Form of Value #11: Insurance

Posted on March 17, 2012 by Darren

Insurance involves transferring risk from the buyer to the seller. In return for taking on the risk of some specific bad thing happening to the policy holder, the policy holder agrees to give the insurer a predetermined series of payments.

If the bad thing actually happens, the insurer is responsible for compensating the policy holder for the damage. If it doesn’t, the insurer gets to keep the policy holder’s money.

To create a successful business that provides value through insurance, you need to:

Create a legal agreement that transfers the risk of some specific bad thing happening from the policy holder to you.
Calculate the likelihood of that bad thing actually happening, using available data.
Collect the agreed-upon series of premium payments over time.
Pay out legitimate claims upon the policy when the bad thing happens.

Insurance is valuable to the buyer because it protects them from risk. For instance, if your house burns down, you likely don’t have enough money in the bank to purchase a new one. But by purchasing homeowners’ insurance, you transfer this risk to the insurer.

If your home is destroyed, the insurance company will compensate you and allow you to buy a new home. If your home is not destroyed, the insurance company gets to keep the premium payments.

Offering insurance is effective because it spreads risk over a large number of people. If an insurer writes policies for millions of homes, it’s highly unlikely that all of them will burn down at the same time. This means that only a certain number of claims will need to be paid at a given time. As long as the insurer brings in more premium payments than it pays out in claims, the insurer if profitable. Car insurance, medical insurance, and life insurance work the same way.

Insurers are concerned about avoiding bad risks, maximizing premium payments, and minimizing payments on claims. As such, they must be careful to avoid fraud. This can be done by preventing illegitimate claims as well as by not cheating customers by collecting premium payments without paying legitimate claims. If an insurer doesn’t pay legitimate claims, they may end up in court as policy holders use the legal system to defend their insurance contract.

To learn more about insurance as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #10: Option

Posted on March 3, 2012 by Darren

An option is the ability to take a predetermined action for a limited time in exchange for a fee. Financial securities come to mind when most people think about options, but other options are all around us: movie tickets, concert tickets, amusement park tickets, coupons, and retainers are all examples of options. In exchange for a fee, the buyer has the right to take a specific action – attend a show, buy a product, or purchase a financial security at a specific price – before the indicated deadline.

To create a successful business that provides value through the use of options, you need to:

Find an action people might want to take in the future.
Offer potential buyers the right to take that action before a specified deadline.
Convince potential buyers that the option is worth your asking price.
Enforce the deadline on taking action.

Options are valuable to buyers because they give them the ability to take a certain action without requiring them to take that action. For instance, if you buy an amusement park ticket, you have the ability to occupy a seat on every ride at the park, but you don’t have to do so – if you find a better opportunity. When you buy the ticket, all you’re buying is the option to experience every ride at the park – nothing more.

Options are often overlooked as a form of value – flexibility is one of the Three Universal Currencies. If you can give people more flexibility, you may have discovered a profitable business model.

To learn more about options as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #9: Loan

Posted on February 29, 2012 by Darren

A loan involves letting a borrower use a specific amount of resources for a specific period of time. In return, the borrower must pay the lender a series of payments over a predetermined period of time, which is equal to the principal loan amount plus a predetermined interest rate.

To create a successful business that offers value through a loan, you need to:

Have money to lend.
Find people who want to borrow that money.
Determine an interest rate that compensates you fairly for the loan.
Estimate and protect yourself against the possibility that the loan won’t be repaid.

When used responsibly, loans allow people to benefit from immediate use of products and services that would otherwise cost too much to buy directly. For instance, mortgage loans allow people to live in houses without having hundreds of thousands of dollars in their bank account. Similarly, auto loans allow people to drive new vehicles in exchange for a smaller monthly payment rather than a 100% down payment.

Loans are valuable to the lender because they provide a way to benefit from extra capital. With the addition of compound interest on top of the principal loan amount, the lender will collect a lot more than the original loan – and in the case of long-term loans such as mortgages, possibly two to three times more. For instance, on a $250,000 mortgage loan with a 30-year term and a 5% interest rate, the lender will receive over $230,000 in interest payments on top of the original $250,000 loan amount.

After the loan is made, there’s not much more additional work that the lender needs to do other than collect the payments. But since there’s a chance that the borrower will stop making payments, it’s important to identify the level of risk with a specific loan prior to lending any money. This is done through a process called underwriting.

During the underwriting process, lenders often require some sort of asset from the borrower as collateral to protect against the possibility that the loan won’t be repaid. If the loan is not repaid, ownership of the collateral is transferred to the lender, who sells the asset to recover any money lost in the deal.

To learn more about loans as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #8: Audience Aggregation

Posted on February 22, 2012 by Darren

Audience aggregation involves getting the attention of a group of people with similar characteristics first, then selling access to that group to a third party. Because attention is limited yet valuable, getting a specific group of people together is useful to businesses that want to get the attention of those people.

To start a business that provides value using audience aggregation, you need to:

Find a group of people with similar characteristics or interests.
Create a way to consistently get that group’s attention.
Find third parties that are interested in paying for the attention of that group.
Sell access to that group without alienating the group itself.

Audience aggregation is beneficial to the audience because it receives something that’s worthy of their attention. Ad-supported websites are a great example: visitors benefit from the information and entertainment that the sites provide in exchange for being exposed to some advertising. If the advertising is overwhelming, they may leave, but most people are willing to be exposed to some advertising if the content is good.

Audience aggregation is also beneficial to the advertiser. When done well, advertising gets attention, attention brings prospects, and prospects convert to paying customers. As long as the sales that result from the advertising bring in more revenue than the cost of the advertising plus the business’s Overhead, the advertising is a profitable tool. This means that the advertiser can keep supporting the aggregator by buying more advertising. The aggregator, advertiser, and audience all win.

To learn more about audience aggregation as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #7: Agency

Posted on February 18, 2012 by Darren

Agency involves the marketing and sale of an asset that you don’t own. Rather than creating value on your own, you partner with somebody else who has value to offer, then seek to find a buyer. In return for establishing a new relationship between your source of value and the purchaser, you earn a commission.

To create a successful agency, you need to:

Find a seller who has a valuable asset to offer.
Establish contact and build trust with potential purchasers of that asset.
Negotiate until an agreement is reached on the terms of sale.
Collect the agreed-upon commission from the seller.

Sellers benefit from an agency relationship because it generates sales that might not otherwise happen. Employment agencies are a great example: Job seekers may be looking for employment, but may have a difficult time finding a job on their own. By working with an agency that has established connections with multiple employers, a job seeker is more likely to find employment. In exchange for setting up the job seeker with the employer and negotiating the salary, the agency receives a fee based on the job seeker’s salary.

Buyers also benefit from an agency relationship – good agents help them find worthwhile assets to purchase. Agents act as a filter for buyers, who trust that the agent will bring their attention to assets worth purchasing. Employers provide employment agencies with a list of requirements for the position they need filled. The agency then tests a candidate’s professional skills with respect to these requirements to determine his or her level of competency. If the candidate’s skills are sufficient, the agency will move forward with the interview process. This results in a better match with the employer’s needs for the position.

Because most agency relationships are dependent upon closing the sale, focus on activities that’ll result in a completed transaction. Then make sure that the commission you receive compensates you adequately for the effort you put into closing the deal.

To learn more about agency as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #6: Lease

Posted on February 16, 2012 by Darren

A lease involves buying an asset first, then letting another person use that asset for a predetermined amount of time in exchange for a fee. Two common assets that are leased are apartments and cars. Others include boats, office space, and furniture. As long as an asset can last long enough to be rented to another person and returned ready for reuse, you can lease it.

To operate a successful business that offers a lease, you need to:

Purchase an asset that people want to use.
Lease the asset to a paying customer on favorable terms.
Protect yourself from unfortunate events, such as the damage or loss of the asset.

The customer receives value from a lease by being able to use the asset for less than the total purchase price. You may not be able to spend $60,000 to buy a Porsche, but for $600 a month, you can easily lease one. After your lease is up, the owner can lease the asset to someone else.

Most assets have a limited useful life. As such, to successfully provide value through a lease, you need to charge enough to bring in more revenue than the purchase price before the asset loses its value.

Also, remember to factor in repair and replacement costs when you determine your pricing so that if your asset is damaged or lost while in use, you’ll be able to recover.

To learn more about a lease as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #5: Resale

Posted on February 13, 2012 by Darren

Resale involves first purchasing an asset from a wholesaler, then selling that asset to a retail purchaser at a higher price.

To run a successful business as a reseller, you need to:

Purchase a product for as low of a price as you can, usually in large quantities.
Ensure that the product is in good condition until it’s sold.
Find potential buyers of the product as soon as you can, in order to keep inventory costs low.
Sell the product for as high of a price as you can, preferably a multiple of your purchase price.

Resellers add value by helping wholesalers sell their products without having to find individual buyers. For a farmer, selling oranges to millions of people is both labor and time-intensive. A more productive use of time would be to sell all of them to a grocery chain, and focus on growing more oranges. The grocery stores then take the oranges and sell them to individual buyers at a higher price.

Retailers such as The Home Depot, Target, J. C. Penney, and Ralph’s work in a similar way: they buy products at low prices directly from manufacturers, then sell them at a higher price as soon as they can.

Finding quality products at low prices and managing inventory levels are the keys to successful reselling. Without a regular supply of sellable product at a low enough price to earn a profit, you’ll have difficulty staying in business. As a result, most successful resellers build strong relationships with their suppliers to make sure they keep getting good products at low prices.

To learn more about resale as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #4: Subscription

Posted on February 11, 2012 by Darren

A subscription offers predetermined benefits on a continual basis in exchange for an ongoing fee. With a subscription, your customers will expect you to provide more value in the future, while you receive fees until they cancel their subscription.

To create a successful business that offers a subscription, you need to:

Provide substantial value to every subscriber on an ongoing basis.
Grow a base of subscribers, and regularly attract new customers to make up for those who cancel their subscription.
Bill your customers regularly.
Keep each customer for as long as you can.

Internet service is a great example of a subscription. The company will keep providing service as long as you make your payments. There’s no need to call the company every month to purchase another month’s worth – you’ll keep getting service as long as you pay your bills.

Offering a subscription is beneficial to you because it provides more predictable revenue. Rather than needing to resell your current customers every month, subscriptions let you build a base of loyal customers over time. Then you’ll know that a certain amount of revenue will be coming in during each billing period.

The key to making a subscription offer work is doing all you can to retain your customers. As long as you keep adding significant value, only a handful of customers will cancel each period. Thus, you’ll be able to plan your finances with more certainty. Any subscribers that you lose will need to be overcome by signing up new customers.

To learn more about a subscription as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #3: Shared Resource

Posted on February 10, 2012 by Darren

A shared resource is a long-lasting asset that can be used by many people. With a shared resource, you can create the asset once, then charge your customers for it use.

To create a successful business that offers a shared resource, you must:

Create an asset that people want to use.
Serve as many people as possible without reducing the quality of each person’s experience.
Charge enough to maintain and improve the shared resource over time.

A gym is a great example of a shared resource. A gym owner can purchase twenty treadmills, fifteen exercise bikes, ten elliptical machines, two sets of free weights, and other fitness equipment that is durable. The gym members benefit by being able to use all of the equipment without buying each piece individually. Rather, they pay a membership fee, which is much more affordable.

Most gyms offer access to their shared resource through a Subscription. Along with this, many gyms also provide personal training Services, which is an example of Bundling.

Businesses including theme parks and museums work in a similar way. Whether it’s riding Splash Mountain at Disneyland or enjoying a painting at the Getty Museum, shared resources provide many people with the opportunity to have an experience that would otherwise be too expensive.

The challenge with offering a shared resource is carefully keeping track of usage levels. If you don’t attract enough customers, you won’t be able to spread out the cost of the asset enough to cover initial costs and regular maintenance. But if you have too many customers, overcrowding will result in an unpleasant experience and frustration for your customers. Not only will they stop using your resource – they’ll tell others not to use it as well, hurting your Reputation.

Finding the balance between not enough customers and too many is the key to making your shared resource work successfully.

To learn more about a shared resource as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #2: Service

Posted on February 7, 2012 by Darren

A service involves helping someone in exchange for a fee. To provide value through a service, your work must benefit the user.

To create a successful service-oriented business, you must:

Have employees who possess a skill that others require but can’t or won’t use themselves.
Make sure that the service is provided with high quality on a regular basis.
Find and keep paying customers.

A good example of a service business is a lawn care provider. A mowed lawn is not a Product – you can’t buy one at the grocery store. The service is a set of actions that the provider takes to change the current look of your lawn into the one you want. Other examples of service providers include accountants, tutors, babysitters, plumbers, wedding planners, and personal trainers.

Services can pay extremely well, especially if the skills needed to provide them are difficult to develop. The drawback, however, is that they’re difficult to Duplicate.

Services usually depend on the provider’s investment of time and energy, both of which are limited. A masseuse can only provide so many massages in a day.

If you’re offering a service, charge enough to compensate for the time you’ll be investing everyday in providing the service to your customers. Otherwise, your financial rewards won’t be worth the effort.

To learn more about a service as a form of value, check out The Personal MBA by Josh Kaufman.

Form of Value #1: Product

Posted on February 5, 2012 by Darren

A product is a tangible form of value. To create a product-oriented business, you must:

Create a tangible item that people want.
Produce that item at as low a cost as possible, while keeping an adequate level of quality.
Sell as many units as possible for as high a price you can get.
Have enough inventory available to fulfill orders as they come in.

Products can be durable, such as hardback books, laptops, and treadmills. They can also be consumable goods such as spinach, blueberries, and vitamins. Products don’t even need to be physical – things like antivirus software, MP3 music files, and ebooks can be sold as well.

Creating value in product form is beneficial because products can be Duplicated or Multiplied. They usually Scale better than other forms of value.

To learn more about the product as a form of value, check out The Personal MBA by Josh Kaufman.

Twelve Standard Forms of Value

Posted on February 3, 2012 by Darren

To successfully provide value to another person, it must be in a form they’re willing to pay for. Economic value usually takes on one of twelve forms:

Product. Create a single tangible item, then sell and deliver it for more than it cost to make.
Service. Provide help, then charge a fee for the benefits rendered.
Shared Resource. Create an asset that can be used by many people, then charge for access.
Subscription. Offer a benefit on a regular basis, then charge a recurring fee.
Resale. Purchase an asset from a wholesaler, then sell it to a retail buyer at a higher price.
Lease. Purchase an asset, then let someone else use that asset for a specific amount of time in exchange for a fee.
Agency. Market and sell an asset or service you don’t own on behalf of a third party, then collect a percentage of the transaction price as a fee.
Audience Aggregation. Get the attention of a group of people with similar characteristics, then sell access in the form of advertising to another business looking to reach that group.
Loan. Lend a certain amount of money, then collect payments over a predefined period of time equal to the principal plus a predefined interest rate.
Option. Offer the ability to take a predefined action for a fixed period of time in exchange for a fee.
Insurance. Take on the risk of some specific bad thing happening to the policyholder in exchange for a predefined series of payments, and pay out claims only when the bad thing actually happens.
Capital. Buy an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payment or regular dividend.

To learn more about the twelve standard forms of value, check out The Personal MBA by Josh Kaufman.

The Hidden Benefits of Competition

Posted on January 29, 2012 by Darren

Suppose you have a great business idea, but find out that other businesses are already offering similar products and services. Should you bother moving forward?

All is not lost if someone else is already doing what you want to do – there are still hidden benefits of competition. When any two markets are equally attractive in other respects, you’re better off choosing to enter the one with competition. Why? Because now you know from the start that there’s a market of paying customers for this idea, eliminating your biggest risk.

The existence of a market means that you’re already on the right side of the Iron Law of the Market, so you can spend your time developing your offer instead of proving that a market exists. If other businesses are successfully serving a market, you don’t have to worry about investing in a dead end, since you know that people are already buying.

The best way to observe what your potential competitors are doing is to buy as much as you can of what they have to offer. By doing this, you’ll gain the following insights:

What value the competitor provides
How they attract attention
How much they charge
How they close sales
How they make customers happy
How they deal with issues
What needs they aren’t serving yet

You’ll get to observe what works and what doesn’t before you commit to a particular strategy.

Learn everything you can from your competition. Then create something even more valuable.

To learn more about the hidden benefits of competition, check out The Personal MBA by Josh Kaufman.

Ten Ways to Evaluate a Market

Posted on January 28, 2012 by Darren

If you’re thinking about starting a new business or expanding an existing business into a new market, do some research first. Here are ten ways to identify the attractiveness of a potential market. Rate each factor on a scale of 0 to 10, where 0 is extremely unattractive and 10 is extremely attractive.

Urgency – How badly to people want or need this right now?
Market Size – How many people are actively buying things like this?
Pricing Potential – What’s the highest price a typical buyer would be willing to pay for a solution?
Cost of Customer Acquisition – How easy is it to acquire a new customer? How much will it cost to generate a sale, in both money and effort?
Cost of Value Delivery – How much would it cost to create and deliver the value offered, in both money and effort?
Uniqueness of Offer – How unique is your offer compared to other offers in the market? How easy is it for potential competitors to copy you?
Speed to Market – How quickly can you create something to sell?
Up-Front Investment – How much will you need to invest before you’re ready to sell?
Up-Sell Potential – Are there related secondary offers that you could present to paying customers?
Evergreen Potential – Once the initial offer has been created, how much extra work will you need to put into it in order to continue selling?

After you’ve rated each factor, add up your score. If the total is 50 or below, move on to another idea – there are better places to invest your resources. A score between 51 and 74 might pay the bills, but won’t be successful without a huge investment of resources, so plan accordingly. If the total is 75 or above, you have a very promising idea – go ahead and move forward.

To learn more about the ten ways to evaluate a market, check out The Personal MBA by Josh Kaufman.

Core Human Drives

Posted on January 27, 2012 by Darren

Since your revenue is dependent on people actually wanting what you have to offer, it pays to have a general idea of what people want to begin with. As human beings, all of us have five Core Human Drives that have a profound influence on our decisions and actions:

The Drive to Acquire – The desire to obtain physical objects, as well as intangible qualities such as power, influence, and status. Businesses built on this drive include retailers and investment brokerages.
The Drive to Bond – The desire to feel valued, attractive, and loved by forming relationships with others, either platonic or romantic. Businesses built on this drive include restaurants, conferences, and dating services.
The Drive to Learn – The desire to become more knowledgeable and satisfy our curiosity. Businesses built on this drive include academic programs, book publishers, and training workshops.
The Drive to Defend – The desire to protect ourselves, our loved ones, and our property. Businesses built on this drive include alarm systems, insurance products, self-defense training, and legal services.
The Drive to Feel – The desire for intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on this drive include restaurants, games, movies, sporting events, and concerts.

The more clearly you can articulate how your offer satisfies one or more of these drives, the more attractive it’ll be to your potential market.

To learn more about the Core Human Drives, check out The Personal MBA by Josh Kaufman.

The Iron Law of the Market

Posted on January 27, 2012 by Darren

Without revenue, your business will fail. Revenue is dependent on people actually wanting what you have to offer.

Every business is limited by the size and quality of the market it attempts to serve – this is The Iron Law of the Market. If there aren’t enough people who want what you provide, your chances of building a viable business are slim.

Knowing this, figure out what people want and need before investing your time and money into creating something new. Market research will save you from creating something nobody wants. Then focus on making things people want to buy.

To learn more about The Iron Law of the Market, check out The Personal MBA by Josh Kaufman.

Economically Valuable Skills

Posted on January 23, 2012 by Darren

If you want to add more value as a businessperson, focus on improving skills related to the Five Parts of Every Business. Not all skills or areas of knowledge are Economically Valuable.

Don’t expect skills that aren’t related to the Five Parts of Every Business to be economically rewarded. Any skill or knowledge that helps you create value, market, sell, deliver value, or manage finances is Economically Valuable.

To learn more about economically valuable skills, check out The Personal MBA by Josh Kaufman.

Five Parts of Every Business

Posted on January 15, 2012 by Darren

A business is a repeatable process that:

Creates and delivers a form of value…
That people want or need…
At a price they’re willing to pay…
In a way that meets the customer’s expectations…
So that the business earns enough profit to make it worthwhile for the owners to continue operation.

Stated another way, a business is a set of five Interdependent processes, and each one flows to the next:

Value Creation. Finding out what people need or want, and creating it.
Marketing. Getting attention and building demand for what you’ve created.
Sales. Converting prospects into paying customers.
Value Delivery. Giving your customers what you’ve promised, and making sure they’re satisfied.
Finance. Bringing in enough profit to keep going and make your effort worth your time, energy, and resources.

In it’s most basic form, a business is simply a process of finding a problem and figuring out a way to solve it that benefits both parties. If you want to start a business, the best way to begin is to define what these five processes would look like.

To learn more about the five parts of every business, check out The Personal MBA by Josh Kaufman.

Value Creation

Posted on January 14, 2012 by Darren

Every successful business creates some form of value. There are endless opportunities to improve people’s lives. Your job as an entrepreneur is to find what people don’t have enough of, then provide those things.

The purpose of your business is to make someone’s life better. Without value creation, a business doesn’t exist – you can’t make deals with others unless you have something valuable to offer.

The best businesses in the world create the most value for others. Some provide a small amount of value to many people, while others give tons of value to just a few. Either way, as you create more value for people, your business will grow along with your bank account.

To learn more about value creation, check out The Personal MBA by Josh Kaufman.