The Personal MBA: The Foundation of Effective Business

Lesson 11 of 14

Finance: Give Your Customers What You’ve Promised

 

The Personal MBA: The Foundation of Effective Business

Lesson 11 of 14

Finance: Give Your Customers What You’ve Promised

 

Lesson Info

Finance: Give Your Customers What You’ve Promised

Force part of every single business we've created something valuable we've got people's attention made them interested and we have closed the deal we now have a paying customer who is expecting something awesome from us and we have more money in our, uh, wallet or checking account because they actually perfect purchased right? But because they purchased we now have an obligation I have an obligation to deliver this thing that we promised during the marketing in the sales process so value delivery the fourth part of every business involves everything necessary to ensure that every paying customer is a happy satisfied customer was glad that they did business with you so everything from the logistics of shipping of physical product all the way through customer service and follow up that is all part of the value delivery process and the more happy customers your business has, the more likely they will be purchased from you again and the more likely that they will be to refer of their peopl...

e who are in the market for similar services to you instead of somebody else so valued delivery is important also particularly if you're offering a risk reversal strategy you get the money when you make the sale but value delivery is what allows you to keep that money after you make the sale now one thing that's that's valuable to to understand or to visualize is sometimes it's easier to visualize the value creation process flowing seamlessly into the value delivery process, right, there's, there's not like you make something valuable, lots of time passes, and then that sometimes goes to the customer, right? One process could be seen to flow through the other, and marketing and sales could happen at the same time. So value stream you can think of is the combination of your value creation and your value delivery process. I think aa lot of these, these things in the value delivery process are really easy to visualize. If you imagine, like an automotive manufacturing company, so let's use toyota just picking one. So toyota has this big, long process called the toyota production system, where raw materials, metal and plastic and glass go in one end, and at the end of that process, ah, car is delivered to a pain customer, right, and there's, a lot of their thousands upon thousands of steps that happened from raw materials to happy customers, all right, thousands of little transformations. And so the division is what's. The car rules off that assembly line, there's a separate process of shipping the car or delivering it to the customer, right, but one flow seamlessly into the other, and if you treated as one big process, you can optimize the entire thing, so if you treat your value, stream it if you look at the thing is one big trust process and try to optimize it as much as possible you may be able to find ways to save yourself a lot of work or a lot of effort in delivering value to the customers right? So if there are ways that you can adjust your your camera or how you take photos in the process of doing a shoot you can optimize the delivery of those images to the customer later right? Because you have less work to do in post production because you did some things in the value creation process right does that make sense? You just imagine it is one big process and try to find ways to optimize the entire thing now a couple of definitions or things that are important to understand has anyone heard the term distribution channel okay helps understand exactly what a distribution channel all is what it means so a distribution channel describes how your offer will be delivered to the user and there are two primary types of distribution channels the first is what's called direct to user distribution so if you are dealing with the customer personally if you're delivering whatever it is that you have promised personally or as a business directly to the user that's direct to you their distribution makes sense right intermediary distribution meat means there are multiple channels and and in most cases it means there's a reseller involved right so when I was working at procter and gamble procter and gamble does not deliver bottles of dawn dishwashing detergent directly to customers never happens what happens is procter and gamble delivers to wal mart wal mart delivers to the end customer right there an intermediary there a reseller and what's nice is that if you are working with intermediary distribution that I think about png as they consult a lots of different resellers right they can have make sure a bottle of dawn dishwashing detergent is on the shelf of every single grocery store all around the world because they make it they ship it to all the intermediaries the intermediaries take care of shipping it to the individual uh consumers so the benefit is you can reach way more people potentially if you're dealing with a lot of intermediaries the drawback is those intermediaries introduce some risks right? What if the product gets damaged? What if the product isn't presented in a very compelling manner and that affects your reputation right? Easy to visualize the thing about this is let's say uh you own a bakery and you make doughnuts right and you sell those donuts through intermediaries, grocery grocery store chains and in transit from the bakery to the grocery store all the donuts get broken and crumble shopper walks into the store sees this package of doughnuts that is just demolished and they don't say man this grocery store is horrible they say this bakery makes really horrible products right that's the risk when you deal with intermediaries it's not a set it and forget it type of thing you have to invest a lot of time and energy making sure they are representing you and your offer in an appropriate way right so it's a tool that has some tradeoffs you could potentially reach many more customers but you have to invest energy making sure they're representing you well I had a wine barrel business when when I was eighteen to twenty two I'll take wine barrels and then cut him in half and selma's planters in the bay area and we'd sell to distributors they have ten or twelve when that stores and I started hearing from them managers and different people that the barrels were falling apart and I think fallen apart what you doing so I figured out that they weren't properly caring for the wine barrels and so they were putting it as a loss leader or a product that was it was damaged in such when in reality I just needed educate them on how to store them properly right and so it was a good is a good process to learn but that model works really well really well it does and that's where you're spending some time training your intermediary distributor's is time extremely well spent because if you can minimize the chance of loss or damage or misrepresentation or whatever uh that pays for itself many, many, many times over. Now the expectation effect is I like to think of it as an equation that guarantees your customers will be happy about that. So the expectation effect is the idea that a customer's perception of quality relies on expectations, the expectations they have going into the purchase and the actual performance or the results they get from the purchase. And you can express that as as kind of a pseudo equation quality equals performance minus expectations. So let's talk about this using an analogy remember when that when the first movie, the matrix, came out, what ninety, ninety nine nobody knew that it really existed not a lot of fanfare before it came out very low expectations were being set about this movie, and people went to go see it and everyone but it was blown away with all of the new and cool stuff that they were able to do, the special effects, all of those things, expectations were low and the movie delivered a really high quality experience, so everybody was really super excited about it, right? One of the most successful movies of the year a couple years later, the second movie in the series came out the matrix I don't you don't remember reloaded. Yes, the matrix ability came out. Expectations were here because the first one was really amazing, right? Performance of the movie much lower than that right movie got pant both by critics and by viewers because the actual what the movie actually delivered in terms of an emotional experience it was way less than what viewers went in expecting right this dynamic if you outperform expectations quality is good if you underperform expectations quality is bad that's the expectation effect right now there's a tricky little little tradeoff here because expectations need to be high enough that people purchase from you to begin with right? You have to set expectations that a certain threshold or you don't get any sales but if you want to make sure your customers are happy you have to deliver above and beyond where the expectations are set so it is in your best interest as a business owner to make really darn sure that you overdeliver upon the expectations you know the best way to do that an unexpected bonus delivering something that you did not promise something that's really good very valuable because if you're able to deliver above and beyond what you've committed to, you are almost guaranteeing that this equation is going to be in your favor and actually that unexpected bonus can compensate for some of the parts of the process that we're below initial expectations right? So knowing that this is a feature of how people evaluate things that they buy or things that they do or participate in you can prepare the entire business to make sure that you are over delivering on the expectations that you've said makes sense one of the things it helps to understand some of the situations in which a low quality experience can be uh can be seen or can be felt, so what makes people say this is a really not so great? I think when it comes down to that uh, the idea of predictability is the best way to think about this process of how do you make sure that you are our adam minimum meeting? The expectations that you're setting and the general idea is can your customers predict that they're going to get a really great result from whatever? Whatever it is that you are offering if they can predict with a pretty high certainty they're going to get what they want fantastic good experience if they can't or if something is violated so the predictability does not come true. Poor quality experience and predictability has three primary factors uniformity, consistency and reliability so uniformity means delivering the same characteristics every time, so when they do this thing can they get this result that they expect so imagine you go to the store, you buy a uh six pack of soda and you come home and two of the cans of soda in the entire case are completely flat no carbonation, right? The products not uniform it's not what you expect and so it's not predictable and that's a low quality experience right? So that uniformity is very important consistency means delivering the same value over time there's a classic now a classic case study in business which was a major disaster for the coca cola company in the eighties remember the new coke fiasco company? So the company had a new formulation for their their primary product based on a ton of research right? This was not a blind decision they've been thinking about doing this for a long time because taste tests said people prefer the taste of pepsi to coke and that was seen as a really big problem. So they changed the formula of coca cola to be a little bit more like pepsi and they sold it as coca cola and guess what happened? People break out because this thing that they were now selling his coca cola was not coca cola it was something else right? It was a consistency here it was not the same thing so one of the company d'oh but back went back to the old formula called a coca cola classic the original one. And so if the company would have launched the new soda formulation as a different product with different expectations as a new thing wouldn't have been as big of a fiasco a zit wass as changing something and selling it under the old expectations the old name make sense okay reliability means being able to deliver value without error or delay. How do you feel about your car if you get into it in the morning and you turn the key and nothing happens. Piss? Yeah. Ticked off piece of junk cars, a piece of junk. And how do you feel about the company who made that car that no longer works? Horrible it's a reliability air, right? There are some things when you use it, you want it. I work in a certain way. Right? So ensuring that your offer as much as possible is uniform, consistent and reliable. Those are the things that you can help. Make sure people get a consistent experience. And a lot of what we're talking about here in a minute is making sure you add systems and processes to make sure your offer is uniform consistent, reliable it's really hard to do with the service business. Yes, we did it, I think successfully, I added two more inspectors and the way we did it as it made its standards of practice. That's, the weed talking the client this week introduced this week go their product, this we deliver and one of things we ran into with the problem with them over, over promising and under delivering them. One little aspect and was just the verb it at the end some customers would ask us when should we expect the inspection report when we get it tonight in a couple of our inspectors go yeah in a problem no no no state state of the protocols say within twenty four hours you will get delivery of said report right if you get it to him tonight that's great but stick with that and then it gives you that whole time period tow leave do the inspection something else comes up another inspection another opportunity you've stayed within the parameters you've said and they have also gone back and deliver it if you can that night and if you could deliver it that night that's seen as a bonus right? You've promised one thing you've delivered better than that awesome but if you promise one thing and you deliver less than that's bad right one of the best things you can do in service based businesses uh to make sure all of this is working it makes checklists of things checklists and standard operating procedures save you in so many ways by making sure but your service is consistent you know former reliable and you make sure that you are setting expectations for what the customer can expect appropriately from your reading list checklist manifesto reckless may have found a halfway through is a really, really good but it's a medical kind of book but it's it's amazingly good I mean do you tell the go into is really, really good yes and it's it sounds like it sounds really boring and that you shouldn't need it he really do it helps so so much okay a couple more ideas so hopefully we can finish the value create or the value delivery section before we go to our lunch break throughput is the rate at which a system achieves its desired goal. So it's a way of measuring the effectiveness of your entire value street from creating something valuable to delivering it to an end user and it's it's it's measured in the form of it's a rate it's it's units over time ok and there are three different ways that you can measure it. The first is dollar throughput it's a measure of how quickly your business creates a dollar of profit. There's a really wonderful book on on the reading list called the goal by eliahu gold gold rat which talks about is it's actually presented in novel form which is kind of weird for a business book but it works really well tells the story of a plant manager that is trying to make this factory run more efficiently and what they measure is how quickly is that factory creating a dollar of profit for the company if you could make the factory produced more dollars of profit more quickly, the whole system is working more effectively right so measuring that as a rate helps you help you measure improvements or experiments you make to the entire process, unit throughput is a measure of how much time it takes to create an extra unit for sale. So continue with the factory analogy on toyota how how much time how many cars can the tweeted a production system produce an hour that's a throughput measure right? How many uh cans of coca cola run off the production line that's a unit production measure throughput measure satisfaction throughput is a little bit weird but it's one that one of the uh one of the fun ones in my opinion it's a measure of how much time it takes to create a happy customer so from the time someone becomes a prospect to the time they're deliriously happy because you've dillard so much value to them, right? How long does that take? And so I measured at one point I'm a big fan if I'm traveling someplace and they need some place to eat quick that I know is going to be good I go to chipotle leg, I love chip away and so when I was living in new york city and I was studying this concept, I wanted to figure out if you walk into the chipotle a in union square during the lunch rush, how long does it take for you to walk into the door to exit the cash register with your nice burrito and drink and go sit down a happy customer now three minutes so every three minutes chipotle is creating another happy customer and more money's in their bank account that it's really good right so just measuring that how long does it take for you to create a happy customer helps you test experiments that can improve that the less time it takes the more customers you concern now we talked a little bit yesterday about the benefits of products tight businesses and that they can scale right you conserve lots of customers with the same thing and we're going to talk about the two ideas that really go into this idea of of a business that is scaleable versus a business that is not and the first idea is duplication and duplication is the ability to reliably reproduced is something of value you design it once you make lots and lots and lots of copies of that thing and sell it to lots and lots and lots of people that's duplication right so you can think of a starbucks location as a system that is designed to duplicate shots of espresso right that's what they do the whole store makes lots and lots and lots of shots of espresso right ah mcdonald's location is a system designed to duplicate big macs there is a design you make lots and lots and lots of copies of the same thing right, that's duplication. Now multiplication is the idea of duplicating a system that can duplicate a product. So for example, if starbucks is a starbucks location is a system for duplicating shots of espresso, you can duplicate entire starbucks locations to serve more customers, right? Which is why sometimes in big cities you see a starbucks right across the street from another starbucks because they wanted to serve more customers in that location, and the easiest way to do it is to just make another one. So you see the really big businesses in the world that are expanding really rapidly, they have a product they can duplicate, make lots of cop copies to serve lots of people, and then they duplicate the entire system that duplicates, and they multiply the number of customers that they can possibly serve. People care predictably to exactly so it's uniform, consistent and reliable. Yes, exactly. So the businesses that you see explode out of nowhere to serving millions and millions of people all over the world, they are multiplying a system that duplicate something so they conserve lots and lots of customers. So we're defining scale here as the ability to both duplicate, reliably duplicate or multiply a process as volume increases. So when more people want this thing that you have made, you either duplicate more or multiply the systems that allow you to duplicate and as your volume or demand increases, you can ramp up the volume to serve that number of customers right? You know what doesn't scale people right can't clone yourself you can't make more of us volume increases right? So if the businesses reliant on human input not a scaleable business so I've been told yes it's a bit it's a big challenge so the smaller the level of human involvement, the more systems and processes ease and machines and automation you have involved typically the more skill of the scale of the business now to related ideas about improving scaleable business the first is accumulation and accumulation is small, helpful or harmful inputs or behaviors that produced huge results overtime right so imagine you starbucks is an example imagine starbucks comes up with a way to decrease the amount of time it takes to produce a shot of espresso by five seconds right small change only five seconds not that big of a deal until you think of the number of shots of espresso that starbucks location makes in a day that's potentially saving hours and hours of effort which allows that store to serve more people more quickly unit throughput increases satisfaction through a book it increases dollar throughput increases right it's a big improvement very small change okay that's accumulation those benefits add up over time now amplification is what happens when you make accumulating changes and you roll that out across all of the starbucks locations in the world, right? You make this five seconds, five second change that accumulates in a single store, but you multiply that across all of the starbucks locations that exist all around the world and all of a sudden starbucks, maybe making millions or potentially billions of dollars over the next ten years by a very small change that saves a little bit of time producing a shot of espresso, right? So the larger the system, the more scaleable system, the mohr, very small changes produce massive, massive results over time. A couple more ideas, we'll take a break barrier to competition, so a lot of ways spent some time talking about competition and whether you should worry about it or not. Uh, the best way to worry about your your competition is to make improvements to your value stream in a way that makes it more difficult for your competitors to compete with you, right. Every single improvement that you make to your value stream your your ability to create and deliver value to a paying customer. Every improvement you make makes it much harder for people to do what you do. So instead of spending lots of time and energy really worrying about what your competitors are doing, just focus on your business and improve it as much as you possibly can, and if you do that you win, go ahead! Warren buffett calls it out, adding alligators to your moat exactly yeah it's like how there's um there's a really old henry ford quote is like I don't pay attention to my competitors, I just keep improving my business over time and I went that's pretty much there's there's a great book on the reading less blue ocean strategy, one of the authors w ten camp says don't compete with your rifles, make them irrelevant any make them irrelevant by being so much better than than other competing offers that blue ocean strategy through the good book ok, but now a force multiplier is a tool that helps you amplify your effort to produce more output. So, for example, if you need to drive a hammer or drive a nail into aboard, using a hammer is more efficient than using your hand right less painful to write, and the reason that works is because what a hammer does it it's a tool for concentrating the force that you are applying by swinging your arm into a very small point where it's most effective right it's tool it's a tool that amplifies your output so ah, force multiplier is anything that allows you to get more results for the effort and energy that you're already expending trying to do something right so things like factories are force mint will multipliers tools that help you get better results whatever they might be a force multiplier in a photography business might be a better camera for a better lens something that helps you get more bang for the energy that you that you're already expending right now generally the on ly good use of debt or outside capital is to obtain access to full small force multipliers that you otherwise wouldn't be able to afford right so if your business idea requires tooling up a factory production line to produce a product borrowing money or getting outside investors to get that line sooner rather than later is probably a good decision because you're getting more result for the effort that you're putting it right spending a whole bunch of your investors money on fancy air on chairs on the other hand don't multiply your output therefore it's probably not a good use of those funds right so in general force multipliers free up your time and energy for better more productive things so if you have a choice obtained the very best tools that you possibly can afford because the scarce resource when you're running your business is your time if you use the best tools that you can get your hands on you get more output for the amount of time in there do you putting it one more idea this is an idea called system is asian and system is asian a system just to define it very quickly is a process that has made explicit and repeatable so the primary benefit of creating a system is you can examine what is necessary to get from point a to point b what is the process that I am using uh for example when a prospect shows up, how do you deal with them? How do you treat them? How do you go through the process? What's the process for me creating something of value what's the process for me delivering that thing right? What is point a? What is point b and what are all of the steps in between now? Most business people particularly most new business people kind of wing everything like I'll make it up aciego along you kind of do it a little bit differently each time, right? That is not the best thing to do if you want your customers to have a high quality experience right? Because you need to make sure you're over delivering on those expectations you need to make sure your uniform and consistent and repeatable so you're reliable provider right? Defining the process, creating a system and making sure that system has followed is the most important thing you can do to make sure your customers are happy satisfied every single time so check lists which we've already talked about are a very big deal all it takes is sitting down and writing through the process of what it takes to do something there's another idea called standard operating procedures so when this thing happens, what do we do? And the nice thing is when you define it you can look at it and you can find the inefficiencies right? Like maybe you're doing something that you don't necessarily have to do or maybe there's a way of changing the process that removes a lot of work for you or maybe there is something that you can add to give your your customers a better experience when you put the process down on paper and you actually look at it it's really easy to see what can be improved when it's all up in your head almost impossible to make the same quality of changes that you can make just by defining what the system actually is right? So creating systems and processes and checklists and standard operating procedures is one of those things like we talked about yesterday feels like a lot of work right? Because it is additional work but it's some of the most valuable work that you can do to define exactly how your business works and to make sure you're delivering whatever it is that you do whether it's a product of service just shared resource or any of the other forms of value to make sure that you are delivering that service as impeccably as you possibly can and it's all through creating a system to do it it's question it's painful it is an event it through the when the customer calls to want to get paid and it's like twenty six steps and how in the hell is this this complicated? Yeah, but once you break it down, you could say I could take this step out my accountant can do this step move things around and it works really well once you do it but it's it's painful to do what it's painful to start and then once you get into the process and it becomes much easier. The biggest hesitation that I've heard because we have so many creative folks in the audience around the world is you know, if your photographer or an artist or another creative person, it kind of feels like I don't want to do that checklist, they're boring, I'm a creative person, right? I want to spend my time doing creative stuff uh what's actually true is doing these systems and checklists and standard operating procedures are the way that you can insure most of your time and energy is spent being creative because you're not add hocking everything else all the time just trying to keep everything running you have a system, you've defined it it's efficient so you can let all of that stuff go because you know it's going to be taken care of so you can focus on this thing that you do really well so my creative clients and readers who have actually gone through this process of creating systems checklist and standard operating procedures find they have way more time and energy to do the fun creative stuff because they're not spending so much time in the weeds making everything else up what's going on keeps you organized to at least for me like in the middle you know, july and august when I'm in the thick of wedding season and I've got twenty five clients that I'm at a drastically different stages with having that checklist where I can look at it I'm like, ok, this is the next step for tom and betty where I'm out of completely different step and you don't miss any of that so you don't know everything khun b predictable um has been critically helpful for me yeah and you know you want to ideally avoid situations where you show up at somebody's wedding and you look in your camera bag and you realize that you forgot to charge the camera battery like you just adults ever would be in that situation right? So it's a little bit of planning a little bit of preparation and a simple checklist the day before a wedding I look at a b c d e f g go down the list and then it could be wrote simple brain dead obvious stuff right? Actually the more obvious it is the better because the obvious things were the ones that you've completely missed in the in the moment, right? You just define at once. Set a system to remind herself the day before something. Or as something is happening, look at the checklist. Use it, and you'll be way better off.

Class Description


Part of The Personal MBA Bundle.

Before you can expect more from your business you need to understand the fundamental elements that make every successful business function. Master those fundamentals, hone your business instincts, and save a fortune in tuition! MBA programs don't have a monopoly on business knowledge.

The Personal MBA will provide the foundation of knowledge that everyone needs to succeed in business. Internationally best-selling author Josh Kaufman will guide you through the tenets and teachings found in every MBA program in the country. Josh’s unique, multidisciplinary approach to business mastery has helped millions of people around the world learn essential business concepts on their own time. By understanding creation, marketing, sales, value delivery, and finance you will have the foundation to make your own business thrive.

Whether you’re thinking of starting a new business or looking for better results from your existing one, this class will help you master the necessary fundamentals to lead you to success.

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a Creativelive Student
 

Each of our 20 students (leadership and business) in Benin Africa read the Personal MBA last week. It was simply amazing to see them discuss this book in class. Josh thanks for helping us build great business leaders in Africa. We (the entire class) will listen live on the 14 and 15 here in Africa. It's worth staying up late for this.

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I have watched almost every business course here on Creative Live and the Josh Kaufman's The personal MBA course is probably one of the best. I watched the live broadcast and then the rebroadcast a few weeks later. I decided to purchase the bundle, course 1 and 2. I still go back and watch them, because even though I'm now very familiar with his content- it still inspires me every time. He is a terrific teacher and he will help you to understand the foundations of business very quickly.

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I had the great opportunity to attend one of Josh's MBA courses and it was one of the best investments I've ever made. Josh has the great ability to explain concepts so that anyone can understand. He teaches all the principles needed to understand and analyze a business. I can't wait for this LIVE event to get a refresher on all the things I've learned. Everyone who enrolls is in for a treat.