business you have to have something worth leasing right could be cars could be apartments what are some other things that are leased or rented that you can think of office buildings, office buildings that what else? Sports unions storage units nowadays it's funny to see all these culture now leasing clothing, drug gowns and jails is big business yeah there's there's ah website called rent the runway, which instead of buying this really expensive designer dress, if you only need it for one occasion, you go online, give them your measurements and they ship you address for an event and ship it back long as you don't destroy the rest again camera gear, camera gear, wedding venue in furniture mart photographers in the community so so notice the durability of all of these things, right? They can survive use from multiple people and so if there's a durable asset that people want, you can acquire a whole bunch of those things and then lend it to somebody they get the thing, you get some money and it's all good now from the purchasers perspective leases are really good because they the purchaser gets the right to use this sometimes very expensive thing and don't have to buy it outright, right? So if you're a photographer and you want to use this really crazy cool ends that costs thirty thousand dollars and you don't have the money to just buy it talk to a lens rental company you can rent it for a week you pay a couple hundred dollars and you could you get the same results? We don't have to own it but uh as the renter, you get to have this pool of stock that people want that lots of people can use so you service them and they pay you money and you make you make the difference between how much you're able to rent it and how much that thing cost you to acquire in the first place. Right now the catch is the damage or loss so if some if you rent a car to somebody and they crashed the car you no longer have the car to rent right? So a lot of the things to think about in running a leasing tight business is the risk of damage, destruction or loss or theft so you need to be charging high enough prices both to get a profit on the original acquisition cost of the asset but also to pay for insurance and maintenance and all of the things that are necessary in order to keep this asset in rentable condition for us long as possible that makes sense. Okay, trash gets a quick question sure this comes from rim co two a couple people are enquiring about this in a chat room good great question what's the difference between lease and shared resource is so a shared resource you can think of a shared resource is something that a bunch of people can use all at once so it's like a group type of experience a lease is usually an individual type of thing so renzi renting a lens from a lens rental company for your camera you're getting the exclusive right tio that thing versus shared resource is more like an amusement park or a museum or some type of shared experience that everybody is having a one time if that makes sense yeah as frank m just appear jim equal share to resource lee secrets current exactly exactly any questions about that cat now? Former value number seven is agency an agency focuses on marketing and selling an asset that you don't own so if you as an agent establish a relationship between someone who wants to sell something and someone who wants to buy something you can negotiate a percentage of that transaction classic example is uh residential real estate right? What is what is ah agent do buyers and sellers s so how does that how does that work? How did they provide value? Sure people properties that meet their particular needs location price center right and then they negotiated profit and negotiate the price excuse me so usually in like a residential real estate type of transaction both of the buyer and the seller have an agent and that agent is empowered to act in their client's interest, right? So the buyer's agent wants a low price for this particular property. The seller's agent wants a high price and there's a negotiation that happens. And if both parties come to terms, the agents get a certain percentage of the transaction as a feat, right connecting buyers and sellers. Now neither agent owns the property that is being discussed, right? They're just representing the interests of either a buyer or a seller and being compensated if a transaction takes place, right. So keys to success in this particular form of value find a cellar with a valuable asset because otherwise you have nothing to sell, right? Uh, establish contact and trust with potential buyers of that asset and negotiate the terms of the sale until in agreements reached pretty straightforward. And then you have to make sure you collect to be agreed upon commission from the cellar, otherwise you don't get paid so a lot of a lot of times um, there are agreements in place when you act as an agent on behalf of somebody else. The money from the transaction actually flows to the agent. The agent takes their cut and sense the rest to the cellar because it's been a pretty big deal over the course of agent of history to actually be paid as an agent so that's that's how that typically works and the benefit for the cellar of an asset is that they make sales with an agent that they otherwise wouldn't make if they didn't have representation, so notice that thie seller isn't really paying anything up front if the asset doesn't sail there, not a cell, they're not out anything, but they benefit if a transaction actually takes place now, the buyer, by using an agent, uh, is able to find assets that they might not otherwise find and filter certain deals that they may be presented with. So, for example, when I was doing the book I learned in the publishing industry, lots of large publishers usually have a relatively small group agents literary agents that they trust to bring them good deals. And so when one of these agents presents them a deal, the publisher knows that it's already been vetted to a certain extent they pay way more attention to that, then a manuscript that just comes unannounced in the mail at some point. So there's a filtering that's valuable for the buyer as well. Now as an agent, couple things or critical number one, you have to make sure deals are actually closing, because if you get compensated on a commission basis, if the deal doesn't close, you don't get paid right? You also are doing a tremendous amount of upfront work without getting paid. So when a transaction takes place, you need to make sure that you are being compensated enough to account for all of the work that you were doing into making that deal happen now since agency commissions are usually in the form of the percentage the higher the deal price the more you get paid write so commercial brokers can make an enormous amount of money on a successful deal because they get a small percentage of a very large sum of money okay and that is scaleable ok, any questions on that the chat universe and the webs are pretty complacent they're really happy right in place is the wrong word they're hungry all right? You're good doing good all right? They're not complacent they love this former value number eight audience aggregation audience aggregation focuses on capturing the attention of a group of people with similar characteristics and then selling access to that audience to a third party most people call this form of value advertising on ly advertising doesn't really sound like a form of value right? It sounds like annoying annoying this but it is a a very unique way to create value for advertisers so here's what typically happens? Have you ever picked up a magazine and you've been leafing through the magazine and you noticed like half of the magazines ads? Why does that happen exactly it's a big part of of the profitability of the magazine uh the reason? Why is that valuable to an advertiser? Why do people pay to be included in that? Because it's a captured, um you got two captured somebody's attention say, you sell dog treats, you want to be in a dog magazine because people who are interested in dogs, they're going to pick up that magazine. If you're a cat person, you're not going pick up that cat that night already vetted the audience to a point where you know that people are going to be more likely to be interested in you. Exactly. So, for example, take a magazine like wire, really great, very well produced magazine that has a lot of technology, future futuristic kind of element to it, wired magazine attracts a very specific type of reader, and that that that type of reader has certain characteristics they have a certain medium income, they have certain demographics, they live in certain areas, they have certain interests and buying some products over over others. And so what wired magazine does is sells access to said that they create a magazine that appeals to this audience, and then they sell access to that audience to advertisers who want to reach these people, right? So it's it's, similar to agency and that you're connecting somebody who wants to attract somebody's attention with the people that you that that advertiser wants to attract right now, here's the trick aa lot of people think advertising uh is is a bit of an easy or a magic business model like if if you're so for example, if you're running a website and you have no idea how you're going to make money from it's like, well, just do advertising yeah, exactly lot lots of lots of ah internet start ups in the valley or kind of still experimenting with this idea. The important thing tio understand about audience aggregation is it is the hardest business model to get right in a long term, sustainable way by far because there's there's a fundamental tension here that exists. So going back to wired magazine, the folks who like technology that read wired usually want to read about you about this stuff they're interested in, right? And if three quarters of the magazine become becomes advertisements that they don't care about, the magazine becomes less valuable and if the magazine becomes last valuable, wired loses their audience because they go someplace else, right? So there's this tension of when you attract a large audience, it can be very profitable for a short period of time to sell lots of advertising, but if you sell too much advertising, you alienate the audience, the audience goes away and you're left with nothing right tap into social network after social network, right attract an audience everybody comes in free excited and all of a sudden the ads start appearing and everybody gets really annoyed and they go away and the social network has no audience anymore right? So there's this fundamental tension that's really, really difficult to get right? One of the only big audience aggregation uh businesses that I've seen do it right in a long term sustainable way is google with search search engine advertisements right? Because people are interested in searching about this thing it's presented as a source of information and it's right along with the other things that they want it's perceived as a form of value right there about this far from pushing it too far right so the more you know when you go to google you type something in three quarters of that pages adds that aren't relevant to what you want to really easy for that audience to go away right so audience aggregation could be a really valuable form of value but you have to be very very we uh attuned to that balance of not enough to be profitable not so much the audience goes away and that's actually what was going to ask so is the real work there curating? Yes, yes making sure so for example aa lot of women's fashion magazines sometimes the ads are perceived as the content people will buy a magazine to look at the ads from designers because it's it's like a photo editorial type of thing really market dependent but if you are planning on using audience aggregation as one of your primary forms of value, it is in your best interest to make sure that your primary audience perceives those, uh, ads as content and gets the balance right that makes sense. Joshua lorraine and I were talking we both think that you're pretty clairvoyant because before you said that it gave the global example sam cox is an audience aggregation what facebook and google doing a question I have to go a bit further on that is two things one thing both facebook and google have in common is their size it's your small guys even that much more challenging to do audience segregation now yes, absolutely and there are some examples of having much smaller audiences but having a very profitable audience. S o for example, there's there's a there's a guy who does independent photo or photography equipment reviews I think his name is ken rockwell and his audience is by google facebook standards not massive but his audiences all people who buy camera equipment that is extremely expensive and so his reviews act as affiliate advertisements that gets him revenue on on a recurring basis that's a balance that works really, really well without millions upon millions of visitors um usually when you're doing something like like a review or providing content that also it functions as a kn advertisement or an affiliate agent t type of relationship that works really well. The selling display advertisements to to the millions of people it's tricky to get right all right, another question from the internet from darren he's wondering if you could affiliate marketing be considered agency yes it's actually an agent e type relationship and it's good because really what you're doing is connecting a buyer a potential buyer with a cellar for commission that's that's pretty much exactly what you're doing it's easy for people to go back like so you say facebook, facebook I know I'm hearing more and more often how irritated people are because every day they go to see what their friends are doing on facebook and all of a sudden they're saying all these sponsored posts um when a company goes too far, is it hard? Is it like a slippery slope to get back to the point where they have the trust of their clientele? Again? The trust element is a really big thing so for a website it's really much easier to make changes quickly because you know people people may be interacting with this thing on a daily basis once you start to annoy people, you have a very short leash before they just go away facebook seems to be a little bit stickier than a lot of other sites in that category just because we've all been using it for so long? Um, but, yeah, it's once people start to get annoyed, uh, it's, a clear signal from a business perspective that something really needs to be looked at because if they're annoyed for too long, they leave. It seems like both of those businesses sorry, the in the case of google, they can often track through to purchase. Yep, and so that's a great measure of our am I being relevant? I think with facebook it's a little more difficult because they maybe could measure how many people hid that sponsored poster unfriended that that company, but how many of us actually take the time to do it? So it seems like google might have a quick path or better path to getting the feedback that they need to make this good decisions. And the tricky part is, uh, the real test is do advertisers continue to spend to find it worth it to spend money doing these sponsored posts? Because if they don't convert into a profitable transaction at some point, those s o your your business model can disappear from either side, your audience leaves or your advertisers don't find it valuable enough to continue giving you money, right? So you have to be really tricky about that balance, because it could it could break down the other side. Good information going on here all right? A lot of people have questions but before we move on frank m is wondering if you could explain just and make sure that we're understanding the terms well would it be accurate to call a movie theater a shared resource for one movie and many viewers an option you can come during x time and an audience aggregate for movie previews yes to all three of those so, uh I love that that, uh you caught that because it a lot of these models are kind of layered one on top of the other and you can have multiple things going on at the same time, so we'll talk about thie option here in I think one or two one or two forms of value later but yes, you could do a movie theater works exactly that. Okay, awesome. I think we're ready to move on. All right for the next answer you're giving us? Yes. Ok, so the first eight forms of value have been buying and selling tangible intangible things. There's a kind of third category that's it's a little weird. We're getting into the realm of finance now and for a value number nine is alone and alone is an agreement to let a bar where use a certain amount of resources for a period of time in exchange for a series of payments of prettified period of time equal to the original loan plus an interest rate. Uh, that's. A really big mouthful. The really the best way to imagine this is ah home loan or a mortgage, right? So you go into the bank and you say I would like to have five hundred thousand dollars to buy house and the bank says it looks it looks at your income looks at your president says ok, we'll give that to you and in exchange for that, you will give us x number of dollars a month for the next fifteen to thirty years at this certain interest rate. And so the bank is giving you a certain amount of money to use for this period of time. And you're agreeing to pay that back with interest over that fixed period time, whatever the mortgage is so low, pretty much every loan works in that way, right borrow resource is pay back over time, pay some interest. Now, if you are extending loans as a business person, this could take a lot of different forms, right? If you offer your clients or your customers payment terms that's what? It's alone, right in a certain a certain sense, so the keys are you have to have resources to lend because if you don't have anything to lend, you can't lend it right uh you have to find people who want to borrow those resource is that money or whatever said an interest rate that compensates you for the risk o r or cos you for giving me the use of this resource is for for a certain period of time and estimate and protect in case the loan is not repaid? This is a wonderful subject in in finance called underwriting right? How trustworthy is this person that you're giving lots of money to? Are they going to pay you back? Are they going to take the money and run? They take the money and run you could be out a lot of money very, very quickly. So what's nice about loans is they allow people immediate access to products that they probably couldn't purchase outright. So very few of us have enough money in our bank account to go and look at a house like it and say I'll take it right a check done so what loans allow ah purchaser to do is purchased something and have access to it way sooner than they otherwise would be able to right and in exchange for being able to access it sooner they pay more for it that's where the interest is and that interest accrues as profit to the lender right the loans are beneficial to the lender because if you have a bunch of money sitting around, you probably just don't want to let it sit there. It would be nice to put that money to work and have some profit coming back from that, so the interest is the profit that the lender gets for being having the resources of ill toe love right, and identifying how risky each individual loan in is is super super important because if you don't get paid back, you can lose a lot of money very, very quickly. Former value number nine now former value number ten is an option and an option means taking a predefined action for a fixed period of time in exchange for a feat. So to our question earlier movie tickets are a great example of an option, so when you go to the theater you purchase a ticket when you buy that ticket, what you're actually buying is the right to occupy a seat in a specific theater for a specific period of time now that doesn't place you under any obligation tow actually sit in that seat at that period of time, you have the option, you can either do it or not, right? Uh options air really, really fascinating because as long as if there's some way to increase the flexibility of the purchaser in exchange for a fee that can show up anywhere so for example um my wife and I were living in new york city and we were in the process of moving to northern colorado and we found an apartment online that looked really interesting but we couldn't go see it because we were in manhattan, right? But we wanted to have some place that we could stay when we got there and the timing was such that it wasn't really feasible to fly out, check it out and fly back so here's what we did um we contacted the folks who were renting the apartment said we're really interested we would like you to save this apartment for us for a couple weeks and in exchange for saving it to it not renting it to somebody else while we're gone, we're going to give you a certain sum of money to save it for us. And we agreed that if we decided to rent the apartment that sum of money would go towards the first on the rent if we decided not to take the apartment they got, uh, sum of money and they could just go rent it to somebody else that's an option it's just something that we negotiated tio increase our flexibility and where we could live after we moved so you can see this it's a very flexible thing aa lot of people when they hear of options actually hear about it in the financial sense so you can go in the stock market and say I would like the opportunity to buy one hundred shares of dell at forty eight dollars a share within this certain time window and pain exchange money for the right to do that? Um, so options are a way of increasing flexibility in exchange for a fee, so to provide value with an option, you have to identify an action that people might want to take in the future offer potential buyers the right to take that action before a specified deadline. That's the key to an option it's not an infinite time when we're talking about it's a very fixed period of time, you have to enforce that deadline and options a lot. Is there the ability to take an action or increase their flexibility without requiring them to take that action? Ok, does that make sense another tool we have to increase flexibility would like a from your point of view uh, portrait session you're like during family photography with that a session fee, even though what you're providing ends up being a service saying yes, I will be at your house or out of park whatever at two p m on saturday for this session, would that be considered an option? That's more service fee so an option would probably look like hey, I have twenty slots available this wedding season I know you probably don't want to commit now you're researching if you would like to save mia spurts to save a spot I'll take a deposit of five hundred dollars and I'll save it for you if you decide to go ahead, I'll apply that teo your feet if you decide not to go ahead, I may have turned away customers for you, so if you want to put this deposit down to save her spot, that would be an option. Season tickets season tickets are an option you don't have to come but if you want to there's a seat in the stadium just for you we do have one right here online and this is from ah lexie hunt and says maybe lou insider baseball but airlines used a probability of customers actually showing up for their seat tio over self lights are there other businesses that are legally allowed toe over sellas? Well um the legally part I'm not sure if I could really speak to but yeah, there are a lot of business is that make a practice of overselling in so you can think of the flight is going from point a to point b regardless of how many people are on the plane so it's in the airline's best interest to make sure it's has fullest possible so they do a cost benefit calculation what's the risk of taking a couple people off by not taking fight versus having a full flight and increasing profitability there um I can't really think of another industry that does there has similar practices or in an institutionalized way but options exist quick quick gallop on that as we think about options and something has opened up in my in my mind we look a lot of courses and things you take online most people now have a thirty day money back guarantee yes so is that a form of ration yes and it's usually presented as way we'll talk about why people do that in the sales section it's a technique called riskreversal but yeah that's an option if you take this course you don't like it you would like your money back for a certain period of time you have the option to tell me I want my money back and I'll uh refund it free of charge so yeah exactly perfect example of an option the questions are rolling in but we have only about twenty four minutes before okay, so maybe we should like what's going on let's go okay for a value number eleven is insurance and insurance focuses on transferring the risk from the purchaser of the entrance to the seller in exchange for a payment or series of payments. So if something bad happens to thie person who buys the insurance the insurance the insure weird word insurer uh the insurer has the legal responsibility to cover that risk so ben this is this is what you do on a daily basis could can you tell people how it works? Sure, yeah basically I work uh right now I'm doing crop insurance so my company provides insurance for farmers who are you basically planting corn or soybeans you know, here in the next few weeks and then taking on through harvest so if there's you know, a hail storm or a drought like last year or flood like two years ago my company's standing there ready to make them or to indemnify them of their loss right yeah and what would happen to these farms if they didn't have the insurance a last time? You know, people you know, whether they take alone you know, have a you have a concern about, you know, losing the property if they can't make their loan payment which lessens happens you know, farming is a very cost intensive business on and there's a lot of uncertainty so that uncertainty is really it's managing that risk the insurance bus is helping them, you know, be able to sleep at night and know that regardless of what happens with the weather, you know they're still going to be ableto make a profit yeah so just think put yourself in the shoes of a family farmer uh going to bed every night and realizing that if we have a hailstorm or tornado like we're done, we're bankrupt what insurance does is it's a legal contract between that farm and the insurance companies saying if this thing actually does come true we've got you covered we're gonna pay for it but in order for us to pay for it, you're going to give us a series of premium payments to compensate us for taking this risk on for you so homeowners insurance does the same thing if your house burns down the insurance company, we'll cover it auto insurance does the same thing it's the transferring of very specific risks from the person who buys the insurance to the person who sells it now as the insurer, the first thing you need to do is create a binding legal contract that actually transfer this risks and specifies what exactly what risks are being transferred in what the terms of the agreement right it's a legal process okay, once you have that legal contract or as you're talking to somebody you might potentially insure you have toe accurately estimate the probability that this bad thing is goingto happen to process called underwriting right? So insurance companies spent an enormous amount of time and it's tension tracking statistics and data that help them understand what is the actual probability this bad things going to happen? Because if the probabilities are in the insurer's favor, either the insurance will be really expensive where they won't offer it because it's a losing bet right so if you are buying insurance, you obviously don't want your house to burn down, but if it does, you have the peace of mind that it's going to be covered as the insurer you. If the bad event doesn't happen, you get to keep all of the premium payments and you don't have to pay anything that's really ah fantastic situation so busy insurance type businesses make their money in underwriting, so taking on the bets that aren't very risky but would be really bad if if if they happened so ensuring people that are good risks that are highly likely to pay premiums for a long period of time but not incur costs in the form of claims that makes sense and changes, they're very, very slim that it's going that the bad things were gonna happen across a portfolio at once, although he's actually not exactly so so how the the insurer makes my there are going to be a certain number of claims, but if your house burns down, you only live in one house, right? That would be catastrophic, maybe have multiple who knows, but one house your house burning down would be really, really bad for you. For the insurance company, they may be insuring millions of houses and it's highly unlikely that all of those houses they're going to burn down at the same time, and so the insurer is in a much better position to take on the risk of some bad thing happening because they're spreading that risk across all of the people that they're ensuring at the same time that makes sense it's like that core human drive to defend their exactly yes, insurance is a defense type of product. If this bad thing happens, you will not want to be solely responsible for it. So let us help what's kind of funny is the insurance industry actually has insurance companies of its own it's called reinsurance, so insurance companies will say, hey, if we have a whole bunch of really bad claims, like a hurricane or a really bad tornado or whatever, and we run out of money paying for all these claims, we want to be insured against the risk of that. So they're even bear insurance companies called reinsurance companies that insure insurance companies about really bad, big bad things happen, and insurance companies pay tens hundreds of millions of dollars for this coverage. So it's a really good way to alleviate risks in a way that's profitable to the insurer. Now you all as and ensure you need to focus on maximizing the premiums that you're coming in while minimizing bad risks so folks who are highly likely to generate a claim. As well as fraudulent activity insurance fraud is a really really big deal you don't want to ensure somebody against their home burning down if they cause they're home to burn down themselves so insurance takes on a whole bunch of different forms right have you ever gone to uh an electronics store and and percent like best buy for example they say would you like the three year extended warranty they're selling you an insurance policy it's all that is it's an up sell to a product that you're already purchasing and best buy is making a bet they're betting that what you pay in a premium in aggregate is going to be more than the cost of replacing this thing of her brakes an example who really bad form of insurance the place where get headphones for my ipod they give the offer like an insurance policy of two years of your films like your headphones stop working within two years they give you a new pair and like everything always like run out like in like six months and it's like it's this bizarre things have been getting free headphones for the past four years I paid like paint like like for like fourteen bucks and it's look at me like like two three years with headphones right such a bad entrance and that's where that's where data comes in so for this thing that we're ensuring the life of how long does it actually last? And how long are we capturing it for that goes with the progressive has the little plug in thing that they're now talking about? You know you've seen their commercials just plug it in the curious thing that I think people don't realize is they plug that into your pc you the computer of your car and they're gathering data about everything you d'oh how long you wait after you turn your carrano tio let it warm up how fast you accelerate how do you slow down? And after looking at all of that, how safe of a driver are you? And if you follow within their norms, you get cheaper? Yes, but if you don't, they're going to take you to the curb yep or raise your prices by raising prices. Yeah, so so uh underwriting is based on data and as far as an insurance company is concerned, more data is better because it's a better you have more ways of accurately assessing the risk that you're taking on in exchange for the premiums yet on the underwriting point. But the interesting thing and mentioning progressive is that, you know, they're out looking for the absolute best insurance toe limit you know, their potential payouts, but they also do something that's really unique to and that they basically little refer you if you're a bad risk, so if you don't need their underwriting criteria we'll offer another form of value and that will recommend you know someone who can save you more money than they can which is another interesting and yes deal with progressive well, we will talk about that in marketing that's that's a example of an idea called qualification so progressive is doing the work of identifying the bad risks very kindly referring them to their competitors s o girls you don't to pay one more form of value and this is for my value number twelve capital. So capital is the purchase of an ownership stake in a business so if you have resource to allocate if you have extra money you can give that money to a business and that business will give you a percentage of legal ownership in that company and if the company extends a dividend if the company is acquired by another company if the company goes public guess what? You get to keep that percentage of the acquisition price or the aipo or whatever it is that you bought s o to provide capital you have to have money to invest right pretty pretty straightforward you have to find a promising business in which you'd like to invest and you have to estimate the businesses worth this is an idea that will talk about tomorrow in the finance section called valuation so you have to do some digging to figure out how much is this business actually worth how much of my thinking of giving, how much money am I thinking about giving the business? And what would that translate into percentage ownership of the business as a capital investor? It's in your best interest to have a low valuation for the company, right? So whatever money that you give to that the business you want, the highest percentage ownership that you could possibly get right valuation is as much of an art as it is a science. Big, big negotiation. Ok, you also have to estimate its future growth and possibility of negative scenarios that would cause the loss of your capital. How likely is it that this thing is going to exist a year from now? How likely is it that one of the founders is going to go to jail, for example, or some other catastrophic thing can affect this business, which would result in the loss of all your money. All of those things play a part in the capital negotiation process, and you negotiate the amount of ownership that you receive in exchange for the capital. Now this is really great, as if you have a bunch of money to invest. This is a way that you can invest in a lot of different companies that are doing a lot of different things. S o, for example, creative life is in the process of growing really, really rapidly creative life has investors. Investors gave money to creative life to hire employees to buy awesome robotic camera equipment, things to do to invest in design and production. All of these things that make creative life what it is that's, how the investor's money is being used at some point as creative live does phenomenally well as we all know that it will. Those investors will see a return on the money that they invested in in the business. So as a business person, if you have capital to invest it's a way of putting it to productive use in something that's, new and really cool, if you are building something new and really cool and you require a lot of money in order to do that, like you need to hire lots of staff or you need to, uh, start a factory or you need tio invest a lot of money and equipment or whatever, attracting investors and and taking on capital in that way is valuable because it allows you to do things that you might otherwise not be able to do right now. Make sense. So those are the twelve forms of value. And if you look at pretty much every business in the world, regardless of what it does, what market were industry and operates in? You will see one or more of these fundamental forms of value that work so interesting exercise for everybody when you read the paper or you're walking down the street or you go to the store. Uh, take a look at a business and just break down in your head. How does it work? What are they offering? What are the things that the people running the business are probably thinking about? This is where you started to see I was talking about, um, looking at a legal structure and seeing the pieces in it. This is a way these are the pieces, and so you can look at any business that exists it start to break it down and here's how they're actually operating. This is what's important. This is what's not, um, so you can look at a commercial watching tv. You can see a commercial by progressive um, that's. They're doing something new. Cool like putting a chip in your computer and you can understand why they're doing it. Why it's valuable how it may potentially help a client and how it helps somebody the business make money. So once you kind of get these ideas in your head, you start seeing them absolutely everywhere, and it makes looking at business is way, way more fun, is there any particular you mentioned, the personal I mentioned? Someone talked about movie theaters and how they're like a bunch of different forms of value I gather all three is there any particular virtue and like having a business that's like a combination of multiple forms of value? Yes s o the benefit of having multiple forms of value in a single business is it gets you diversification and how the business makes money so for example um going back to the best by example earlier of selling products as a reseller and also offering insurance uh the insurance brings in an enormous amount of profit on top of what they would already already make as an example a cz reselling elektronik type equipment. So a lot of these ways you know if you already running like a basic product or service business it's in your best interest to go through these other forms of value and see if there are other ways that you can help door customers get something additional but they want it's just a checklist of ways that you can help your customers. You can help your clients achieve some results that they want and whether that's providing insurance whether that's providing options um loans are an example so that is anybody seen the the tesla electric rick sports car speaking of luxury vehicles earlier they just came out with with a financing a process that is a combination of a lise and an option to buy back that really drastically reduces the amount of money that people need to spend up front in order to get in one of these vehicles and potentially resell it later, so they're selling a product they're selling it direct, so they don't. They're not selling it through through dealerships or whatever they're selling a product with an option that has an insurance element it's a whole bunch of things at once, but they understand their customers well enough to use all of these forms of value to create something that makes it way more likely that interested people are going to end up with one of their cars. So it's it's really fun when you're developing a business to walk through all of these things? Because it increases the options, you have to serve your customers dramatically and that's the core of of the up sell potential in your ways to evaluate the markings acts all twelve of those fit into that. These are all things that you can do to serve your customers. Let's go on to its own idea called the hassle premium, and the hassle premium is people are almost we're always willing to pay for things that they believe are too much of a pain to take care of themselves. So if there's something that your clients or your customers really hate to do if it requires a lot of effort, if boring, uh, if it's painful, if it's something that they would rather not deal with to you as an entrepreneur, as a business owner, that is a big opportunity, the bigger the hassle, the bigger the opportunity, assuming you are in a position to take that away or alleviate it in some way. So a good example of this is, uh, think of something like a long at your service. If you really wanted to, you could go out and mow your lawn yourself pretty much everybody it has is physically capable of operating a lot more and cutting their own line. If you buy a mower and gasoline, you may spends one hundred dollars let's just say people spend more than one hundred dollars a month on lawn care services because by hiring a lawn care service, they don't have to think about it. They don't have to do it themselves, and so they'll pay twelve, fifteen, twenty times as much per year to get the same result, because buying the service takes away the hassle. So one of the best things you can do as a business owner as an entrepreneur is start putting your antenna up and trying to find things that just really suck for people what's a hassle what's aboard what's what's a drudgery and if you can find a way to take that away that's a business opportunity let's find a way to solve it and the premium part is the bigger the hassle before you can charge for it which is nice get perceived value is the idea that value is in the eye of the beholder we all value so we've talked a lot about the commonalities in terms of what people want, how much people want those things is a very subjective decision everybody kind of weights all of those things very differently and those weights fluctuate over time so for some people s for example take somebody who owns a house that was recently broken into how much do you think they they value a home security system at that point much more much more then maybe they did the day before before this specific event happened right? So value is in the eye of the beholder and that value changes on it minute by minute basis and so perceived value is the idea that how much your customers will be willing to pay for your offer is directly related to how valuable they perceive it at the moment they're making the buying decision right changes all the time and so the most valuable offers kind of recapping some of the things that we've talking about been talking about this morning the most valuable offers satisfy one or more of the prospects core human drives right? They offer an attractive and easy to visualize and result there's some benefit to purchasing they command the highest possible premium by reducing and user involvement as much as possible less work less hassle and they satisfy the prospects status seeking tendency by providing desirable social signals that make them help them look good in the eyes of other people if you do those four things, guess what you've increased the perceived value of this thing that you are offering and if you've increased the proceeded value, people will be willing to pay more for this thing that you're doing that make sense to bring it all together here now modularity also bringing things together is the idea that most successful businesses combine multiple forms of valued multiple forms of value to offer value multiple ways. So this is where we were talking about best buy re selling products and offering an insurance policy tesla's selling cars with option value rental car services, renting cars and selling insurance on top of it. Having a whole bunch of different things that you can offer in discrete units and layering them on top of each other is a way to increase the number of ways that you conserve your customers and by making your offers as small and modular it's possible it's kind of like legos, you can arrange them any way you want right? So lots of different ways that you conserve customers combined them to create a package that service each unique customers means that's a really great way to increase your revenue, increase your profitability likewise bundling and un bundling. So when you have different modular forms of value, so a bunch of different products or a bunch of different services or insurance component or an option component, you have lots of different things that you could offer to a customer bundling and un bundling is the way that you can mix and match those things to create packages of things that satisfy unit customersneeds. So a classic example of bundling and unbundle ing is ah, think of records or cds or albums in some sense, right? The product that is being sold is a collection of songs they're sold is a unit there sold is a bundle right on bundling would be the active, taking all of those individual tracks and selling them on their own as individual mp three downloads, right? So you could sell the bundle. You can unbundle it and sell a bunch of different things to, and what allows you to do that is modularity the ability to mix and match what you're offering so each specific customer can choose what serves them best based on the perceived value at the time and how much they're willing to spend that make sense so moges. So, with all of these forms of value, modularity and un bundling and and bundling and unbundle ing give you the flexibility to make things that are tuned for each specific client or customer that your side.

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